Builder buys back luxury development
April 21, 2009
Parkite David Dorius said he built a spec home in Promontory four years ago "when the market was hotter than a pistol and the project was moving along well."
"We were looking to make some money on the deal," Dorius said about his intentions to quickly flip the investment property. "Now we’re the lowest priced (single-family) home available that is not either a bank-owned home or a short sale, and it’s not selling."
A group of creditors forced the luxury Promontory subdivision into bankruptcy last spring when the developer, Arizona-based Pivotal Group, defaulted on loans. In an unusual outcome, Pivotal Chief Executive Officer Francis Najafi bought the project back at a highly reduced price when Promontory was auctioned April 15.
"The better outcome for me as a Realtor, for the real-estate market in general and for a lot of the homeowners would have been for another developer experienced in high-end golf course communities to have picked it up and started running with it, versus having it go back into the hands of the primary principals there," Dorius said.
Bids for the project came only from Najafi and lender Credit Suisse, a bank which withdrew its offer April 16.
Najafi’s bid of $70 million was approved in U.S. Bankruptcy Court Friday. Years ago his company defaulted on about $275 million in loans Credit Suisse packaged for investors.
Recommended Stories For You
"That is just wiped off the books," Promontory Managing Director Rich Sonntag said about the debt. "It’s essentially considered a bad debt. The banks had the opportunity to step in and protect that debt by buying the asset, holding it until the value increased and then selling it. They made the judgment that they didn’t want to do that because it would require putting additional money in over the years."
Sonntag insisted Najafi did not orchestrate the bankruptcy to avoid repaying the loans.
"I wish we were all that smart," Sonntag chuckled in a telephone interview Tuesday. "That isn’t what happened here. What happened here was a developer who felt very strongly about trying to preserve the community he created."
Still, Najafi acquired Promontory for a fraction of what he owed. Recent appraisals have estimated the value of Promontory at between $230 and $560 million.
"I don’t think that anybody, a year ago, thought that this would be the outcome," Sonntag said. "This only occurred after Pivotal had been in negotiations with the bank for months and months and months trying hard to avoid the stigma of bankruptcy."
And the auction was a public process, he said.
"At the end of the day, because the markets had deteriorated to the point that they had, it was possible to acquire the project back and continue with the original plan," Sonntag explained.
Promontory was marketed to about 80 potential buyers prior to the property being auctioned, Sonntag said.
"At least 20 returned confidentiality agreements and took a hard look at it," he said.
During the yearlong bankruptcy, Promontory maintained its operations. The gated community east of U.S. 40 consists of two golf courses, several clubhouses, equestrian facilities and more than 1,000 potential building lots.
Nearly 400 Promontory homes have already been built.
Pricey membership fees are meant to keep investors from speculating on real estate at Promontory, Sonntag said.
"We don’t try to sell to speculators. I’m afraid that perhaps more people did speculate on these lots than we would have liked," he said. "We had some who did perhaps get in over their heads and there is going to be a period of time here, during this slow market, where a few of those get cleaned out."