On the surface, it looks like two builders trying to duck their creditors. But looks are not always completely revealing.
David Cohen and Todd Stevens, who explored selling their Scottsdale, Ariz.-based home building business, Hacienda Builders, to a local developer last fall, effectively shut down Hacienda's day-to-day operations in the spring of 2008. Around the same time, the partners formed a new business called Encanta Construction.
On June 12, the Arizona Registrar of Contractors (ROC) issued Encanta a contractor's license, even as it suspended Hacienda's license in July (it would have expired in September) when Hacienda lost its bonding and after at least 27 liens had been placed against its assets by subcontractors claiming nonpayment for services. The Arizona Republic reported last week that Hacienda had been named as a defendant in at least six civil lawsuits filed by various claimants that include Bank of America and the newspaper itself. The Republic also reported that Hacienda—which has not filed for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code—has faced foreclosures on more than a dozen properties.
BUILDER was unable to reach either Cohen or Stevens at Encanta's phone number, so it could not determine what activities their new company might engage in. "What it appears to be might not be what it actually is," observes RL Brown, a Phoenix-area consultant who publishes a well-respected housing newsletter. (Both Cohen and Stevens are former clients, although he hadn't spoken to either about Encanta.) In an e-mail, Stevens stated that he could not speak specifically about Encanta, but noted in general about economic conditions, "Until the supply and demand imbalance that exists in the housing market is corrected, foreclosures return to a level that does not cause the disruption we have seen in the markets and banking industry, and the economy recovers and consumer confidence returns, it is irresponsible to build new homes."
In Arizona, a new company can receive a contractor's license as long as a "qualifying party" within the entity applying for the license is not encumbered by liens or lawsuits. Brian Livingston, public information officer for the ROC, explains that the Registrar would not have issued Encanta a license had Hacienda filed Chapter 11 unless a bankruptcy court judge ruled that the licensing process could go forward. Livingston also says that it could take a year before the liens and lawsuits against Hacienda are sorted out, at which point a disciplinary ruling could, hypothetically, affect the renewal of Encanta's contractor's license.
Brown suggests that Hacienda's past could haunt Encanta, which he thinks might encounter problems obtaining bank financing or hiring subcontractors. But Reed Porter says Encanta shouldn't suffer from Hacienda's travails, which he says resulted from its banks abruptly cutting off that builder's line of credit.
Porter knows something about this because he says the same thing happened to his company, Gilbert, Ariz.-based Trend Homes. "After we threatened to shut down our operations, we had a verbal agreement with our bank to move forward on projects," says Porter, Trend's president. "But the banks didn't abide by that and wouldn't pay our subs." He also notes that Trend's deposits were in the same banks that provided its operational financing. "So when they pulled their credit, they simply swept up all of the money. No one could have foreseen that happening." Porter says Stevens told him personally that Hacienda's lenders would not allow Hacienda to close on several homes it had sold.
When the investment firm Najafi Cos. acquired Trend's assets earlier this year, the builder had to apply for a new contractor's license. "We had several men who were qualified to be qualifying parties," Porter explains, meaning they have the required experience, took a class, and passed a test before being issued a license. Porter goes on to say that while the license is issued to the company, if one of those qualifying parties were to leave Trend Homes, the company would have between 60 and 90 days to find a replacement. (The same is true of its broker's license.)
Porter says he was not surprised to read that the ROC had issued Encanta a license, but he feels the Republic's reporting was "unfair" and one-sided because the newspaper had gotten stiffed by Hacienda. He speculates that Hacienda did not file Chapter 11 because it is still working with one bank to close out one of its communities. At some point, he expects Hacienda to liquidate as an operating entity under Chapter 7.
As for Encanta, it is Porter's understanding that it is not being set up as a production builder, but would instead seek "onesy or twosy projects, if they can find them in this tough market." Porter doesn't think Encanta will have a problem hiring subs, because Trend didn't after it filed Chapter 11 as a precursor to Najafi acquiring its assets. "The subs understand what's going on with the banks, and almost every one of our subs has been willing to work with us. We had to give them more assurances through our lender, though, that they will be paid."
John Caulfield is senior editor at BUILDER magazine.
Learn more about markets featured in this article: Phoenix, AZ.