Deflating Arizona’s Builders : Bankruptcy Filing of Lincoln’s Parent Reverberates Through Valley of the Sun’s Economy

When American Continental Corp. filed for bankruptcy in mid-April, several of the Phoenix area’s largest home builders saw customer interest evaporate for two weeks.

John Lucking, manager of the planning division for Valley National Bank, the state’s largest bank, said, “Any time a company as large as American Continental has problems, it has an unsettling effect on the market, because we don’t know for sure how it will work out.”

With $7 billion in assets, American Continental ranks as Arizona’s fourth-largest company and is one of the state’s largest employers. The company, which owns Irvine-based Lincoln Savings & Loan, has made $1.4 billion in loans to Arizona citizens and businesses, and has invested $1 billion in Arizona real estate.

Shook Already-Troubled Economy

So when American Continental filed for protection from creditors, and regulators seized Lincoln a day later, the actions reverberated throughout an already-troubled Arizona economy.

The real estate market, the major component of the Arizona economy, has been battered for the last year by the effects of overbuilding, and will feel the brunt of the bankruptcy.

Lucking and Tom Hickcox, an executive with a large Arizona home builder, said real estate values are expected to gyrate more because of American Continental’s problems.

Hickcox said his firm had no customer traffic for two weeks after the April 13 bankruptcy filing. He said other area builders he contacted had similar slowdowns.

Terry Trost, an economist for the Phoenix Chamber of Commerce, said he is concerned about how regulators will dispose of the huge amounts of real estate that Lincoln had been developing. A “fire sale,” he noted, could greatly worsen the economy by further depressing the value of real estate.

Little Lasting Effect Seen Outside Real Estate

But Trost said American Continental’s financial woes should have little lasting effect outside the real estate industry.

“In a micro sense, there are all sorts of businesses who are affected by this,” Trost said. “But in a macro sense, the effect is zero. Most of the damage (to the economy) had already been done. . . . If you take real estate out of the picture, the rest of the Phoenix economy looks pretty good.”

Among those hit hardest by American Continental’s bankruptcy are subcontractors such as Cannon & Wendt Electric, which worked on the huge Phoenician Resort in Scottsdale, a hotel complex that cost $270 million to $330 million to build.

“They owe us $2.5 million, and it’s really wrecked our cash flow,” said Gene Whitson, a Cannon executive. “We have had to borrow money, several hundred thousand at 13%, to stay in business.”

More Than 2,000 Change Orders

The $2.5 million represents more than 10% of Cannon & Wendt’s annual gross. The disputed charges involve more than 2,000 change orders on the Phoenician--changes in the design or construction made midway through the project.

Cannon & Wendt is one of several subcontractors suing American Continental for a total of $19 million in unpaid bills for work done on the Phoenician.

“These are small businesses, and I’m scared some of them will go under if they wait too long to be paid,” local stockbroker Ray Catrozo said. “What seems like a small amount to American Continental represents a lot of these guys’ annual income.”

Disputes over payment for work on the Phoenician might have a bright side for the state’s construction industry, according to John Pape, a manager with the Arok Construction Co. He said his company is owed $25,000 for drywall and plaster work on the Phoenician’s health club.

“We have been trying to get a prompt-payment bill through the legislature for some time,” said Pape, a former president of the American Subcontractors Assn. “Keating has gotten the legislature’s attention for us.”

Identity Crisis for Continental Homes

American Continental’s bankruptcy created an identity crisis for Continental Homes, the Phoenix area’s largest home builder and a former subsidiary of American Continental.

“Our phones were ringing like crazy,” said Hickcox, the home builder’s vice president of sales and marketing. “We had calls from current customers and from people who had homes built years ago and still had service warranties with us--all of them wondering how it affected them.”

Hickcox said the public has continued to confuse the two companies, even though Keating sold the subsidiary in 1985 to its managers. The bankruptcy filing caused the home builder to develop a new ad campaign that describes the company’s evolution, specifically the 1985 transaction.