Assuming there are no eleventh-hour snags, Caruso Homes of Crofton, Md., will emerge from Chapter 11 bankruptcy protection within the next two weeks. That would put Caruso, which filed for protection on June 23, 2008, in rarefied company with a handful of home builders that have entered Chapter 11 and lived to tell about it.
Like many builders, Caruso Homes was hammered by an economic collapse that exposed the financial fragility of the builder’s aggressive expansion ambitions. By the time the builder and 24 affiliates filed for Chapter 11, Caruso Homes had more than 3,000 lots and debts that exceeded $110 million, $88 million of which was owed to banks.
This past year has been an arduous series of negotiations with lenders and investors, but the reorganization plan was finally was affirmed by a bankruptcy court judge on Sept. 4. That plan illustrates just how complicated it can be for a builder in dire straits to travel through bankruptcy and arrive at a point where it can operate again, unencumbered by its debt obligations.
Joel Sher, an attorney with Shapiro, Sher, Guinot and Sandler, who represented Caruso Homes during the bankruptcy proceedings, says that his client survived the ordeal because “it was able to maintain liquidity” (which included $2.5 million that owner Jeff Caruso put into his company after the bankruptcy filing). Sher also notes that Caruso maintained good relationships with his lenders and kept up the properties that collateralized his debt. “We took some tough stands, but there was never an adversarial situation.”
To get out from under its debt load, Caruso Homes cut various deals with its creditors, which include nine traditional banks, to dispose of more than 770 lots. Some banks simply took back the land; others are allowing Caruso to complete construction; in some cases, land was sold to investors, from which the builder struck agreements to take down lots at a later date. Caruso estimates that creditors will get back about 30% of what they were owed. The banks will also get another 3% to 7% from Caruso to release guarantees and a cut of the builder’s proceeds over the next three years.
Some of the affiliates will be recreated as new holding companies, but Caruso Homes as an operating entity will remain pretty much as it was before Chapter 11. However, Caruso says his company will be considerably smaller (it currently has only around 20 employees) and initially will focus on contractor-fee work.
It will manage the build-out of a 400-lot active-adult community called Symphony Village in Centerville, Md., for its investor-partner, the Dutch firm SNS Property Finance. (Caruso says that community has about 120 lots left to build on.) Caruso Homes will also take down about 100 lots from investors at two other projects and manage the buildout for a fee. Those projects will include regional models from which Caruso Homes will market five smaller (5 to 20 lots each) projects.
Caruso says his company is also working with SNS to build out a 1,000-lot community in Anne Arundel county in Maryland that was recently rezoned to market-rate from active adult. (Caruso thinks the 55-plus market is waning.) However, to move forward on this, Caruso says he’s going to have to hire more people. In July, he brought in Bob Schultz’s organization, New Home Sales Specialists, to help him rebuild his sales team.
John Caulfield is senior editor for BUILDER magazine.