Another Big Builder Lets Loan Default : Development: Newport Beach-based Fieldstone, the Southland’s second largest, hopes to restructure $150-million package. But the news just compounds the industry’s woes.
News that Southern California’s second-largest home builder has defaulted on a $150-million development loan is sending a shiver through an already ailing industry.
The decision by Fieldstone Group of Cos. to allow the loan for the 2,300-acre La Costa planned community in northern San Diego County to go into default shows that not even the biggest and most successful builders are immune from cash-flow problems. Late last year, in fact, the giant William Lyon Co., Southern California’s biggest home builder, was forced to divert to its banks the cash flow from several large projects in lieu of defaulting on the loans.
But more than a symptom of internal ailments, defaults by companies such as Fieldstone, which built 1,225 homes and had sales of $301.5 million last year, demonstrate why banks are running away from the residential real estate market and leaving healthy small and medium-size builders without the financing to pursue their projects.
“It’s a complex issue, with the regulators breathing down the bankers’ necks as well,” said E. James Murar, chairman of RGC, a Newport Beach home builder that has seen its plans for low-cost single-family homes in pricey Orange County delayed for months by problems getting financing.
“We are working with a whole series of banks, and it takes a long time,” Murar said. “And then when they see that a major builder has defaulted, it colors the way they look at the rest of the market.”
Defaulting on a construction loan is sometimes just a tactic in the tortuous process of renegotiating loan terms. Indeed, Fieldstone President Keith A. Johnson says he is confident that the loan by a consortium headed by Continental Bank in Chicago will be revised to fit the realities of today’s market.
“The banks have said it’s their hope and intention to renegotiate,” he said Tuesday. “We have submitted a complete proposal and expect an answer next week.”
Johnson acknowledged that having a default on file is embarrassing to the company but doesn’t mean that it is having grave financial difficulties or will be abandoned by its other lenders.
“This is the first one ever filed, although in a business like ours I’d guess that technical defaults happen all the time, like driving 60 in a 55 zone,” he said.
Some lenders are taking credit-tightening even further. San Francisco-based Wells Fargo & Co., one of the biggest lenders on new housing tracts in California just a few years ago, has drastically reduced the amount of money it is willing to lend to developers, said Scott Bottles, the vice president who runs the bank’s real estate operations out of its Los Angeles office.
Bottles said the relatively few projects that Wells Fargo will be financing this year and into 1994 will probably be communities with low-priced homes geared toward first-time buyers.
“The market for affordable homes should continue doing well, but demand for (more expensive) homes should stay pretty soft,” said Bottles, adding that his company has also cut back on loans for new commercial and industrial projects.
Irwindale-based H.F. Ahmanson & Co., parent of Home Savings, won’t lend money for any new real estate projects and is in the process of shutting down its own home-building and commercial development subsidiary.
“It’s a lot safer to make a loan to one buyer who wants to purchase a $200,000 house than it is to finance the construction of an entire tract or a $200-million office building,” Ahmanson spokeswoman Mary Trigg said.
Fieldstone, based in Newport Beach, is trying to assure its lenders that safety is not an issue, Johnson said. “When we told them the default notice had been filed, in general they said that they were not surprised and that the filing might make them a little more concerned but that they thought it made sense for all of us to have this loan restructured.”
Fieldstone and Brookfield La Costa Inc., a subsidiary of Canadian investor Brookfield Development Inc., formed Fieldstone La Costa Associates to acquire the San Diego County property in 1988. Plans called for 3,600 homes to be built there.
But to date, Fieldstone, the general partner and developer, has built only 61 houses and has permits for a total of just 132. With so few houses to sell, the project has not generated enough cash to meet scheduled payments on the loan from the Continental consortium.
Fieldstone missed a $16-million payment in March and has been unable to come up with $39 million in new equity demanded by the bank when the land was reappraised this year at a much lower value than that used in the original loan agreement. Accrued interest of $5 million brings the total default claimed by Continental to $60 million.
Johnson says that home sales aren’t a problem. Fieldstone Group has active developments in San Diego County, where it has been the best-selling builder of single-family homes for several years. The company’s San Diego homes range from about $180,000 to $320,000, with the La Costa homes at the high end of the scale.
Progress at La Costa, Johnson said, has been slowed by environmental concerns and government planning processes. Officials in Carlsbad, which has jurisdiction over the project, have approved construction of 1,000 houses but have not issued final permits. Johnson said that restructuring of the loan is a condition for receiving final building approval. If that happens, he said, he expects to begin construction of the 458-home project in the second quarter of 1994.
Builders in Default
Defaulting on real estate and construction loans has become increasingly common among Southern California builders who sometimes use it as a negotiation tactic when seeking to restructure a loan. Details of some recent default actions:
* July, 1993: The Fieldstone Group of Cos., Southern California’s second-largest home builder, defaults on a $150-million development loan for the 2,300-acre La Costa development in San Diego County.
* November, 1992: D.T. Smith Properties Inc., a major Southern California builder, defaults on a pair of of trust deeds. As a result, a 177-acre residential tract in Santiago Canyon is slated for auction.
* May, 1992: Covington Development Group Inc. of Fullerton defaults on $7.3 million in construction loans and $6.7 million in other debt. Company officials cited declining property values, the recession and the regional home-buying slump for its loss of more than $15 million in three years.
* November, 1991: Home Capital Corp., a San Diego-based firm, defaults on its $72.7-million loan on 416 acres of land in Mission Viejo known as the Pacific Hills development. Three Orange County builders eventually purchased 103 acres of the property from the Bank of California, which foreclosed on the project.
Source: Times files
