Monday, April 6, 2009

Workouts 101: Complete the Project!

If you have a construction loan in trouble, your focus needs to be on completing the project. Lansner on Real Estate tells the sad story of Atherton Newport’s Stonehaven development here.

An excerpt details the consequences of the project shutting down while on partially complete:

  • After a year of standing idle, the development now is undergoing “forensic” inspections, examining the wood, the concrete slabs and the site to see what needs to be replaced and what can be salvaged.
  • “There obviously is some weather damage and vandalism that has occurred,” Patton said. “Luckily, all the roofs are on.”
  • Eight buildings have been standing with exposed wood framing and rusting nails. Seals around windows have been flapping in the wind, and drywall is stacked on floors inside the walls that have yet to be enclosed with tarpaper.
  • Once inspectors determine the scope of materials that need to be replaced, the new owner will treat the structures for mold and termites and recertify the slabs.

Sometimes a project shutdown is triggered when the lender stops advancing funds. That was the case on a Staybridge Suites hotel in Chicago.

As described in this Chicago Real Estate story from October, 2008:

Though the building’s shell is largely complete, construction crews walked off the job over the summer, a sign that CapitalSource had stopped advancing funds for the project. Subcontractors have filed liens with the Cook County Recorder seeking payment of more than $2.5 million for work on the building.’’

The loan was “out of balance,” and CapitalSource demanded that the joint venture come up with another $5.9 million in equity to bring the loan back into balance, according to the foreclosure complaint, which was filed earlier this month in Cook County Circuit Court.

The lawsuit doesn’t specify how the loan fell out of balance, but the loan agreement indicates that cost overruns could have pushed the construction budget higher than its original figure of $52.3 million, leaving the project with a funding shortfall. The loan is in balance only if remaining funds can cover remaining costs, according to a loan agreement filed with the complaint.

Often, if a bank is taken over by the FDIC there are transition problems. From a Nation’s Building News story in November, 2008:

Home builders with outstanding construction loans are reporting that they are having to stop work on new housing developments and are losing sales as the result of failed banks and thrift institutions being taken over by the Federal Deposit Insurance Corporation (FDIC).

“Builders with outstanding loans that are placed under FDIC control are frequently unable to contact a decision maker to deal with routine but time-sensitive matters related to loan draws or extensions,” NAHB President and CEO Jerry Howard said in a Nov. 20 letter to FDIC Chairman Sheila Bair…

Earl Snyder, a veteran FHA/VA home builder in Englewood, said that he has run into problems finishing eight homes in various stages of construction ranging from slab to almost finished. Six of the homes have already been sold to buyers with FHA mortgages. Although he was never late on loan payments, after being taken over by the FDIC his bank gave him 60 days to repay a $2.5 million construction loan.

In the case of the Stonehaven project, the the project seems to have been caught up in a much larger bankruptcy case. In a multicreditor bankruptcy action it can be difficult to fund additional advances to complete a project even if a lender wants to do so. Or, perhaps the developer realized they had no upside to the development and saw no point in working on it while the bankruptcy proceeded.

In any case, shutting down a partially completed project is one of the fastest ways to destroy real estate value.