Monday, December 29th, 2008 at 10:04 PM
‘Contrived Default’
from sddt.com
Barratt American, the Carlsbad-based homebuilding firm, and three affiliates, filed for Chapter 11 bankruptcy protection on Christmas Eve, but how much it owes, and how it will survive aren’t immediately clear.
While Bank of America (NYSE: BAC) has claimed it is owed $79 million in secured debt (not counting $5 million in unsecured BofA debt) and Barratt’s top 20 unsecured creditors bring the total to more than $100 million, any remaining secured and unsecured creditor totals weren’t listed in the bankruptcy filing.
Along with BofA, the top creditor amounts include $2.66 million for Interior Specialist Inc. of Carlsbad, $1.3 million for Canac Kitchens of Carlsbad and $1.26 million for SelectBuild Construction of San Marcos.
Michael Pattinson, Barratt American president, declined to speculate on how much is owed saying it would just be a guess. He did say he plans to keep operating and develop what he can until the company gets back on its feet.
“We will continue to build custom homes and fire replacement homes as we sell existing assets and reorganize our company with a view to re-commencing new home construction in 2010. We do not foresee any recovery in the housing market that would prompt speculative home development in 2009,” Pattinson said.
So how did Barratt American find itself in this situation? While an economy with home sales at a trickle didn’t help matters, Pattinson said when Bank of America yanked its $125 million credit line in August 2007, that was the blow that staggered his firm. Pattinson was able to get about $70 million on that line when the bank balked.
Pulling credit lines and not renegotiating loans has become increasingly common in this economy. San Diego-based Innovative Communities was left in worse shape than Barratt after City National Bank refused to renegotiate a $15 million loan. Innovative is about to embark on a Chapter 7 liquidation proceeding. That company had about 5,500 residential lots in the Southland — most of which are outside of San Diego County.
The lenders in both cases have declined comment pending legal proceedings.
Pattinson and a group of partners purchased Barratt American for $165 million in 2004. The firm had been a customer of BofA for 27 years beginning in 1980 and had borrowed and repaid more than $1 billion until the bank created what Pattinson referred to as a “contrived default” in August 2007. That happened when the bank refused to extend loans at its Nantucket (in Leucadia) and Magnolia Estates (in Carlsbad) developments upon their bi-annual renewal dates. Barratt was then forced to stop construction on homes that were currently in escrow.
Over the next seven months, Pattinson said Barratt paid interest on a frozen bank line and paid down principal by $30 million in anticipation of the line’s renewal — going so far as to slow the company’s payments to its subcontractors.
When Barratt stopped paying interest, BofA commenced foreclosure proceedings on 11 properties around Southern California, representing about 1,300 lots from San Diego to Los Angeles. Seven of those properties are already gone and the remaining four are expected to be taken by BofA shortly.
Pattinson said he finds it particularly galling to watch the federal government bail out banks, including BofA, while the bank used its bailout money to purchase such troubled behemoths as Countrywide Mortgage and Merrill Lynch.
The 2,500-acre Fanita Ranch property in Santee, where about 1,400 homes are planned, that is owned by a separate Barratt-affiliated entity is not part of the bankruptcy proceedings. However, in October, Guaranty Bank of Los Angeles filed a notice that Fanita Ranch, L.P., a Barratt-affiliated entity, had defaulted on a $25 million loan. This debt reportedly comes to more than $27 million with interest.
Pattinson said he has lined up a new financial partner and he is working with Guaranty to renegotiate the Fanita note. He added that matters have been complicated due to ongoing environmental litigation involving the developer, a group known as Preserve Wild Santee and the city of Santee. With the building climate in particular, Santee officials including Mayor Randy Voepel, have openly wondered whether or not Barratt can still develop this property.
“I’m confident we’ll get this resolved,” Pattinson said.
Pattinson isn’t just sitting waiting for something to happen. As a result of this frustration, Pattinson and several other homebuilders, including Innovative Communities President Tom Dobron, formed a group called the Homebuilders Coalition for Economic Recovery to take on the banks by, among other things, lobbying for banking reform in Congress.
Since June, 154 builders nationwide have joined the coalition, including 70 from California. “Almost all builders report being the victims of contrived defaults and made to order appraisals as banks disengage themselves from residential lending and instead pursue builders for recovery and fulfillment of personal guarantees,” Pattinson said.
The goals of this consortium are multi-faceted. One goal for the coalition is to eventually create pools of unleveraged funds so homebuilders won’t have to rely on banks.
For now Pattinson’s company must just hang together. Barratt had 140 employees at its peak earlier in the decade, but is down to roughly 15 today. Dobron, who had to lay off some of his own children, let 85 employees go before calling it quits completely.
There is no question the banks hurt, but so has the economy. In San Diego County, home prices have dropped by as much as 40 percent within the past 18 months and the margins have evaporated. Dobron notes that home prices are what lot prices were a year and a half ago in Las Vegas where he has built many of his projects, and such a reality makes tract homebuilding all but impossible.
Pattinson said rebuilding homes destroyed by fire and custom homebuilding should keep him going, but concedes it could be a long time before Barratt returns to what it was.
From Zach at the NCT:
But Dan Schaldach, owner of D&S Construction in Escondido, said he sees it differently. His company has been framing houses for Barratt for years, he said.
“I think he (Pattinson) has been blaming other people for their mismanagement,” Schaldach said. “They had a pretty high lifestyle, and it caught up with them.”
His article:
http://www.nctimes.com/articles/2008/12/29/business/zbb246c7de6ad69e88825752e0077eeba.txt
Posted on Monday, December 29th, 2008 at 10:04 PM in Foreclosures/REOs, Local Flavor | 7 Comments » | 
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1. By 2004 (when he purchased the company), the bubble was painfully obvious to anyone who cared to pay attention to the trends. IMHO, it was very poor timing that led to Baratt’s problems (and smart timing by the company’s sellers who actually knew what they were doing in 2004 — selling high).
2. It would be great if the whole concept of developers buying up large swaths of valuable land and then sticking ugly McMansions on tiny lots would come to an end. I personally think it would be in everyone’s best interests (except the developers and homebuilders) if large, corporate land purchases were restricted so that end-users could buy their own lots and build custom homes. When developers and builders buy up all the land, they can claim that we’re “running out of land” when, in reality, there is plenty of land, but it’s all under the control of a few entities who want nothing more than to drive land prices up. Hence, we get the hideous tracts of pink stucco boxes all stuck together, without the land and vegetation that are necessary to keep our environment clean and provide a more pleasant landscape for those who actually plan to live there.
Good riddance to them.
CA renter | December 29th, 2008 at 11:16 pmI think it is total bullshit that banks are pulling credit lines to good customers.where is all the tarp money going?Now they are screwing people on interest rates for credit cards.Amex yanked about 30 grand in credit from me for no reason.I had no balance and have awesome credit.This is hurting the economy bigtime.
arizonadude | December 30th, 2008 at 5:05 amYou might add to this information that the federal regulators and the California Dept. of Financial Institutions essentially prohibited banks from lending on residential projects in 2008. A result of the FDIC increase in coverage for bank accounts I am told.
It’s an unreported story that I think may come out that the feds and state are also not letting the banks lend even though the lender might be willing to commit to at least some loans.
Mozart | December 30th, 2008 at 9:48 amI think it is total bullshit that banks are pulling credit lines to good customers.where is all the tarp money going?
It’s buying treasuries, which is why the treasury rate has been near zero.
JordanT | December 30th, 2008 at 9:58 amYeah I’ve seen first hand multiple developers hoard large swaths of land, mostly between the 5 and 805 freeways near the 52. They even lease out some of it as farmland for several years to increase demand for the few houses they do build.
BDiego | December 30th, 2008 at 1:43 pmI’ve got news for you, Mr Pattinson: it’s not written in the Constitution that lenders are always supposed to roll over loans. Homeowners trying to refinance or tap HELOCs, SIVs and conduits trying to roll over short-term debt, investment banks large and small, foreign banks, pretty much everyone else is in the same boat with you, Mr Pattinson. Haven’t you noticed?
A line of credit is not the same thing as savings in the bank, way too many people have forgotten that.
Daniel | December 30th, 2008 at 3:00 pmMr. Pattison was quoted in one of the local papers (in 2007, I think) as saying somthing to the effect of, “I don’t believe in lowerring prices; all it does is make people stop buying–they then only wonder, ‘Well, what will the price be next week, next month?’ It ruins the market.”
What Mr Pattison forgot is that it’s not always a seller’ market; and whether he likes it or not, he doesn’t get to arbitrarily set his price–a buyer has to agree with it.
We experienced this first hand, trying to but one of his homes just as the market was starting to decline. They never would ome close to what we believed was a fair price. And all the homes in Carlsbad that were supposedly in escrow were apparently not comp’ing (by either the banks and/or the buyers) at the agreed-upon prices, so they fell through. He should have had a bit of a fire sale and gotten out. But he didn’t and now BofA owns the homes.
I agree, that bad management and poor timing are not the banks fault.
shoppingaround | December 30th, 2008 at 6:17 pm