Debtor-in-possession financing for real estate & operating companies

Debtor-in-possession (DIP) financing is a loan to a company or property owner that has filed for Chapter 11 bankruptcy and continues to operate its business or property as the "debtor in possession." It funds operations, construction completion, payroll and the costs of the case while the debtor restructures or sells assets.

Because the Bankruptcy Code gives DIP lenders protections other lenders don't get. With court approval, a DIP loan can receive super-priority administrative claim status, liens on unencumbered assets, junior liens on encumbered assets and, in some cases, a priming lien ahead of existing lenders if they are adequately protected (11 U.S.C. §364).

A priming DIP loan takes a lien senior to an existing lender's lien. Courts allow priming only if the debtor cannot get credit otherwise and the existing lender's interest is adequately protected, for example by an equity cushion or because the DIP money increases the collateral's value, such as finishing construction. Priming is often contested.

In a roll-up, some or all of a prepetition lender's existing debt is converted into DIP debt, gaining DIP priority, usually in exchange for providing new money. Roll-ups are common in corporate cases and are scrutinized by the court and creditors.

A Chapter 11 case for a debtor whose business is a single property or project generating substantially all of its income, as defined in 11 U.S.C. §101(51B). Under §362(d)(3), within 90 days of filing (or 30 days after the court determines the case is a SARE case, if later), the debtor must generally file a plan that has a reasonable possibility of being confirmed within a reasonable time, or begin monthly payments to the secured lender; otherwise the lender can seek relief from the automatic stay. Timing matters, so DIP and exit capital should be lined up early.

DIP loans typically carry higher interest rates than performing loans plus commitment, closing and exit fees, reflecting the legal complexity and short timeline. Pricing depends on collateral coverage, priority, the size of the loan and whether the lender is new money or the existing lender.

Courts can approve interim DIP financing within days of filing at a first-day hearing, with a final order after notice to creditors, often within a few weeks. Lenders usually want term sheets negotiated before the filing.

A loan or equity investment that repays the DIP loan and funds the debtor's plan of reorganization when it emerges from Chapter 11. A DIP lender may provide a DIP-to-exit facility that converts into exit financing.

Yes. Small-business debtors under Subchapter V of Chapter 11 can obtain DIP financing with court approval. These loans are smaller and often come from specialty lenders, insiders or new investors.

No. DIP financing is governed by the Bankruptcy Code, local rules and the court. Win-Win works alongside your bankruptcy counsel and financial advisor to source and negotiate capital; they advise on legal strategy.