There's been continued doubt as to whether Reston, Va.-based Comstock Homebuilding Cos. would continue operating through the balance of 2008, given the market's headwinds and the amount of debt the company has coming due this year. But yesterday, the struggling company struck a deal with one of its lenders to eliminate $32.7 million in secured debt, a move that gave the company a little breathing room by improving its total leverage from 80.8% at the end of June to 76.9% today.

The agreement with BB&T was termed a "friendly foreclosure," or a deed in lieu of foreclosure, in that the company effectively handed assets--265 lots in Atlanta and 101 lots and 65 condo units in Northern Virginia--back to the bank as collateral for loans in default.

"A friendly foreclosure is a structure that benefits both parties," said Comstock CFO Bruce Labovitz in an e-mail.

The win for Comstock is that the deal comes with no strings attached. The bank takes the haircut if fair market value of the assets is less than the loan value. "[BB&T accepted] the deeds to properties as payment in full for the outstanding obligations," said Labovitz. "This avoids 'mortgaging' our future earning potential."

BB&T also released the company from its obligations with no deficiency liability post-foreclosure, meaning should any issues arise with the properties following foreclosure, they will be the bank's headache rather than Comstock's problem.

BB&T, on the other hand, benefits from expediency in foreclosing on the properties and is in a more advantageous position should the company eventually file for bankruptcy.

Legal and financial experts consider friendly foreclosures an alternative to bankruptcy.

It's unclear whether Comstock will continue to play a role in the management and monetization of these assets on behalf of the bank. Larry Comegys, a managing director with financial advisory firm Algon Group, said that sometimes in cases of friendly foreclosure, banks will keep the builder involved in the day-to-day management of the assets, typically using a fee structure, in attempt to prop up the asset value. Although technical ownership has changed hands, "it looks like the names haven't changed on the door," Comegys explained.

Further details regarding whether this deal will be a model for workouts with additional lenders were unavailable.

"As detailed in the press release, we consider this an important first step in our efforts to reposition Comstock. But until we complete negotiations with all lenders, any additional comments would be inappropriate," stated Labovitz.

At the time of the deal's announcement, the foreclosure process on select lots at MaristoneThe Bluffs at James Road, Wyngate Point, and Glen Ivey communities in Atlanta was completed. A similar process is underway at two of the company's Virginia projects, Barrington Park and Woodlands of Round Hill; the transaction should close before Sept. 30.

Comstock started showing signs of stress in 2007. By April 2008, the company's auditors, PricewaterhouseCoopers, indicated that, following an audit of the company's 2007 financials, there was serious concern over whether the company would continue operating as a going concern.

In early July, unable to maintain sufficient interest reserves on $94 million in debt, the beleaguered company stopped making scheduled interest or principal payments on the debt and hired Brad Foster of FTI Consulting as an interim chief restructuring officer.

While the BB&T deal is a significant milestone in the restructuring of the company's debt--and provides a potential template for future deals with other lenders--it doesn't get Comstock out of the woods yet. In 2Q2008, the company logged an operating loss of $17.0 million, marking a 115% drop from a year ago. Total revenues for the quarter came in at $12.0 million, as the company netted 20 new sales; cancellations ate away more than 40% of its gross orders.

Moreover, during the quarter, the company took roughly $13.7 million in impairments, with an undisclosed amount related to the BB&T properties. As of June 30, the company's cash position stood at $9.9 million. Following the BB&T debt elimination, Comstock has $124.5 million in total debt outstanding.

Comstock is hardly the only builder--public or private--in desperate negotiations with lenders. Algon Group's Comegys said that he's seeing more unsuccessful work outs, a factor contributing to the increasing number of builders shutting down operations.

"It's getting harder and harder for builders to restructure with their banks," Comegys said. "The rollercoaster is moving into a much steeper decline."