PETITION

Yeah but someone is making money from all of this doom and gloom, right? You bet your a$$. The real estate consultants/advisors!! Using Houlihan’s for illustration purposes, let’s dive into what these guys do.

Before we do, let’s establish some ground rules: we’re going to MASSIVELY over-simplify how this works just to extract some number out of the abstract figures and give folks some semblance of an idea of how this works. So, please spare us the righteous indignation about incomplete calculations, okay?

In the Houlihan’s bankruptcy case, the debtors seek to engage Hilco Real Estate LLC as its real estate consultant and advisor. For the uninitiated, Hilco Real Estate counts countless bankrupted companies as clients, e.g., A&P, Fred’s, Gander Mountain, Furniture Brands, Garden Fresh Restaurant Corp., hhgregg, Hostess Brands, Ignite Restaurant Group, Logan’s Roadhouse, Payless Shoesource. You get the idea. Perversely, these guys kill it when you don’t (spare us the spin, y’all).

According to the agreement between Houlihan’s and Hilco, Hilco will, among other things, (a) meet with Houlihan’s to ascertain its goals, objectives and financial parameters (read: wherewithal); (b) mutually agree with Houlihan’s on a strategic plan for restructuring, assigning or terminating leases; (c) negotiate with third parties landlords in furtherance of the agreed-upon strategy; (d) provide updates on progress; and (e) assist Houlihan’s in closing the relevant lease restructuring, assignment, and termination agreements. The contract is exclusive. Said another way, Houlihan’s has agreed to convey over to Hilco all responsibility for negotiating with landlords for purposes of extracting concessions.

Of course, Hilco doesn’t do this sh*t for free. They have a variety of ways to make money.

First, it’s important to note that the Bankruptcy Code requires that debtors decide what to do with non-residential real property leases within 120 days from any filing. Consequently, many distressed companies engage real estate consultants long in advance of bankruptcy to get a handle on the real estate portfolio, help devise a strategy, and kickoff negotiations with landlords. Accordingly, any assigned or terminated lease pre-petition is eligible for 6% of Lease Savings (back to this in a minute). If a lease is modified rather than terminated, Hilco gets a flat fee of $1,500 + 5.25% of the savings. Post-petition, Hilco gets 6% for assignments/terminations/sales of leases — if there are any at that point that return cash value.

Houlihan’s is a sale case so what happens if the leases are assumed and assigned pursuant to a sale of all or substantially all of the assets? Per the Agreement,

“…any Lease that is assigned or sold to a purchaser of all or substantially all of the Company's or a division of the Company's assets shall not, in and of itself, be considered an Assigned/Sold Lease (but may still be a Restructured Lease).”

Wait, what? The agreement doesn’t even define what an “Assigned/Sold Lease” is? But, it appears the intent of this language is to carve out leases that simply transfer to a buyer. No fee for Hilco there — that is, unless there is an agreed modification to the lease prior to assumption and assignment. (Note to Hilco: tighten up your sh*t). This makes sense.

Of course, all of this might as well be written in Dothraki:

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