.bodytext {float: left; } .floatimg-left-hort { float:left; margin-top:10px; margin-right: 10px; width:300px; clear:left;} .floatimg-left-caption-hort { float:left; margin-bottom:10px; width:300px; margin-right:10px; clear:left;} .floatimg-left-vert { float:left; margin-top:10px; margin-right:15px; width:200px;} .floatimg-left-caption-vert { float:left; margin-right:10px; margin-bottom:10px; font-size: 10px; width:200px;} .floatimg-right-hort { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 300px;} .floatimg-right-caption-hort { float:left; margin-right:10px; margin-bottom:10px; width: 300px; font-size: 10px; } .floatimg-right-vert { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 200px;} .floatimg-right-caption-vert { float:left; margin-right:10px; margin-bottom:10px; width: 200px; font-size: 10px; } .floatimgright-sidebar { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 200px; border-top-style: double; border-top-color: black; border-bottom-style: double; border-bottom-color: black;} .floatimgright-sidebar p { line-height: 115%; text-indent: 10px; } .floatimgright-sidebar h4 { font-variant:small-caps; } .pullquote { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 150px; background: url(http://www.dmbusinessdaily.com/DAILY/editorial/extras/closequote.gif) no-repeat bottom right !important ; line-height: 150%; font-size: 125%; border-top: 1px solid; border-bottom: 1px solid;} .floatvidleft { float:left; margin-bottom:10px; width:325px; margin-right:10px; clear:left;} .floatvidright { float:right; margin-bottom:10px; width:325px; margin-right:10px; clear:left;} Greater Des Moines’ residential real estate market has shown signs recently that some developers may be the next casualties in a market already reeling from foreclosures.

Earlier this month, three Central Iowa banks filed foreclosure petitions on more than $6 million in past-due mortgage loans on 25 residential properties owned by Oaks Development Co. and its general partners, John C. Kline and Randy Walters.

In other legal action, builders Dave Walters and Dan Stanbrough are fighting a foreclosure on an office plaza on which they guaranteed $1.3 million, as well as a $2 million foreclosure on a half-vacant strip mall they completed about two years ago in Indianola. In a third foreclosure case, Walters and Stanbrough could lose about 36 acres of development land near Easter Lake. The land, on which $734,000 is owed, is scheduled to be auctioned by the Polk County sheriff next month.

In all but one of the smaller cases, each is a foreclosure without redemption, meaning the properties involved will go immediately to auction by the sheriff if the lenders’ favor.

Though Des Moines’ real estate market has been relatively strong compared with many other areas of the country, the recent foreclosures on developers may be just the tip of a much larger iceberg, say attorneys familiar with the cases.

“I think there are a lot of developers who are in serious trouble,” said Don Neiman, one of three bankruptcy trustees for the southern district of Iowa, which includes Polk County. “(Those developers) haven’t filed yet, but I would expect them to file Chapter 11. I’m surprised we haven’t seen these file yet; we’re just waiting for the other shoe to drop.”

Foreclosures or bankruptcies involving developers are significant because of the havoc that would cause, said Matt Cronin, a Des Moines attorney. He represents a number of subcontractors who have filed mechanic’s liens against developers in the hope of claiming some of the past-due billings owed to them. In the past 12 months, 1,246 liens were filed in Polk County, a 3 percent increase over the previous year but down significantly from 2003-04 and 2004-05 levels.

Delicate balance

The flow of money, particularly in residential development, represents a delicate balance, Cronin said.

“The only way for these guys to make money is for real estate to move, and when it stops moving, nobody gets paid,” he said.

“Once the house of cards starts coming down, once one lender forecloses on one development, that causes defaults in other loan agreements, and they’ve all got guarantees, and it just starts ratcheting down.”

The end result, Cronin said, may be further decreases in property values, and developers potentially filing for bankruptcy.

If you can’t as a developer turn your inventory, unless you’ve got really deep pockets and capital, it doesn’t take that long until your cash resources are tapped. – Thomas Burke partner, Whitfield & Eddy PLC

The house-of-cards effect may already be happening.

In a case heard last week in Polk County District Court, Bank of the West is seeking judgment against Airport Plaza LLC and Dan Stanbrough, Dave Walters, and his wife, Jody Walters, who each guaranteed half of the $1.3 million borrowed for the Thornton Avenue strip center.

Though Airport Plaza was still making payments to the bank, Bank of the West invoked a cross-guarantee default provision that allows it to foreclose if other loans guaranteed by the borrowers are also in default, said Thomas Burke, a partner with Whitfield & Eddy PLC who represents Bank of the West in the case. Additionally, the bank alleges that the property’s value has decreased, which created a default on a required debt service credit ratio, he said.

Burke said developers have been plagued by an “unholy trinity” of excess inventory, rising interest rates and slowing sales.

“Many developer deals are booked on a prime rate plus floating basis, so a deal that worked at four and a quarter may not work at eight and a quarter,” he said. Ultimately, “if you can’t as a developer turn your inventory, unless you’ve got really deep pockets and capital, it doesn’t take that long until your cash resources are tapped.”

The dollars owed, and consequently the interest accruing on the debt, are large. In one of the foreclosure cases involving Oaks Development, First Bank is seeking more than $4 million that’s past due on a $4.5 million loan on the developer’s Meadow Cove Condominiums project in the South Side. Bank of the West has filed a foreclosure petition against Oaks Development for six lots in Timberline Park, a residential development in Urbandale, for a total amount owed of more than $1.4 million. Also, Legacy Bank has foreclosed on one lot in Ironwood Plat 1 in Altoona, on which Oaks Development owes approximately $180,600.

Neither First Bank nor Bank of the West would comment regarding the two largest foreclosure actions against Oaks Development.

Jerry Wanek, a bankruptcy attorney who represents Dave Walters as well as Oaks Development in their foreclosure cases, said that many residential borrowers are facing foreclosures due to higher payments on adjustable-rate mortgages. So far, however, he said he has not handled Chapter 11 bankruptcies for any developers.

Asked if he expects Oaks Development’s foreclosed properties will proceed to sheriff auctions, Wanek said, “it’s hard to guess how litigation may turn out; all options are still available. Particularly with Meadow Cove, it’s my understanding an issue between two lenders needs to be resolved, unrelated to us.”

Wanek did not say whether Oaks Development’s partners plan to file for bankruptcy protection. As for their future, “I fully expect my clients will have a continued ability to operate their businesses,” he said. “They are successful people and will continue to be very successful people.”

Just a ripple

Rumors are “definitely running rampant” about certain developers, local developer Bill Knapp said. “I think it’s probably true that some are having problems,” he added.

Knapp said he believes the current situation is just “a ripple” compared with what developers experienced during the recession in the early 1980s, however.

“I see some people get into trouble because they’ve bought so much land, and when the market slows a little bit, some of these folks get into cash-flow problems,” he said.”If this continues for the next year or so, a lot of people could get into trouble, but I don’t see it lasting that long. I take a lot of it not too seriously at this point.”

It’s the developers who personally guaranteed a loan on a project or cross-collateralized projects who will get burned, Knapp said.

“Every project should stand on its own, rather than be backed by another project or personally,” he said.

Not yet clear is how these foreclosures may affect some of these developers’ newest projects. Less than a year ago, Dave Walters announced plans to construct a $50 million, 14-story office downtown building on $1.8 million of property he owns in Gateway West. Matt Anderson, an economic development coordinator for the city of Des Moines, said he has not heard anything from the company since that initial announcement. Other big projects under way include Walters’ Jordan Creek Office Park, where construction on the first building has begun, and Jordan Creek Crossing II, for which the city of West Des Moines approved a three-story office-retail building in March.

Neiman said the real losers in the end may be the banks that financed the deals.

“They’re going to end up owning the properties the developers had,” he said. “That’s a problem I see coming, but it’s not there yet.”

According to figures released last week by RealtyTrac, a national foreclosure database, foreclosure filings in August in Iowa were up 32 percent over July. Additionally, banks in Polk County owned 879 houses as of the end of August, according to RealtyTrac.

Steve Goodhue, president of First American Bank in Clive, said his bank is fortunate not to have a high level of concentration in land development or residential development. For those developers his bank does work with, “certainly we are beginning to see developers with excess or spec inventory have discussions about how to market or move property more aggressively,” he said.

“Times like this do create opportunities,” Goodhue added. “With the drop in the prime rate, we anticipate more activity in the Des Moines area. Our (loan) pipeline is strong, and we expect it to continue to be strong. We’re optimistic that we’re going to see continued activity in the residential and commercial areas.

“And there are some very experienced builders and developers in the area who know what to do to move properties and stay ahead of the curve. They obviously recognize there has been some excess inventory, and they know what they need to do without us having to encourage them.”

Correction: The identity of the attorney representing Daniel Stanbrough was incorrect. Stanbrough should not have been associated with the legal counsel identified as “a bankruptcy attorney” in the article. Daniel Stanbrough is being represented in the identified litigation by William B. Serangeli of Smith, Schneider, Stiles & Serangeli P.C. The Business Record regrets this error and any inconvenience or hardship this has caused to Daniel Stanbrough.