Facts:
- 35 lot subdivision
- Site Improvements complete, including building pads
- 3 Model Homes Complete
- Total Loan Commitment $10.5 Million (average $300K per unit)
- 20 Homes completed, 10 homes sold and closed escrow 6 months ago, 8 standing, 2 under construction
- No recent sale activity
Builder:
- 20 years in business
- Past 5 years averaged 36 home sales per year
- Currently 3 projects under construction, all financed by different lenders
- Averaged $900,000 income over past 4 years
Status:
- Original Average Home Price $450,000
- Loan to Value 66.66%
- Current Average Market Value of Homes $340,000
- Local competition includes Publicly Held Builders
- Cost overruns have reduced
- Loan interest reserve has a positive balance that can keep the loan current for more than 6 months.
Builder Request:
The builder is proposing to complete the project, however calculates the project will only be able to pay off $9,850,000 of the $10,500,000.
The builder's reasoning is the market has lost value and the hard construction costs are over budget.
In addition, the builder asked for a compensation package to complete the homes, citing that he has no resources available for overhead and salaries.
Questions:
- Should the bank consider this offer?
- Are the builderÕs projections accurate?
- Is this a good project, well designed, well merchandized, comprehensive marketing program with qualified sales staff?
- Does the builder have the organization in place to complete the homes, including supervisory and accounting staff?
- Has the builder rebid the project recently to take advantage of the changed market conditions?
- What is the status of the builders other projects?
- What effect do the other lenders have on the long-term success of the builder?
- What type of competition is in the immediate market area?
Workout:
The Tuxhorn Company evaluates and reviews the project to answer the above questions. Each situation is different and requires insight based on knowledge and experience. Most banks do not want the project back; however they also do not want to put good money after bad. Our services provide a detailed evaluation of the current situation as well as evaluation of possible exist strategies. Examples of projects available on request.
