Richard Borge

Los Angeles–based KB Home an-nounced in September that it was returning to the Mid-Atlantic market, more than a year after retreating from it as the economy was unraveling. In its absence, 180 acres in Gaithersburg, Md., which KB and Centex acquired four years ago to develop into a $1 billion mixed-use community, have been slogging through one of the more contentious bankruptcy proceedings and extended legal battles in recent memory.

Litigants that include the builders, developers, and Bank of America agreed in late September to a 30-day timeout to mediate their differences. Any resolution, though, would require compromises and concessions that neither side previously had shown much inclination toward making. Meanwhile, Gaithersburg’s planners wait and wonder if this property will ever be developed.

Documents filed with bankruptcy courts in Maryland and Delaware recount how the Crown family, which owned the farmland for nearly a century, decided to divest to avoid paying steep inheritance taxes after an uncle died. In September 2005, they agreed to sell the raw land to two investor/developers Stephen Lebling and Aris Mardirossian, who were then partners in Crown Village Farm, a joint venture that KB and Centex formed to purchase and develop the property. LaSalle Bank financed the joint venture with a $100 million term loan and a $100 million revolving credit facility. (Bank of America acquired LaSalle in 2007).

The developers, though, subsequently accused KB and Centex of reneging on certain aspects of the partnership agreement. They claimed they were owed millions in consulting fees for the role they played in bargaining down the purchase price to $137 million ($153 million after closing fees), and getting Gaithersburg to annex and rezone the 182.8 acres for residential in 2006. They said the agreement and corroborative evidence supported their claim that the joint venture would convey 18.5 acres of this property to their companies for separate commercial development and would pay them $15,000 for every housing unit developed at Crown Farm.

In their amended complaint, the developers are demanding the 18.5-acre commercial parcel plus $30 million in damages.

The “sketch plan” for Crown Village Farm calls for 2,250 single-family attached and detached homes (12 percent of which would be moderately priced); 320,000 square feet of retail space (which would be developed by Crown Retail Farm, a business entity owned by Finmarc, a property management company); and the allocation of 32.1 acres for schools and a transit station.

Building this community became less feasible financially as home buyer demand withered. The joint venture tried unsuccessfully to sell a portion of the land in 2007, and then the entire property a year later, at which point development was in limbo. The outright sale couldn’t muster a bid higher than $60 million, despite Bank of America’s appraisal of the land’s value at $104 million.

Crown Village Farm filed for protection from creditors under Chapter 11 on May 1, 2009. Lebling and Mardirossian contend that five months earlier, the builders and lender concocted a prepackaged reorganization plan that, according to documents, would dissolve the joint venture’s obligations to all creditors except Bank of America, would release the builders from their $100 million note if they each paid the bank $22.5 million, and would allow the builders to acquire the land at auction for $70 million.

At presstime, the developers were pursuing their lawsuit against the joint venture, the builders, and the bank, according to Mardirossian’s attorney Joel Sher. The land will be held in abeyance until the bankruptcy case is settled. But as it re-enters the region, KB is noncommittal about whether Crown Village Farm figures in its future. “We are planning to build a mix of both townhomes and single-family homes in a number of attractive sub-markets in the area,” KB told Builder via e-mail. (It’s not clear if Centex, now part of PulteGroup, is still in the development picture.)

As for Gaithersburg? “It would have been nice if we had the revenue and tax base in place by now,” says Greg Ossont, its planning director. But the city wasn’t banking on that money and has another 4,000 residential units and four million square feet of commercial space in its pipeline.

Once Crown Village Farm’s lawsuits, bankruptcy, and ownership issues get resolved, Ossont expects the city would re-engage in discussions about its development.

Learn more about markets featured in this article: Washington, DC, Atlantic City, NJ.