This is usually not a good sign that the company will be able to restructure successfully and emerge from bankruptcy. It may indicate, to some extent, that the company has not been able to negotiate with the secured lenders on the restructuring plan, in which case a fire sale and liquidation is likely on the way for investors and buyers. See our sister site for a Report on the List of Real Estate Properties available from Rhodes Homes and the valuation provided by Rhodes Homes itself.

However, in the case of Rhodes Homes, we can identify some mitigating factors as to why they may need more time. The bankruptcy proceedings involve 32 entities with hundreds of millions in outstanding debt and approximately 11,000 potential creditors, including 2 levels of senior secured debt. This is indeed a complex case. On the hand, in the current climate, we should be applauding the fact that the builder has managed to negotiate with its lenders for continued use of cash for operations so far. For those of you interested to know whether and how the builder is continuing with partially developed lots, see the Cash Flow Budget provided here.

Digging deeper, we found that these projects are financed by SNSPF Interim Finance B.V., a Netherlands private limited liability company, which provided funding for the building of single family homes in Maryland and Virginia.

Two of the more prominent projects are Symphony Village and Tanyard Cove. Symphony Village is an active adult community located in Centreville, Maryland for which the infrastructure is substantially completed and a number of residences have been constructed and sold. A number of lots are currently available for sale.

Tanyard Cove consists of an undeveloped parcel of land near Glen Burnie, Maryland currently going through the Anne Arundel County entitlement process, which is anticipated to yield approval for an active adult housing community consisting of single-family homes, villas/townhouses, condominiums and apartments.

Currently, these projects are relatively unaffected by the bankruptcy process that Caruso Homes is going through, although it was recently revealed in court that most of these projects have defaulted on their loan facilities as well. This means that an informal workout is happening behind the scenes and some lots may be up for sale at a liquidation price, depending on the restructuring plan negotiated with the lender and sales trends.

For more details, see the Jun’09 Research Report on Caruso Homes by The Downturn Analyst.

What are these customer care and incentive programs? One of the most important ones is the warranty programs. Rhodes Homes traditionally provide all home buyers with a 1-year limited warranty.

Another important one is the sales incentives program - discounts on price of home and/or design options, financing incentives, and promotional incentives. Examples include:

• Discounts on base prices of individual home or all homes in a community
• Free options and/or upgrades
• Lot premium waivers
• Buydowns of interest rates
• Payment of closing costs

Rhodes Homes disclosed in court that it offered 6 buyers who have canceled home sales contracts with a coupon towards a purchase of a Rhodes Home within six months from the cancellation date. The coupons are worth a total of $60,000.

One other important court-approved activity is that Rhodes Homes will continue to pay HOA fees. Rhodes Homes generally pays HOA fees in two situations:

• Partially-completed developments with homes left unsold
• HOA fee subsidies for current development homeowners until the development is fully sold.

Apparently, Rhodes Homes currently pay around $28,000 in HOA fees.

Finally, for those of you who use their golf course at Tuscany Residential Village, Rhodes Homes has also obtained authority to honor its gift cards!

Click here for more details on the bankruptcy proceedings of Rhodes Homes, including their internal valuation of real estate properties on the market.

Conflict in Foreclosure Sale

An interesting piece on conflict between institutional stakeholders appeared in Bloomberg this morning – see Wilbur Ross Defies Bruce Rose in Battle Over Housing Villains. Carrington Capital, a hedge fund, accused American Home Mortgage Servicing of putting its interests ahead of those of bondholders. It is in American Home’s interest to quickly unload foreclosed properties, while Carrington stands to gain from delayed foreclosure sales.

Conflict in Builder Bankruptcy

There is an analogous (albeit inexact) scenario playing out in the field of bankrupt home builders. An example is seen in Randall Martin Homes (for which the Dobson and Higley communities filed for bankruptcy last year).
In both cases, the banks, being senior secured lenders (being 1st in line in terms of recovering on the builder’s debt), moved for relief from stay, in order to pursue foreclosure of the distressed real estate. On the other hand, the hedge fund, Mountain Funding, which held a second lien, attempted to provide post-petition financing and supported the builder’s bankruptcy restructuring efforts.

In the midst of proceedings, Randall Martin Homes filed a Disclosure Statement and Reorganization Plan proposing to restructure the banks’ secured claims such that it would bear interest at no greater than 6.5% per annum, amortized over 20 years and paid over 7 years. It also proposed to restructure its claim with Mountain Funding. In exchange for the hedge fund providing post-petition financing, it would receive all new equity interests in Randall Martin Homes.

It is not hard to understand the incentives driving this scenario. Based on appraisal values proffered at the time, the banks might recover around 70% if they foreclosed and sold the real estate. The hedge fund might end up with little, save for an unsecured claim against the shareholders of the builder who have guaranteed its debt.

What the hedge fund held was an instrument similar to a call option, with the strike price being the value of the bank’s outstanding debt amount (or the amount at which it was willing to compromise, taking into account deteriorating market conditions). One of the key drivers of option value is asset volatility. A restructuring effort by the builder is likely to represent a measure increasing volatility. After all, one may consider it a gamble – to bet on a rising housing market whereby the builder can continue operations and sell off homes at a price level higher than that of foreclosure sales.

Unfortunately, this play was resolved in favor of the banks. The court granted the motions for relief from stay. I am an advocate of reorganization over liquidation, but this case smacks of irony - it is the hedge funds which are trying to push for reorganization in an attempt to protect their self-interest. But not before the banks have made some colorful, strong remarks in court filings - attached below for readers with the same sense of ironic humor.

The benefit to Mountain Funding from the Plan is obvious – it allows Mountain Funding to speculate on an increase in the value of Debtor’s property in exchange for a de minimis payment to unsecured creditors and a commitment to pay FNBA at artificially low rates over a commercially unreasonable time while it waits for the real estate market to recover. Although Mountain Funding stands to benefit greatly, the proposed Plan provides no apparent benefit to Debtor. Upon information and belief, the only reason for Debtor’s blatant give-away to Mountain Funding is Mountain Funding’s threat to enforce its guaranty against Bury. Armed with that threat, Mountain Funding has turned Debtor into a puppet attached to a set of strings that only Mountain Funding controls.

Jun’09 Update: Properties on Fire Sale

John Laing Homes is undergoing impending liquidation ever since being converted to Chapter 7. We have a  list with John Laing real estate properties if you are interested in picking up any properties at a fire sale price. These are likely to be higher quality assets because the bankrupt builder did not intend to abandon these properties, unlike some others (see discussion below).

Click here to read an excerpt of this John Laing Homes Properties Report.

Home Sales Research

John Laing Homes Basic Report $129.99John Laing Homes Enhanced Report $149.99

 

Mar’09: Abandoned Properties We covered John Laing Homes in John Laing Homes declares bankruptcy and John Laing Homes - Resistance to Insider DIP Financing.

Since the bankruptcy filing from more than a month ago, the bankrupt builder has not sold any homes. According to lawyers for Guaranty Bank, the builder has not even identified specific properties for sale.  What John Laing Homes has done, however, is to state the projects which it clearly intends to exit. These are listed as “Abandoned Projects” in exhibits submitted to the bankruptcy court. The John Laing Homes Research Report provides a list of these abandoned properties.

What happens to these abandoned properties?

One scenario is that construction would be at a stand-still, with parts of the projects remaining unfinished. This definitely reduces the home values of these communities. One example is John Laing Homes’ Stapleton Project in Denver, Colorado with unfinished common areas and the builder has no definitive plans for completing the construction.

The best which the builder could say in court filings was that they had made a proposal to a bank and they believe the bank is considering the proposal. Remember to consider what this means in today’s tight credit environment, with banks facing problems in the credit crisis.

If you are thinking of buying a home in the community, think twice when considering the time-line for which work-in-progress can be completed. Another thing to think about is whether you should ask the builder or existing homeowner for more concessions and discounts.

A worse scenario is presented by Wells Fargo in a motion for adequate protection. The bank claimed that projects (including Mare Island, Port Hueneme, Stapleton) “have not been adequately weather-proofed and therefore are subject to damage and deterioration from exposure to the elements. In addition, many of the Projects and/or homes or units located thereon have not been appropriately secured to limit the general public’s access, thereby exposing the Projects and the improvements thereon to potential vandalism and liabilities associated with any injuries that may occur thereon.”

John Laing Homes responded that the structures built upon the projects are locked and installed with alarm systems that are connected to the local authorities, and that periodic inspection was performed. Well, just to be on the safe side, spend a little more time examining homes by bankrupt builders for sale. Also, cross-check the homes which you are considering buying against the list of Abandoned Projects to make sure that you won’t be stuck with a home in an unfinished community.

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Often, when a builder goes out of business or files for bankruptcy, it leaves behind unfinished projects, which could sit for some time before being taken over by lenders or sold to other builders, she said. There can be little demand for those projects these days, because they are speculative, and few people are buying.

“Besides,” Huang said, “the builders and developers which might be interested in these projects are likely to be facing financial distress themselves.”

We were just cited on the Charlotte Observer which featured C.P. Morgan Homes - a homebuilder which closed last month, leaving behind unfinished projects. If you have questions about homebuilder bankruptcies, don’t hesitate to email Adria Huang at adria@thedownturnanalyst.com (The Downturn Analyst is our sister site).

See our recent update on Caruso Homes. More details about properties sold and the sale prices are published in the Caruso Homes Research Report by The Downturn Analyst.

Another interesting tidbit on this case: Do you know exactly which entities are behind Heritage Highgate and Heritage Residential?

Equity Security Holders of Heritage Highgate:

• David Brandschain (15%)
• Lawrence Wargo (16.19%)
• Richard Carroll (16.19%)
• Sheppard Investment Group, II (52.62%)

Equity Security Holders of Heritage Residential:

• David Brandschain (15%)
• HBG-Land Partners, III, Inc (1%)
• Heritage Partners, LP (84%)

These details were scoured from the schedules filed by Heritage Highgate.

Why is it important to examine financial schedules filed by bankrupt builders? As a matter of due diligence, you should always assess the financial position of bankrupt builders before buying from them. It tells you about how well the development will be maintained and whether you can claim on home warranties, etc.

Check out our Latest Report on Heritage Highgate which provides an analysis of the builder’s financial position, based on financial statements filed in bankruptcy proceedings.