National Realty files for Chapter 11 protection

August 2022 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

August 2022 Issue

In June, New Jersey-based developer National Realty Investment Advisors and several of its subsidiaries filed for Chapter 11 bankruptcy protection in the District of New Jersey.

The company owns completed properties, three properties which are near completion, and 16 which remain to be completed or are in the planning stage, according to National Realty’s independent manager, Brian Casey. The value of these properties currently is asserted to be $225m, with future stabilised values asserted to be over $1bn.

According to court documentation, National Realty owes vendors and other creditors about $10m. Among the company’s biggest creditors are Cipolla & Co., an accounting firm, which claims to be owed $1.3m, and the head of New York public relations firm Repute PR, which has a $450,000 claim. Other notable creditors include Cipolla & Co, Ryan Blanch, Red Seat Ventures, LLC and iHeart Media. The company’s 30 biggest investors had provided funds ranging from $952,580 to $5.5m, according to the petition.

National Realty estimates that it has approximately $10m in obligations to trade vendors and other unsecured creditors, in addition to $38m in secured debt and approximately $540m of preferred limited liability company interests held by 2000 investors, according to the bankruptcy filing. National Realty received its last investment in January, “when it was determined that ceasing the solicitation of additional investors was in the best interest of protecting the fund’s investors and other creditors”.

Mr Casey’s firm, the Casey Group, first joined National Realty as a manager of the Partners Portfolio Fund in November of last year “to address issues related to the management of debtors [by] ensuring that the fund [and] NRIA used the fund’s assets appropriately”, according to the filing.

Mr Casey was appointed National Realty’s independent manager in late April and said in a first-day motion that the Chapter 11 petition aimed to buy the company time to reorganise after past overspending on salaries and other financial strains. According to Mr Casey, the petition’s goal “is to provide the debtors with a breathing spell to prevent a disorderly liquidation of their estates through subscriber redemptions and to reject and/or terminate disadvantageous contracts and other arrangements”.

He added: “At the conclusion of the process, the debtors plan to propose a plan of reorganization that will provide a substantial, if not full, recovery to all stakeholders and position the debtors to continue operating as a profitable mid-sized real estate firm.”

The bankruptcy filing follows a number of subpoenas and requests for information from the United States Attorney’s Office for the District of New Jersey, the Securities and Exchange Commission, the New Jersey Bureau of Securities, and other state agencies in Alabama and Illinois.

In March 2021, the United States Attorney’s Office in New Jersey charged Nicholas Salzano, a terminated portfolio manager and adviser to NRIA, with wire fraud and identity theft, in connection with an offer to sell an interest in the debtor’s fund. Mr Salzano was arrested by the Federal Bureau of Investigation in February 2021 for allegedly using falsified loan papers to try to extract more money from an existing National Realty investor.

Additionally, in a July 2021 offering memorandum seeking additional investment, National Realty disclosed that it may use cash from new investors to pay existing ones, according to a report from the Philadelphia Inquirer, which analysed investor communications it had obtained to question whether the company’s portfolio of largely unbuilt projects would be able to deliver the returns it had promised fund participants. The disclosure is a potentially risky way for an investment fund to operate, as it may require ever more participants to pay into the fund, rather than making money from its business. The company also disclosed in the memo that it was under investigation by law-enforcement officials and financial regulators “in connection with the management and operation of the company and its compliance with various laws, rules and regulations”.

Richard Summerfield