Lisa Schoolcraft of the Atlanta Business Chronicle has an article in the September 19th edition entitled Home Builders at the End of the Line (subscription required for full article). In the article, Lisa discusses the reality that a reorganization is simply not an option for most builders and developers in today’s market. Many opt for Chapter 7 right off the bat, while others try Chapter 11 but quickly realize that they do not have the ability to pull it off.
Three big metro Atlanta home builders have filed for Chapter 7 bankruptcy, listing debts of $27 million among them. Homes By Ken Butera Inc. of Winder filed for bankruptcy Sept. 3, Quantum Homes Inc. of Atlanta filed Sept. 4, and Creative Customs LLC of Stone Mountain filed Sept. 12. Two affiliates of Quantum Homes also filed Sept. 4: JA Development Inc. in Atlanta and Buy Rite Group Inc. in Atlanta. Smaller home builder Copacali Homes Inc. of Canton and its affiliates Copacali Homes & Properties LLC and Copacali Communities Inc. filed Chapter 7 bankruptcy Sept. 16.
I frequently get calls from developers and builders who are experiencing financial difficulties or facing foreclosure. The funds have dried up, and no one is buying new homes. I discussed this issue with Lisa –
Many builders who have filed for Chapter 11 bankruptcy protection may not be able to survive, said Scott Riddle, a bankruptcy attorney who is representing Vision Real Estate Management Inc., which filed for Chapter 11 reorganization protection Sept. 1. Vision Real Estate Management is building the mixed-use development Edgewater Trail in the city of Buford.
“The most common issue now is that there is little hope for a successful reorganization for many home builders and developers,” Riddle said. To have a successful reorganization, builders and developers must have refinancing, additional loans or properties that are selling, Riddle said.
“All of those options have dried up to some extent,” Riddle said. “Many of the builders are simply at the end of the line as far as sales or funding and in that case, Chapter 7 is probably the only option short of just allowing a foreclosure.”
Other bankruptcy lawyers are also getting frequent calls –
“I talk to a broke builder almost every day,” said John Pennington, the bankruptcy attorney handling the case for Willmartin Properties LLC, which filed for Chapter 11 reorganization Sept. 1. “The sad thing is you can’t help them.”…
Chapter 11 reorganization is “a fairly expensive process if you can’t preserve equity or if the banks won’t give you time,” said G. Frank Nason, a bankruptcy attorney with Lamberth, Cifelli, Stokes, Ellis & Nason P.A. in Atlanta. If the bank is eventually going to foreclose on property while a builder is trying to reorganize, the builder ends up being liquidated anyway, he said.
Other cases involving home builders are not evident from Bankruptcy Court records. Many individuals decided to get in the building business a few years ago when the market was much better. They decided to build a spec house or two, personally guarantee the debt and put up their personal residence as collateral, and now they cannot sell the new homes. In many situations, it is a wasted step to file a bankruptcy petition on behalf of the company. Rather, the individuals simply shut down the company (which often has no real assets other than the real property), allow the lender to foreclose, and then file personal bankruptcy because of their personal liabilities.