Technical valuation issues will always be important, but what about those special situations involving intangible values that transcend the property’s tangible market value?
Sometimes the value of a property isn’t just about measuring comparable sales or the net present value of rental cash flows. Sometimes the buyer also must consider intangible interests of the seller or third parties. Don’t forget the other guy.
On Dec. 12, 2011, the U.S. Bankruptcy Court for the Central District of California, Santa Ana Division, approved the sale of Dr. Robert H. Schuller’s Crystal Cathedral to the Roman Catholic Archdiocese of Orange County for $57.5 million.
The Crystal Cathedral, built in 1980, is a worship center constructed of more than 10,000 panes of glass – a unique structure that has been home to Schuller’s “Hour of Power” television ministry ever since.
Crystal Cathedral Ministries’ first Chapter 11 reorganization plan required a sale of its unique realty for at least $50 million. The ministry initially named nearby Chapman University as its buyer of choice for a “fair market value” price of $51.5 million, “all cash.”
Chapman had proposed to use the facilities for university purposes while leasing back all or part of the property to the ministry for an extended period of time. The archdiocese had proposed to purchase the property outright, leaving the ministry with an optional short-term leaseback period.
So what happened to change the outcome?
Chapman and the archdiocese both had outbid several other suitors, and their bids were similar in features and amounts. The archdiocese’s bid was slightly higher, offered an immediate closing with no additional due diligence period, and included a cheaper leaseback provision. However, Chapman’s long-term leaseback period appealed to the going-concern interests of the ministry’s leadership.
The archdiocese sweetened the deal by several million dollars. But because an immediate and more definite payment wasn’t convincing the first time, price alone didn’t seem to be the deciding factor. The determining factor seemed to be the archdiocese’s additional offer to provide a substantial set of intangible benefits favoring the ministry’s mission.
First, the archdiocese showed the court that the ministry probably wouldn’t be able to sustain the leaseback option under the Chapman plan, suggesting the existence of a significant risk to bankruptcy creditors. The bankruptcy documents don’t reveal if that was an important factor in the final decision.
Next, the archdiocese offered several concessions appealing to the ministry and its supporters. For example, the archdiocese promised to maintain the architectural and aesthetic integrity of the unique Crystal Cathedral facility when adapting the facility to the Catholic Church’s strict worship requirements. The church offered to maintain a permanent office in the facility for the founder, Schuller, for his lifetime. It promised to use and maintain the elaborate pipe organ – one of the largest in the world.
The church also promised to lease back certain portions of the facility to the ministry at bargain prices, to maintain permanently the Memorial Gardens as a nondenominational burial ground and honor existing contracts, to maintain and improve the nondenominational library, as well as making other concessions that promised to retain indefinitely the nondenominational religious purpose of the Crystal Cathedral facility and mission.
These concessions were offered in a spirit of cooperation between the archdiocese and the ministry, without compromising the church’s distinct worship requirements. In addition, the archdiocese offered one of its other existing facilities to the ministry as an alternative facility, at a bargain lease price with a purchase option, providing continuity for the ministry following bankruptcy.
While the Bankruptcy Court would decide whether to approve the ministry’s plan of reorganization and the real estate sale under the plan, to a great extent the sale decision was left to the ministry and its creditors, deferring to their business judgment.
Despite having additional risk because of uncertainties regarding the post-plan due diligence period and possible resulting price adjustments, the ministry initially decided to sell to the neighboring university with the hope of continuing the ministry in the Crystal Cathedral for the foreseeable future.
The bankruptcy pleadings suggest that an overriding consideration in ultimately selling to the archdiocese was its willingness to work in cooperation with the ministry.
The archdiocese would maintain in perpetuity the religious integrity of the ministry’s trademark Crystal Cathedral rather than over a limited 15-year period, while carefully transitioning the worship sections to meet the special religious needs of the Catholic Church.
The bankruptcy sale of the Crystal Cathedral is one example in which creatively leveraging goodwill and the intangible benefit of continuing the seller’s vision into the future triumphed over the initial pragmatic concern for merely buying more time to continue operations.
In this case, the Catholic archdiocese didn’t just negotiate a business deal. It won the deal by thinking of the other guy – by creating a partnership that will let the Crystal Cathedral Ministries’ 56-year vision live on in harmony with that of the Catholic Church.