Kara Bankruptcy is met with uncertainty
app.com
Builder's woes affect others
Posted by the Asbury Park Press on 10/7/06
BY MICHAEL L. DIAMOND
AND DAVID P. WILLIS
BUSINESS WRITERS
Kara Homes' bankruptcy filing has left scores of customers and creditors wondering if the troubled builder is going to complete the developments it has under construction and make good on its debts.
In Old Bridge, Ira Cohen, a homeowner living in one of Kara's more recent developments, Horizons at Birch Hill, said the community's clubhouse, swimming pool and landscaping remain incomplete.
In Marlboro, Peter Rallis, owner of All About Construction Inc., said he was forced to lay off 35 of his 50 employees because Kara has not paid him $239,500 it owes him.
"It has taken us down to the bottom," Rallis said.
East Brunswick-based Kara Homes, one of the biggest home builders in Monmouth and Ocean counties, filed for Chapter 11 bankruptcy Thursday night in U.S. Bankruptcy Court.
The company said it had $350.2 million in assets and $296.8 million in liabilities. Under Chapter 11, Kara will be allowed to remain in business, and creditors' claims will be frozen while it comes up with a reorganization plan and tries to regain its footing.
David Bruck, the company's bankruptcy lawyer, said the company laid off 100 workers this week, leaving it with 70, but it would take steps to continue operating. Among them: It wants to find financing to finish developments currently under construction and sell two or three uncompleted projects to other developers.
"It was a product of slowing sales and difficulties in the field," Bruck said of the bankruptcy, referring to the time it takes for municipalities to approve projects.
Experts, however, said Kara is an example of what can go wrong to an aggressive builder when the real estate industry collapses. After paying top dollar for land, it is not able to sell its homes at a high enough price to pay off its debts, they said.
"This was part of what we were looking for — and I don't use the word "bubble' — but a housing sector slowdown," said David H. Downs, a professor at Virginia Commonwealth University School of Business in Richmond, Va. "The question is, who was going to be overleveraged?"
Kara's bankruptcy marks a dramatic turnaround. The company built 590 homes and had $288 million in sales in 2005, making it the 127th biggest builder nationwide, according to Builderonline.com. It was named the fastest-growing builder in the nation as recently as 2002 by Builder Magazine.
The fallout from Kara's bankruptcy is far-reaching. The filing lists thousands of creditors. Among the largest unsecured creditors — those with no collateral to rely on — in Monmouth and Ocean counties are: RWZ Inc. Stairs & Rails of Lakewood, which is owed $890,654; Benchmark Inc., also of Lakewood, owed $876,585; and Michael J. Wright Construction Co. Inc. in Dover Township, owed $780,309.
Among the other creditors: Kara's laid-off employees who are owed back wages.
Some homeowners said they have been left in the lurch. Ira Cohen and his wife, Risa, moved from Manalapan to Horizon at Birch Hill in Old Bridge in February, 15 months after the home was originally scheduled to be completed.
But Cohen said problems remain. He had hoped the builder would fix the leader, which spills water from the gutter onto the driveway, turning it into an ice rink during the winter. And he had hoped the builder would complete the clubhouse, swimming pool and landscaping to the entrance of the development.
"We're concerned whether or not they're going to complete this development at all," Cohen said.
Ellen Voltolino, 51, of Dover Township put down $12,500 on a Kara house in Woodlake Greens in Lakewood with the caveat that the money would be returned if she couldn't sell her old house, she said.
Her house was on the market from January to June but didn't sell, she said. She asked for her money back but hasn't received a response.
"It's like they stole my money," Voltolino said. "I don't have $12,000 to throw away in the garbage."
Kara might find other developers willing to buy some of its undeveloped land.
Home-building giant Hovnanian Enterprises of Red Bank has looked at a number of Kara's parcels and has purchased one in Shrewsbury, said J. Larry Sorsby, Hovnanian's chief financial officer. Sorsby said it isn't unusual for Hovnanian to buy from another builder.
"We are always interested in land parcels where we can make a reasonable economic return," Sorsby said. "It wouldn't surprise me that we would look at some of the Kara properties, just like we would any transaction."
Some customers are not waiting to see if Kara makes good on its debts.
Ocean Township lawyer Douglas Katich said Friday that he would file civil lawsuits on behalf of several customers charging company officials with fraud — a charge he said would be appropriate "if they are soliciting deposits when they knew the business wasn't viable."
Bruck declined to comment about the possible lawsuits. |
