Builder - December 2008 - (Page 36) UPDATE personal guarantees, the banks can go, and in some cases are going, after builders’ assets and properties. “I love the concept of the American Dream,” says Dobron, who started working for builders after graduating from college more than 30 years ago. “But today, the American Dream has turned into the American Nightmare.” During housing downturns, the home building industry tends to lose about 20 percent of its membership. But this recession is far worse, causing some analysts to project that 50 percent or more of home builders could either sell their assets and close their doors or fi le for bankruptcy. “There will be many more than in any previous downturn,” says Tony Avila, senior adviser to Americrest Homes of Boca Raton, Fla., a new home building company with private equity backing. “My guess is half of the Builder 100 will go bankrupt, be merged away, or shut down.” Banks remain under pressure despite the U.S. Treasury’s $700 billion bailout of financial institutions, because so many of the loans they made in the past few years, both to home buyers and to builders and developers, are now worth BUSINESS M to stay in business amid plummeting any builders are facing an uphill battle “I love the concept of the American Dream. But today, the American Dream has turned into the American Nightmare.”—Thomas Dobron far more than the assets they back. Banks also bought mortgage-backed securities, assets that have been and continue to be devalued. Banks are required to maintain certain levels of capital to back the loans they’ve made. With their loans underwater, their capital ratio requirements are going to fall below levels required by the FDIC, which (see page 38) could shut them down. F OR MOR E S T OR IE S ON T HE PL IGH T OF S T RUGGL ING BUIL DER S A ND T HEIR EF F OR T S T O W OR K W I T H T HEIR CR EDI T ORS, GO T O W W W.BUIL DERONL INE . C OM /BU S INE S S . land values and banks looking to protect their own investments by reappraising developments and asking for cash payments to make up lost equity. In such a world, with some banks coming after personal guarantees signed by builders to secure loans during the housing boom, home builders need all the help they can get. Below is a list of tips from sources mentioned in this story, as well as Los Angeles attorney Saied Kashani. Kashani worked for banks during the 1990s housing recession in California and now represents builders. He has had some success fighting for builders’ personal assets and has been retained by members of the Homebuilders’ Coalition for Responsible Bank Behavior in San Diego. ▪ SEEK OUT SPECIALIZED ATTORNEYS WITH LOCAL EXPERTISE. This needs to be done before builders actually find themselves in trouble with their loans. A coordinated rescue effort can be launched if the plan is put together wisely; this includes outlining how a project can return to profitability and presenting it to the banks proactively. Once the builder starts leaning toward failure, banks will smell the blood in the water. ▪ KNOW THE RULES. In California, one of the nation’s hotbeds of builder bankruptcies, banks can go only after assets held in the state, or held by a bank that has branches in California, Kashani says. If a California builder still has some cash in a bank account, there is no need to keep it in a California bank or in the same bank that gave the builder its loans. It may be wise to keep money in a number of different banks. ▪ KEEP IN MIND THAT BANKS ARE OBLIGATED TO MINIMIZE DAMAGES. Builders should present banks with an alternative to selling properties at auction, such as selling the assets to a third party. If a builder can demonstrate that will mean a greater return for the bank, it may be amenable to such a deal. Nothing precludes builders from being part of that third party. If a bank declines the offer, the financial details of that offer could be used against the bank in foreclosure court. ▪ PLAY DEFENSE. Sure, you could just bemoan the state of the economy, blame the media for scaring away would-be buyers, and let your banks take all your assets. Or, you could hire a team of specialist attorneys and fight them tooth and nail. Insist on being allowed to build out a project to pay a bank back rather than handing them the property. Take as much time in responding to them as you reasonably can. The harder a builder works to stay involved, the better the chances that the builder retains its assets and property and that the bank moves on and focuses on something else. ▪ DON’T TIP YOUR HAND. When a bank requests financial information, give it only what is requested and nothing more. Some builders who presented banks with their entire personal and business portfolios in an effort to be open and honest with the banks later regretted it. It is not necessary to disclose information that is not relevant to the case at hand. ▪ PROTECT YOURSELF WITH A MORTGAGE. A loan guarantor in California may not have to give the bank his own home if it has a mortgage on it. If a guarantor owns a home outright and signed personal guarantees to get bank loans, the bank may be able to take the house. ▪ REMEMBER, BANKS MAKE MISTAKES TOO. If a builder or its attorney finds an error, it can be used in court against the bank. Was an appraisal initially inflated by a bank appraiser? Do the loan documents contain erroneous language? Did the bank appoint a receiver to the loan who has a bond amount less than the loan value? Perhaps the bank violated the loan agreement by loaning more than stipulated in the loan documents and never adjusted the wording? Any small bank error can be used to give the builder more time to work out its problems or as a bargaining chip in a settlement.—E.B. HAVE BUSINESS TIPS OR STRATEGIES TO SHARE? E- M A I L D E N I S E D E R S I N AT: d d e r s i n @ h a n l e y w o o d . c o m 36 ■ B U I LD E R de ce m ber 2008 W W W.BUILDERONLINE.COM http://www.builderonline.com/business http://WWW.BUILDERONLINE.COM
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