And now for something completely different: banks complaining that builders won’t complete a master-planned community in what is arguably the country’s worst housing market.
That, at least, is what three giant lenders—JPMorgan Chase & Co., Credit Agricole and Wells Fargo & Co.—seem to be pushing for in their petition last week to the U.S. Bankruptcy Court in Nevada to force into involuntary Chapter 11 South Edge, a special-purpose partnership of builders and developers that’s behind the 2,000-acre, $1.25 billion Inspirata community in the Las Vegas suburb of Henderson, Nev., which has been all but dormant for two and a half years.
The banks—representing a group of 39 institutions that lent South Edge $585 million when this project first got off the ground in 2004—also want the court to appoint an interim, and then permanent, trustee to take over the operation of this project, which the banks complain has been held “hostage” by the builders that control 100% of South Edge (see chart). The banks say this appointment could be the “last hope” for this project, which they claim has been plagued by mismanagement and self interest, although it’s not clear from the petition how much of Inspirata might eventually be completed under a trusteeship.
Builder/developer acreage % interest in South Edge
KB Home Nevada 946.38 48.45
Focus Property Group 304.52 15.59
Coleman-Toll Partnership 205.49 10.52
Alameda Investments 159.0 8.14
Kimball Hill 122.86 6.24
Pardee Homes Nevada 95.71 4.9
Meritage Homes 68.96 3.53
Beazer Homes 50.4 2.58
Source: JPMorgan Chase & Co. petition to U.S. Bankruptcy Court in Nevada, Dec. 9, 2010.
The builders, which have 20 days to respond to this petition, aren’t saying much yet. KB Home, in a prepared statement, calls JPMorgan’s petition “a bad faith maneuver” that is “entirely without merit.” KB adds that there is a “better long-term solution” to developing this property, although what thay might be isn’t specified. Martin Connor, Toll Brothers’ CFO, told BUILDER on Monday that he hadn’t read the banks’ petition and that his company “generally doesn’t comment” about pending litigation.
When asked to characterize market conditions in Las Vegas since early 2008 (the point at which the banks contend that builders stopped taking down land at Inspirata), Connor responded “the area was deteriorating rapidly and continued to do so.” Toll had other projects in the Vegas market that had been “affected similarly” by the housing recession. “But in some cases, we owned the land, which is a whole different situation.”
This case boils down to who’s going to take the biggest financial hit for guessing wrong about this project and the market: the banks or the builders. In essence, the banks argue that by refusing to take down land after April 15, 2008, the builders (with the exception of Focus) were in breach of their contractual obligations (see takedown schedule below). And because the builders stopped buying land from South Edge (which, the banks reiterate several times in the petition, they controlled), South Edge fell into default on its loan and interest payments to the banks.
Amended Takedown Schedule
295.95 acres April 15, 2007
483.35 acres October 15, 2007
324.07 acres April 15, 2008
50.4 acres July 15, 2008
445.52 acres April 15, 2009
121.58 acres October 15, 2009
Source: JPMorgan Chase & Co. petition to U.S. Bankruptcy Court in Nevada, Dec. 9, 2010.
Of Inspirata’s original 1,953 acres, the builders have acquired 773.82 acres. Morgan contends that the builders were obligated to purchase the rest of the land, which the banks value at $270 million. The petition also contends that the builders are on the hook for as much as $600 million in development and maintenance costs, while at the same time they have failed to aggressively pursue “hundreds of millions” in municipal financing from the City of Henderson, which raised $102 million through a bond offering to purchase roads and other infrastructure from the community as South Edge completed it.
While all this was happening, two of the builders involved in this project, Kimball Hill Homes and Woodside Homes (Alameda was a Woodside LLC), went bankrupt and subsequently liquidated. But the banks assert that they are not asking the court to place South Edge into Chapter 11 because of the housing bubble bursting, “but rather on account of how the Builder-Defendants’ reacted to the bursting bubble and sabotaged their project for their own benefit.”
In its petition, Morgan contends that the banks were willing to restructure the terms of their credit agreement with South Edge; Morgan, in fact, entered into an amended credit agreement with South Edge on March 9, 2007, which increased its construction loan by $50 million. On May 27, 2008, the banks entered into a Forbearance Agreement on May 27, 2008 for the purpose of rejiggering this project’s credit terms. However, the banks now claim they were duped into entering Forbearance Agreement, which they terminated one month later.
In May 2009, Focus filed a suit against the other builders demanding arbitration on behalf of itself and South Edge, to require the builders to honor their contractual obligations.
While the panel said Focus had no standing to assert claims for South Edge, it found that the builders had breached their contracts, had failed to fund loan interest payments, had ceased construction, and had refused to take down land. The panel awarded Focus $36,815,354 in compensation. (The builders have filed notice that they intend to appeal this ruling.)
So where does all this legal wrangling leave Inspirata, whose plan included 8,500 homes and a 300-acre town center? So far, two of its proposed seven villages have been completed , and a third is in limbo. The Las Vegas Sun, quoting data from SalesTraq, reports that 427 homes were sold at Inspirata in 2008 and 2009. The petition asserts that South Edge has spent $43.3 million of the city’s bond money on infrastructure improvements, and would be entitled to “a minimum” of $91,956,686 if the community’s infrastructure were completed.
A court-appointed trustee, states the petition, could enforce a takedown schedule on the builders, recover infrastructure financing from the city, allocate funds for “basic maintenance and cost-effective affordable work,” and develop a reorganization plan for the project. Whether that means Inspirata would be realized as originally envisioned, though, remains to be seen. “A Chapter 11 trustee,” the petition states, “will be able to forge ahead with the lenders to develop and confirm a plan of reorganization or liquidation that will maximize the value of the Inspirata estate, to the benefit of the creditors and to the community at large.”
John Caulfield is senior editor for BUILDER magazine.
Learn more about markets featured in this article: Las Vegas, NV.
