What a difference a week can make.

Up until last Monday, Kimball Hill Homes was negotiating with a financial investor that was poised to acquire the beleaguered builder and lift it out of Chapter 11, which Kimball Hill had entered in April. Kimball Hill's 17 lenders were on board with the deal, and the builder, according to its CEO Kenneth Love, had even signed a letter of intent and a term sheet with the investor.

Then, suddenly, the investor got cold feet, says Love. He couldn't pinpoint why exactly, except to say "things just got gloomier." Four other possible suitors for Kimball Hill's assets had dropped out of the picture over the previous two months, as the credit crisis tightened and the housing market continued to deteriorate. Love says that investors finally lost confidence in the housing market when Kimball Hill’s business in Texas—previously the one state that seemed immune to the housing virus—got sicker.

After a "quick deliberation" among the company's executives, Love says he decided the only course of action left would be to shut down Kimball Hill Homes' operations, just shy of its 40th anniversary. Over the past few days, the company laid off 160 of its 400 employees. However, Love insists that the dismantling of the company is not going to be done with a wrecking ball. "We're trying to get through a pretty disappointing week with our heads held high. And over the next months, I think you’re going to see a very different kind of wind down."

In an interview with BUILDER yesterday afternoon, Love laid out how Kimball Hill intends to close its operations, in three phases. Over the next 120 days, the company intends to complete 450 homes that are in various stages of construction, and deliver those homes to buyers. Within the next six months, Kimball Hill also hopes to be able to sell its 170 homes in inventory and 90 models. (It is returning deposits to around 100 buyers of homes that hadn't been started.)

During the second phases, which will happen simultaneously with the first, Kimball Hill will attempt to "monetize" its land and other assets. As of October 31, the company had 66 owned communities in which there are 3,018 finished lots, 419 lots under development, and 3,740 "paper," or raw, lots. Love says that he would prefer to sell off these assets in bulk to one or a few buyers, even though he admits the demand for land right now is soft. "The gap between bid and ask has widened," he observes. That being said, he believes there are investors looking to buy land they can hold on to for a number of years until market conditions improve. However, if Kimball Hill can't find a single buyer for its real estate, it will sell off assets individually over the next 15 months.

Phase three will involve tying up loose ends, like pending lawsuits. But unlike most other bankruptcies, Kimball Hill is not saddled with a blizzard of mechanics liens. "We’re very proud of what we did during the Chapter 11," says Love, whose company set up a pre-petition liability fund that, to date, has repaid 96 percent of its trade partners and product suppliers. Love notes as well that as employees are laid off, each will receive a "fair" severance that is based on their levels of responsibility and tenure with the company. (Kimball Hill still has $35 million in debtor-in-possession financing it can draw on, as well as cash from the sale of its homes.)

When asked to recount at what point Kimball Hill's fate was sealed, Love says it was when it realized that it couldn't reduce its debt quickly enough. "We took action" to de-leverage its balance sheet in 2005 and 2006, he explains, including selling a 20 percent stake, for $110 million, to a subsidiary of GMAC. Love says the company thought it would be able to sell more equity to investors until the downturn accelerated, which also severely limited its cash flow. "Our problems were not operational; they were financial. Every company has to decide what it wants to be. We decided to reduce debt. We just couldn’t paddle fast enough."

Love intends to stay with the company for the next few months. He's not sure what his next move will be, but he would like to remain in the home building sector. Despite a tumultuous and nerve-wracking year, which included the death of the builder's founder, David Hill, and the ultimate dissolution of one of the largest production builders in the U.S., Love says he still sees home building as "a compelling business. I've grown to love it."

John Caulfield is senior editor at BUILDER magazine.

Learn more about markets featured in this article: Chicago, IL.