Home Builder’s Default Likely to Hurt Industry : Real estate: The news from Fieldstone indicates why banks are squeamish about financing new housing projects.
News that Southern California’s second-largest home builder has defaulted on a $150-million loan for a sprawling new community in La Costa has shaken an already ailing industry and could make it harder for other developers to get the cash needed to keep their bulldozers running and their carpenters employed.
When Newport Beach-based Fieldstone Group of Cos. confirmed Tuesday that it has defaulted on a loan for a 2,300-acre planned community in northern San Diego County, it also provided the latest example of why banks are squeamish about financing new housing projects.
Over the last few years, most lenders--at the urging of federal regulators--have been tightening their credit requirements for developers who want to build new housing tracts. Until recently, though, most analysts said big builders weren’t hurt much by the credit crunch because they could always turn to less conventional lenders for financing, such as pension funds and overseas banks.
But that perception began to change last year when William Lyon Co.--Southern California’s biggest home builder--was forced to divert to its banks the cash flow from several large projects to avoid defaulting on the loans.
Fieldstone’s announcement is further evidence that even the region’s biggest developers are suffering from the credit crunch and the state’s three-year slump in home sales.
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 homes and has permits for a total of 132.
Without more homes to sell, the project simply hasn’t generated enough cash to service the loan. New loans made for each phase of construction in a large project provide the capital to meet scheduled payments on the original acquisition loan. Fieldstone President Keith A. Johnson said Fieldstone and the banking group could not agree on terms for a loan in March to begin a new 458-home subdivision in the La Costa development and that caused the company to miss its March payment.
“We are still negotiating the terms,” Johnson said.
While small and mid-size builders were already having trouble getting financing for new projects, the recent troubles at William Lyon and Fieldstone could make it even more difficult for them to line up construction financing and stay in business.
“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 financing problems.
“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, Johnson said 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. “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 it is having grave financial difficulties or will be abandoned by its other lenders.
Still, Fieldstone’s troubles certainly won’t help improve the financial community’s perception that loaning money to developers in today’s economic environment can be a risky undertaking.
San Francisco-based Wells Fargo & Co., one of the biggest lenders on new housing tracts in California just a few years ago, has already 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 it 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.
Some lenders are taking credittightening even further. 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.
