Regency Homes has generated $80.65 million in mortgages since it purchased the land for Michael's landing in 2004. About 25 homes have been built and a retirement village is under construction. Photo by Duane Tinkey
Regency Homes has generated $80.65 million in mortgages since it purchased the land for Michael's landing in 2004. About 25 homes have been built and a retirement village is under construction. Photo by Duane Tinkey


Wake up. The dream is over.

The message from close observers of the Central Iowa residential construction market is that the dream ended at least a couple of years ago, but it has taken some builders, buyers and bankers a little too long to rub the sleep from their eyes.

Instead, the alarm rang loud and clear April 25 when Regency Homes announced that it was shutting down its residential construction activities, laying off staff, and trying to generate some cash flow so it could live to see tomorrow.

Observers point out that Regency is not the first builder to stumble in a tough economy and probably won't be the last. However, they worry about the repercussions for the residential market. Several have suggested that Iowa banks may suffer, that home buyers will steer clear of a bumpy market and that other builders and developers could fall.

An Iowa State University economist noted that the psychological effect on home buyers could keep them out of the market.

"It's one thing to see a builder going under in North Carolina, but when you see it happening in your back yard, you're going to become more skeptical," said Meghan O'Brien, an ISU Extension economist.

"I'm a little skeptical of people trying to put a positive spin on this," she said.

Here's some negative spin from two veterans of the Central Iowa real estate business: the Regency collapse could result in the largest debt write off in the history of Iowa.

Others offered essentially the same analysis, but none wanted to be identified by name. They say "you have to be in the loop" talking to builders, bankers and real estate agents to understand that the collapse of Regency, or any other builder, doesn't happen overnight.

Regency's struggle will have far-reaching effects. The company announced it was out of business on Friday, April 25. By press time Thursday, the Polk County Clerk of Court records showed that nearly $1 million in mechanics liens were filed in Polk County District Court alone. Even a local sign maker commented that some builders had called to cancel orders for signs advertising their companies.

Liens

The following are the 10 largest mechanic liens filed with the Polk County clerk of court against Regency Homes or its subsidiaries during the week of April 28.
Click here to see a full listing of liens.

Filed By

Against

Amount

For work completed on

Beisser's Lumber Co Inc.

Providence Pointe Condominiums LC

$149,055.67

12 percent from 2/19/08 to 4/28/08

Civil Design Advantage LLC

Deer Creek Estates LLC

$90,095.41

18 percent from 7/1/05 to 4/9/08

Civil Design Advantage LLC

Deer Creek Estates LLC

$55,735.99

18 percent from 7/1/05 to 4/10/08

Beisser's Lumber Co Inc.

Glenstone Townhomes LC

$37,430.76

12 percent from 3/24/08 to 4/28/08

Civil Design Advantage LLC

Wolf Creek Townhomes LLC

$33,485.70

18 percent from 12/11/07 to 4/3/08

Beisser's Lumber Co Inc.

Tradition Condominiums LLC

$29,676.82

12 percent from 9/27/07 to 4/25/08

Beisser's Inc.

Creekside Townhomes LC

$24,458.10

12 percent from 12/26/07 to 3/27/08

Civil Design Advantage LLC

Deer Creek Estates LLC

$21,786.33

18 percent from 7/1/05 to 4/2/08

Beisser's Inc.

Glenstone Townhomes LC

$21,328.10

12 percent from 3/17/08 to 4/22/08

Tesdell Electric Ltd.

Regency Homes

$19,000

4/21/08

Source: Polk County clerk of court. Information up to date as of May 1.

If you weren't an officer tied to Regency's residential and land development divisions, you spent last week working for free at the company's grandiose headquarters at 6600 Westown Parkway.

If you were an officer, you were dealing with bankers involved in what one observer described as "very complicated" financing arrangements that appear to have hobbled Iowa's largest home builder. You were telling real estate agents to keep selling the inventory that was on the market.

In Des Moines alone, agents were closing on about 60 single-family residences, townhomes and condominium units that were in the $110,000 to $250,000 range, a Regency spokesman said.

Building on debt

The home builder appears to be carrying a lot of debt. Regency's centerpiece development, Michael's Landing in West Des Moines, generated $80.65 million in mortgages since the first piece of ground was purchased in 2004. Michael's Landing was touted as a community within a community, a place for young people to realize their dream of home ownership and for grandparents to watch the progress of the generations that followed them. First called Tallyn's Reach, it was renamed in honor of the late Michael Myers, who founded Regency.

Today, it is mostly open ground with paved streets. About 25 homes have been built and sold and a church-sponsored retirement village is under construction. Because of the weak economy, some builders have backed out of buying other lots, said Alan Sprinkle, Regency's senior vice president of operations.

Sprinkle is one of those coming to the office on a volunteer basis every day. On the Monday after Regency announced it was ending its residential operations, Sprinkle had the wide-eyed look of someone who realizes he or she is on a wild ride, or has stumbled into the path of a freight train.

A few days later, he was answering phones, running a copy machine and answering questions, some from laid-off workers worried about insurance benefits, others from a reporter asking whether Regency was headed to bankruptcy.

Regency is fighting to avoid bankruptcy, in part because of the large amount of equity in the company, Sprinkle said. He declined to say how much equity was in the company.

"I really thought we might be calling people back to work in a week," Sprinkle said. He is quick to point out that the cash-strapped company will fight to stave off a bankruptcy filing, and that he believes the company will make a comeback.

Pouring money into Michael’s Landing

Date

Amount

Lender

June 22, 2004

$7 million

Northwest Bank, Northwest Federal Savings Bank

July 31, 2006

$12.4 million

Northwest Bank, Northwest Federal Savings Bank

October 17, 2006

$7.65 million

First National Bank Midwest

April 5, 2007

$47.5 million

Wells Fargo Bank

April 17, 2007

$6.1 million

First Federal Bank

Total: $80.65 million

Source: Dallas County Assessor's Web site

James Myers, company president and son of Regency founder Michael Myers, has said that the company's woes stem from a cash shortage that occurred when Wells Fargo & Co., a Regency lender for the past 20 years, pulled out of a line of credit.

Sprinkle would say only that the "rules changed" with the lender. He could not say whether the line of credit was linked to a $47.5 million loan in April 2007 from Wells Fargo to Michael's Landing LLC, the current development arm of the project that bears its name.

A spokesman for Wells Fargo said the company would not comment on whether it had changed the nature of its lending requirements to Regency or any other builder.

Though the Regency announcement caught some local developers and real estate agents off guard, it was not a complete shock to others.

O'Brien said it is no secret that banks are changing their lending practices, regardless of whether their customers are home buyers or home builders.

O'Brien, who worked for bankers and builders before arriving at Iowa State, said shaky practices such as providing unsecured loans to builders and 100 percent mortgages to buyers, practices that were unheard of before the real estate boom of 2002-2005, are disappearing.

"I think the industry was aware of what was coming," O'Brien said. "It was just a gradual thing, but then lenders got very concerned about lending and development without a certain amount of presales."

She said lending rules started to tighten in 2006, when the first signs of a market slowdown were becoming more obvious.

O'Brien said one concern is that buyers will make their own risk judgments about the health of the Central Iowa real estate market, possibly opting to stay out of the market until they see conditions improve.

"Consumers are smart; they just move in masses. When things are good, they move in that direction," she said.

However, Sprinkle noted that in the two weeks prior to Regency's announcement that it was shutting down, the company sold 22 houses one week and 20 the next.

The area of the market that is seeing positive movement is entry-level homes priced at between $110,000 and $250,000, a segment in which Regency has a lot of inventory.

Room for optimism

And although no one discounts the negative impact that can result from the collapse of a large builder like Regency, there is a fair amount of optimism among some real estate agents and builders.

Chad Ireland sells homes for Coldwell Banker Mid-America Group Realtors in Ankeny. He said that one agent in the office is having a "record" year, having sold 40 houses in January.

"We're swamped, but that has nothing to do with Regency at all. We've been busy for the last eight years, but we've been real busy since January," Ireland said.

He noted that most of the sales have been in the $160,000 to $200,000 range. Ireland said his office has listings in eight communities, including Polk County's western suburbs.

"When things slow down, the last thing to slow down is the starter market," he said. "There's some activity. Whoever is saying there's not, come hang out with me the last two or three weeks."

Justin Bauer, vice president of Kimberley Development Corp., said the builder is "hitting our clientele and our niche."

He said the company has sold two of the four speculative homes that it is building. Kimberley has sold high-end homes in the $900,000 to $1.2 million range as well has homes priced in the $240,000 to $300,000 range.

"We're not complaining at this point," Bauer said.

As for the future of Regency, Sprinkle isn't making any predictions, but he does hold out hope that the company can "build our way back through this."