Among Neumann’s trade creditors with significant exposure were companies that provided material and labor, such as Stock Building Supply and Republic Windows & Doors. (Neither would comment for this article, but Berman notes that some of Stock’s liens had been released, implying the pro dealer had accepted a settlement.) Few product suppliers are creditors in this case because Neumann required contractors to sign material waivers before starting any work. Sometimes, Neumann itself was the supplier: Avenue Incorporated, a carpentry contractor based in Orland Park, Ill., was owed $3.1 million, of which $650,000 was lien-related debt that included back charges and advances Avenue had made to Precision Framing Systems, a Neumann-owned component plant, which the builder sold for $1 million to an affiliate of Denver-based Oakwood Homes.
The mechanics’ liens are complicated by the fact that several were filed against homes Neumann had sold prior to filing Chapter 11. Others were filed against unfinished or unsold homes on properties that five of Neumann’s eight bank lenders took back in exchange for debt relief. (In mid-March, for example, Neumann turned over six developments to Residential Funding, its largest lender, which agreed to reduce Neumann’s $90 million debt to $13.6 million.) The banks themselves must now resolve these lien obligations before construction can resume on those properties, if they decide to continue building on the land they took back.
Hilco Trading Co., a financial services provider, was hired to assess Neumann’s real estate to gauge its liquidation value. “The land evaluation is a big determinant of [creditors’] rights,” explains Mark Fisher, an attorney with Schiff Hardin, a Chicago firm that represented several trade creditors, because it provides insight about which properties might be sellable and at what price. “Hopefully we’ll get something, but the process has been very slow,” said Avenue’s corporate counsel John Cooney in early February.
A cautious future
Several of Neumann’s 22 communities were unfinished when it filed for Chapter 11. The builder was active in two subdivisions in Antioch, Ill., where about half of the proposed 1,400 homes had been completed and another 50 were under construction. Jim Keim, the village’s acting administrator, said in early February that infrastructure, such as street lighting, and amenities, such as clubhouses and pools, hadn’t been installed. Performance bonds ensure that this infrastructure gets built, said Keim, “and we’ve had talks with bond agencies about forcing the start of that construction by the spring.” On Feb. 27, a bankruptcy court judge approved a deal between Neumann and lender Cole Taylor to liquidate Antioch’s unfinished Clublands development through an auction scheduled for May 14. A new company, called Newco, was formed to separate these assets from Neumann’s other properties. Cole Taylor expects to recoup $14.4 million from this liquidation.
Some of Neumann’s trade creditors told Builder they’d be willing to take on construction work or finish uncompleted homes, as well as any new homes the banks decide to place on the properties they’ve retrieved. Contractors are reluctant to turn down business in a bad market, but they are more careful about which builders they’ll work with. “What’s important is communication between our clients and ourselves,” says Steve Schwarz Jr., vice president of operations for Chicago-based SS Schwarz Construction, one of Neumann’s secured trade creditors. “What we’re saying to builders is that if someone sells a house, we’re ready to jump in and build it.”
But Hoffman thinks the “toughest question” contractors are asking themselves is, “When do you draw the line and tell a client you don’t want to work with them?” If market conditions don’t improve soon, the answer could become moot. “Even before Neumann, we’d recommend that contractors give customers a 60-day window,” says Cooney of Avenue Incorporated, who serves as outside counsel for other contractors. “That’s when I’d start sending letters demanding payment. Since Neumann, people are taking heed of that advice.”
Other stories in Field Report 2008: