Although 2020 started superbly and with great expectations, it cut down even the A-listers on the Bulgarian real estate market – investors in office, retail and hospitality properties.

The lockdown sent IT companies, which had been dictating the local office space market, into home office. The future of commercial and entertainment properties like shopping malls, cinemas, concert venues and sports arenas remains uncertain.

But of all sectors, tourism remains the hardest hit. The crisis has postponed the opening of 1,070 hotel rooms in four- and five-star hotels in Sofia, including the first Hyatt Hotel in Bulgaria.

Globally the trend looks the same. At the end of March 2020, Marriott International reported a 75 % decrease in revenue, Accor closed almost 30 of its hotels, Best Western announced a 90 % decrease in revenue, and IHG cut its dividend for the first time in 25 years.

The crisis in the tourism sector has also raised concerns in another traditionally conservative market: financial institutions who fund the construction of properties in tourist destinations. Dealing with inefficient immovable assets is a daunting task for banks, which usually do not have the capacity and resources to manage collaterals of nonperforming loans.

The problem may increase significantly if the property is in construction, since everybody knows to "expect the unexpected" when it comes to construction projects. The construction industry is used to reacting, correcting and resolving issues, but distressed projects have the unique ability to catch investors unaware and leave affected parties with no viable way out.

"Intelligence is the ability to adapt to change"1

In view of the current economic conditions, many lenders may prefer to provide loan extensions hoping to receive repayment and eventually benefit from a future economic turnaround. For these reasons, work-out agreements may become a sought-after alternative for many real estate projects.

These agreements aim to guarantee payment of the debt, while giving the defaulting borrower the opportunity to benefit from the project's value. As most real estate projects are owned by special purpose vehicles and are their sole asset, any representations or warrantees given by the borrower are usually not available in the event of default. Seeking warranties alone can increase the likelihood of a borrower's insolvency, which is a risk for most lenders.

Turning lead into gold

Common types of work-out agreements may settle (i) new terms and conditions of a loan, (ii) the sale of part or all of the project or refinancing, (iii) the borrower's recapitalisation by a new partner, contributing equity or expertise that reduces the lender's risk, or (iv) the redesigning and repurposing of the project to ease its management.

Changing the purpose of a project will lead to a change in the designation of the affected real property. This is a well-known and unsurprising legal procedure. The law provides for the option to change the purpose of part of a building (e.g. a cinema in a shopping centre) or of a building and undeveloped real property. The main requirement is that the "new" purpose must be admissible according to the effective general and detailed zoning development plan (when it comes to a building or undeveloped real property) or approved by the neighbours (when it comes to parts of building). In any case, the legal framework and the case law on these issues are well-established and do not pose a challenge if the parties agree to seek a creative and convenient solution to the crisis.

 Footnote

1  Stephen Hawking

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