Reprint from Nation’s Building News – The Official Online Newspaper of NAHB
Case Study: Developer is $300 Million in Debt and Sees $100 Million in Equity Disappear
(This is the third in a series of articles on what builders need to know about restructuring their debt and planning for surviving financial adversity in today’s real estate market.)
By David McCain and Bill Albers, MPKA, LLC
You have made the decision to hire a debt restructure specialist, and the process begins.
From the time you hire a debt restructure specialist to the time you reach a settlement can take as little as 60 days or as long as a year, but the process is typically completed within three to six months. The following case study was performed within this time frame.
Case Study One — Strong History Development Group
A developer for more than 40 years, Strong History had 50 active developments with cumulative debt exceeding $300 million, all personally guaranteed by Founder.
Founder’s personal balance sheet consisted of a few hundred thousand dollars in cash, with over $100 million of stated real estate equity spread over the 50 active developments. Unfortunately, a review by MPKA of the company’s projects and balance sheet found that the vast majority of the project finance loans were underwater (i.e., the loan amounts were higher than the projects were worth) and that Founder’s $100 million in equity was nonexistent at current real estate values.
MPKA was subsequently engaged to negotiate with Strong History’s banks. Following are some of the specifics in these negotiations.
Large National Bank
Large National Bank had five project loans with Strong History totaling over $40 million located in Florida, North Carolina and South Carolina. MPKA negotiated a global settlement with the bank with the condition that each of the five debt restructure workouts was contingent upon the other:
Loan One had an unpaid principal balance of $5.3 million. The project consisted of 210 entitled single-family lots, of which 110 were developed. When the loan was originated in early 2005, Strong History negotiated a finished lot takedown agreement with Large Public Builder at $70,000 per finished lot. When the market collapsed, Large Public Builder walked away from the property. With no sales, Strong History defaulted on the loan and Large National Bank filed a foreclosure action. The property design was fair to good but the location was fair to poor. Vandals repeatedly ravaged the utility boxes, fences and light poles.
Several appraisals later, the property was eventually determined to have a value of $1.9 million. Neither Strong History nor Founder or any investor had interest in continuing with the property. Ultimately, MPKA convinced Large National Bank to take the property back in a deed in lieu of foreclosure transaction conditioned upon Large National Bank releasing Strong History and Founder from the $3.4 million deficiency.
Loan Two had an unpaid principal balance of $6.1 million. The project consisted of 250 entitled single-family lots, 110 of which were developed, and 200 entitled undeveloped multifamily lots. The loan was originated in 2007. Several large national builders had finished lot option contracts ranging from $50,000 to $70,000 per lot, depending on lot size. The project was in a good location, but all of the large national builders walked from their option contracts.
Loan Three had an unpaid principal balance of $14 million. The project consisted of 2,000 entitled single-family units, of which 400 were developed. Three large public builders had lot contracts with Strong History. While the builders did not walk from the property, each significantly curtailed the pace and price of its lot purchases.
Both Loan Two and Three were in default and in foreclosure proceedings. Large National Bank received current appraisals totaling $15 million against a total debt of $20 million. MPKA arranged a transaction in which a private equity group purchased the two loans from the bank for $10.5 million, with the condition that the bank forgive all of the nearly $10 million in loan deficiency against Founder. In addition, with the bank’s consent, Strong History remained a participant in each of the loans on a management and development fee basis, and with a profit participation hope certificate after certain returns were achieved by the private equity group.
Loan Four had an unpaid principal balance of $9.9 million. The project consisted of more than 200 acres of mixed-use development, with 300 entitled lots, half of which were developed, 50 acres of developed commercial land and 30 acres of undeveloped commercial land. The property was in a good location and was well positioned.
Loan Five had an unpaid principal balance of $3.5 million. The project consisted of nearly 400 entitled but undeveloped single-family lots, many of which fronted the intercoastal waterway.
Both of Loans Four and Five were in foreclosure, with no debt service payments made for more than 12 months as both loans had matured. Appraisals on these two loans varied, however; the lowest valued appraisals totaled over $30 million against nearly $13 million debt. MPKA negotiated a loan extension on each of the two loans, essentially convincing Large National Bank that in the absence of a takeout lender, the most reasonable chance for repayment was to extend each loan. They were both extended for 24 months with a 12-month extension option.
Large Regional Bank
Large Regional Bank had four project loans with Strong History, totaling over $25 million, located in Florida, all personally guaranteed by Founder:
Loan Six had an unpaid principal balance of $3.1 million. The project consisted of 75 completed single-family lots. Two local builders had been buying lots at $80,000, but each walked from the community. The project and the lots were fair to good and recent appraisals suggested a value of $1.5 million.
Loan Seven had an unpaid principal balance of $7.6 million. The mixed-use project consisted of 265 single-family lots, 225 multifamily lots and 25 acres of office and retail space. While entitled, none of this project was developed. A national public builder had an option contract at $70,000 per finished lot but walked when the project stalled. At loan origination, the project was appraised at over $18 million.
Loan Eight had an unpaid principal balance of $10.5 million. The finished project consisted of 300 single-family lots but was in a poor location. Two national public builders walked from lot option contracts of $45,000. Recent appraisals suggested a value of less than $4 million.
Loan Nine had an unpaid principal balance of $4.2 million. The project consisted of 165 finished single-family lots, optioned to two regional builders at $42,000 per lot. Each of the two builders slowed their lot takedown schedules to one lot per month.
All of Large Regional Banks’ loans with Strong History were in default for nonpayment and in foreclosure. MPKA negotiated the packaged discounted sale of these loans for $10 million. In addition to eliminating the $15 million personally guaranteed deficiency of Founder, MPKA negotiated favorable loan purchase terms. The purchaser put $1 million cash down and received a loan back from Large Regional Bank of $9 million, three years interest only at prime plus 1%, totally non-recourse to the purchaser, and Founder was eliminated as a guarantor on the new loan. In addition, with the banks’ consent, Strong History stayed involved with each of the projects on a management and development fee basis, and as a profit participant, after certain investment returns were achieved by the new investor.
The next article in this series will continue to examine actual case studies of recently transacted deals.
David McCain and Bill Albers are the principals of MPKA, LLC. They have successfully restructured more than $1 billion worth of home builder and developer debt over the last 24 months.
Please call Claire Spence at 281-359-2118 to schedule a call with David McCain or Bill Albers.