On Sept. 17, a hearing is scheduled in the U.S. Bankruptcy Court in Chicago, at which Kirk Homes is hoping a judge will give thumbs up to the builder’s amended reorganization plan. If the judge confirms the plan, the Streamwood, Ill.-based Kirk would be near the finish line for emerging from Chapter 11 protection, which it entered May 12.
That plan calls for Kirk Homes—which has been in business since 1978, and two decades later became an employee-owned operation—to be 49% owned by its president, John Carroll, with employees owning the rest of the company. Last year, Kirk Homes closed 78 houses and generated $24.7 million in revenue, compared to 328 homes and $113.3 million in 2006, its best year. The ESOP won’t be entitled to any dividends for five years.
As of Sept. 1, the company had $96.8 million in assets and $64.5 million in liability, most of which are owed to its bank lenders. The banks rejected the company’s first reorganization plan that would have repaid them around $31 million. When debt is undersecured—as when the value of assets used a collateral is worth considerably less than the loans themselves—claims are typically split into two classes: one based on the current value of the assets and the other known as “unsecured deficiency claims.”
Kirk Homes’ lenders, though, took the unusual step of choosing what’s known as a 1111(b)(2) election, which according to Forrest Lammiman, the builder’s attorney at the law firm Meltzer, Purtill & Stelle, entitles the banks to receive the entire $52 million of their claims over a 15-year period through a floating lien that can increase through appreciation of the collateral's value.
In some respects, Kirk Homes’ situation is similar to another builder, Caruso Homes in Maryland, which is on track to emerge from Chapter 11 by the end of this month. Caruso also had to appease lenders by amending its reorganization plan to give back more of its assets.
Kirk Homes filed a second amended reorganization plan last Saturday to reflect this new payout scheme. In the amended plan, the company also retains more assets. Initially, Kirk Homes was going to hold onto three subdivisions with about 350 developed lots, and its offices. In the new plan, the builder also retains 180 acres of vacant land at one subdivisions for future development, and 58 acres adjacent to its Apple Creek subdivision that’s been zoned for commercial development.
Lammiman told BUILDER on Thursday that a $3.5 million construction loan Kirk Homes had negotiated from Cole Taylor Bank may not be needed. That's because the builder's home sales and real estate liquidation during its bankruptcy protection period should leave Kirk Homes with a reserve fund of nearly $10 million by the time it comes out of Chapter 11.
John Caulfield is senior editor for BUILDER magazine.
Learn more about markets featured in this article: Chicago, IL.