An investment firm that has made its mark in condo conversions now plans to crack into home building by acquiring troubled companies, retaining their management teams, and injecting new financing and operational disciplines into their businesses.

Homebuilder Capital Solutions (HCS) in late December acquired about two-thirds of the assets of Village Homes, a Greenwood Village, Colo.-based builder that has been in Chapter 11 since November 2008. HCS spent $21.9 million to purchase 57 completed or partially completed homes, 950 lots, and the Village Homes name, under which homes will continue to be built and sold.

Many of Village’s management team, including senior vice president Matt Osborn (whose family owned the company), is staying on to run the business. “It's an opportunity for us to restart our communities and restart building in those communities,” Osborn told The Denver Post.

HCS is a Denver-based affiliate of Colorado & Santa Fe Real Estate, which in 2009 spent $115 million to acquire distressed residential projects in Arizona, Florida, and Colorado, and plans to spend another $250 million over the next two years in the same way.

Marcel Arsenault, HCS’s chief executive, tells BUILDER that his company is targeting builders whose core structures are sound, regardless of what actions led them astray during the housing downturn. “I need to find partners who get it, who got caught out there, and are looking to get back into the game,” says Arsenault.

During the past 12 years, Arsenault—through another business unit of Colorado & Santa Fe called Condo Conversion Solutions (CCS)—and his partners have done $450 million in condo conversions. He explains that CCS was set up “to take advantage of what was coming down the pike” in terms of turmoil in the housing market. HCS is “an outgrowth” of that model, and about 15 months ago it paid around $18 million in cash to acquire D.R. Horton’s Trimark division in Denver, which included 186 attached homes and about 950 finished lots. “We’ve had a terrific experience with this [deal],” says Arsenault. “We’ve sold out and made a lot of money, and now we’re starting to build on the land.”

Since consummating the Trimark deal, HCS has made three other purchases in Florida, one of which has more than 1,000 residential lots. All told, HCS controls more than 4,000 finished lots. “We like that business, and we’re good at it.”

Arsenault wants to position Village Homes to be “one of the builders that can give the nationals a run for their money.” It will hold onto what it considers to be Village’s “best lots” and sell the rest to other builders. Ideally, Village would be building about 100 homes per year. However, where Village previously had been active in 12 subdivisions until it filed for bankruptcy protection, Village’s construction activities are now confined to four or five communities, according to John Waggoner, president of Lowe Enterprises Real Estate Group-Central. Lowe Enterprises contributed about 5% of the money to acquire Village Homes’ assets and is acting as the managing partner.

Lowe’s “point person” on this deal, says Waggoner, is Eric Eckberg, a senior vice president at Lowe who, between 1994 and 2006, was division president of TOUSA’s Engle Homes division in Denver. Waggoner says that Eckberg is working closely with Osborn and his team.

Initially, Village would build single-family detached homes from its most successful house plans, which over time will be tweaked to match buyer demand. It remains to be seen, though, to what extent Village can self-fund its recovery. Waggoner says the turnaround plan primarily calls for using cash generated from land and home sales. But Arsenault says that if Village needs to borrow money, he expects its leverage would be 50% on a project’s cost, and up to 75% for construction. Arsenault says he doesn’t fear debt and is willing to personally guarantee loans, which would separate him from most other builders who have been scorched by such guarantees. “The best time to borrow is in 2010 [because] I’ll be the only one standing in line at the bank.” He adds that his company paid off its loan for the Trimark acquisition within six months.

Both Waggoner and Arsenault are convinced that Denver’s housing market will be among the first in the country to recover. Arsenault says his opinion is based on the same kind of intense analysis of the housing market that led his company, in 2005, to stop buying land, sell most of its commercial real estate (for around $100 million), and to short the stock of KB Home, well before the housing bubble had burst.

Arsenault’s hedge fund has started buying home builder stocks again, and “all of the indicators are starting to turn positive.” He expects the housing sector to bottom out and rebound within the next 12 months. Meanwhile, HCS is looking at other distressed builders it might consider acquiring in Florida, Arizona, Las Vegas, California, Denver, and the Carolinas, with Florida in particular “presenting tremendous opportunities.”

Waggoner says that Lowe views its involvement in buying Village’s assets “as an investment,” and believes its four-year turnaround plan “will generate very attractive risk-adjusted returns.” He concedes, though, that Lowe’s multiyear plan invariably has multiple exit strategies, depending on how market conditions shake out.

John Caulfield is senior editor for BUILDER magazine

Learn more about markets featured in this article: Denver, CO.