By the time you read this article,it could be out of date. Builders are filing for bankruptcy protection faster than the media can keep up. And the likelihood that more companies will have to take that route hasn’t been this great in decades as foreclosures accelerate and credit tightens toward the point where builders run out of cash and options.
Through January, more than a dozen builders had filed for bankruptcy over the previous several months. The number of bankrupt contractors is unquestionably worse. In Northwest Arkansas alone, 70-plus building-related bankruptcies were filed in 2007, according to that market’s Morning News. “We’re just seeing the tip of the iceberg,” predicts Brett Weiss, an attorney representing Turner & Associates, an Upper Marlboro, Md.–based developer trying to reorganize under Chapter 11. The largest builder to file to date is TOUSA, which on Jan. 29 petitioned for Chapter 11 protection with more than $1.7 billion in liabilities. Bankruptcy provides TOUSA a haven to restructure its debt and keep its home building divisions running. Experts warn, though, that the process is never a panacea for what ails a failing business.
As more builders drift toward what, for most, would be uncharted waters, Builder took a closer look at companies that have filed either Chapter 11 or Chapter 7, to see what builders can expect from the ordeal. What emerges is expensive, complicated, and time-consuming. Builders must be prepared to relinquish some control of their operations and assets to creditors that usually include banks, municipalities, suppliers, and subcontractors. Even the smoothest bankruptcies have unforeseen circumstances. And while there have been successful builder reorganizations, such as NVR’s in the early 1990s, the odds of coming out of bankruptcy as a functioning entity are long.
“What drives a bankruptcy is the loss of liquidity,” says a source involved in Neumann Homes’ Chapter 11 case, who requested anonymity. “Even companies with lots of cash eventually run out.” Last October, the managing partner of America’s First Home in Florida insisted that his company would weather the downturn because it could draw on a $20 million cash reserve. When it filed for bankruptcy protection in December, this builder listed only $850,000 in cash on hand. In January, America’s First Home petitioned a bankruptcy court to liquidate its assets.
Builders in trouble shouldn’t count on lenders to bail them out, either. For one thing, more banks are having their own financial problems, so their patience has worn thin with debtors. Anthony Perry found this out when he started alerting his banks a year ago that his company, Oakwood Homes in Woodstock, Ga., was struggling. “Some stopped speaking to me, others cut me off and said they’d never lend me another cent, and a few tried to foreclose on us,” says Perry, who in January filed Chapter 7 and is liquidating his business. Builders that cross-collateralize their bank loans with overlapping parcels of land can run into problems when, under bankruptcy, they want to sell different pieces of that real estate and need to get multiple banks to sign off on the transaction, which bankruptcy experts say is usually easier said than done. When banks shut off their faucets, desperation inevitably ensues: RS Custom Homes in Clackamus, Ore., filed for bankruptcy in December with $557,105 in liabilities, a good chunk of it credit card debt on 15 accounts that served as “cash flow” for its owner, Robert Swelland, when RS couldn’t sell five homes it had built on spec. (Its lender repossessed those houses four months earlier.) Brad Elliott, owner of Elliott Building Group in Langhorne, Pa., which is liquidating under Chapter 7, tried to keep his business afloat last year by borrowing $1 million against personal assets from an investor that charged him 35 percent interest.