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With 7,000 acres of land in inventory, Bill Knapp isn’t looking to gain more ground.

He seems the logical person to turn to at a time when a storied Central Iowa builder and developer, Regency Homes, is on the ropes. However, he said last week, “We really don’t need any more land, and I don’t want to take advantage of people who are in trouble.”

Knapp announced his retirement earlier this year from Knapp Properties Inc. and turned over the day-to-day operation of that company to his nephew Bill Knapp II and Gerald Neugent. But along with a far-ranging group of other developers, bankers, subcontractors and home buyers, he has been watching closely the unraveling of Regency Homes and affiliated companies connected with the residential construction market.

It is a drama that began April 25, when Regency announced it was shutting down all but its commercial development arm, Regency Commercial Services, because of cash problems created when Wells Fargo & Co. decided to call in a line of credit.

James Myers, president of Regency Homes, is said to have been meeting for the last two weeks with creditors, trying to sort out financing that would keep afloat the company that was founded by his late father, Michael.

Knapp said the Myers family and others affiliated with Regency “run a great company; they are great people.”

Knapp Properties has worked with development groups that included Regency on projects such as the Galleria at Jordan Creek. Regency also has developed a townhome project on land it purchased at another Knapp project, Tournament Club of Iowa in Polk City.

For his part, Knapp said this is not a good time to be involved in residential projects.

For one thing, the upfront costs are tremendous and the turnaround time, at least for now, is long. Neither is a recipe for prosperity, and those circumstances seem to have conspired against Regency.

“With the economy taking a pretty good-sized dip and the overbuilding of housing and overbuilding of lots, it caught up with them,” Knapp said.

Myers has ignored several requests for an interview with the Business Record. However, it appears that one of Regency’s premier projects, Michael’s Landing in West Des Moines, has contributed to its cash flow problems.

New lender, hot developer

As of late last year, the company had secured individual mortgages totaling $80 million in connection with Michael’s Landing, some of which were used to cover previous mortgages, others that were released in part when lots were sold at the development. As a result, it is difficult to draw a clear picture of the outstanding debt on the development.

For example, a $10 million loan from Bankers Trust Co. to a Regency limited liability company that is tied to Michael’s Landing appears to have had few payments on it since it was issued last August. Portions of a $47.5 million loan from Wells Fargo & Co. have been released as lots have sold at Michael’s Landing.

A Regency spokesman has said that some of the company’s debt related to Michael’s Landing has “cleared,” but did not say to what extent.

Iowa Banking Superintendent Tom Gronstal said it will take banks several months to sort through all the details of Regency’s financial arrangements on its various projects.

“My opinion is that the banks will have to work together on this to work it out,” Gronstal said, adding that it’s likely some issues will have to be resolved by the courts.

“I think you’ll see lawsuits going back and forth,” he said. “The banks may need to sue the guarantors to get them to pay.”

The loan to buy land for Michael’s Landing came from Northwest Bank in West Des Moines.

Northwest opened its doors in April 2004. Two months later, it provided Regency with a $7 million mortgage toward the purchase of more than 200 acres. That loan later was rolled into a $12.1 million mortgage from Northwest.

The Bankers Trust mortgage paid down part of the Northwest loan, the balance of which was assigned to another lender, said Ed Arndorfer, executive vice president at Northwest.

That transaction cleared Northwest of any financial exposure to Michael’s Landing and provides a glimpse of the rigors of financing a large project.

Donald Nickerson, Northwest’s president, would not comment further on the specifics of the bank’s relationship with Regency, but he did say that the bank remains bullish on the Central Iowa construction and development scene.

“We’ve made the decision that we are in land development and residential construction,” Nickerson said. “We’re not going to exit the market.”

Fast times and easy money

Though lots have been sold and some homes built, Michael’s Landing is largely empty land with the infrastructure for development – streets, sewer and water – in place.

And that might point to another problem Regency ran into.

Regency paid roughly $40,000 a acre for Michael’s Landing, an amount Knapp said is too high. And by other estimates, it probably paid $25,000 to $30,000 per lot to run streets, sewer and water to building sites.

When paying that kind of upfront money to develop mortgaged land, “you have to develop immediately, because the interest will eat you up,” Knapp said.

But Knapp also observed that because Regency was able to build homes and sell them at a fast-and-furious pace through 2005, the company’s leaders put themselves in a position that required them to buy land and develop it as quickly as possible.

“They were eating up land so fast that they had to buy a little in advance, and they were eating through it too fast,” he said.

Knapp also noted that much of that activity occurred when banks were eager to put people into homes, offering mortgages with no money down. Others have noted another anomaly in the home-lending market, something called “no income, no asset” home buyers.

Too many people were buying homes before they were financially prepared to do so.

“We’ve been going through a time when anyone could borrow money,” Knapp said. “We’ve been selling them houses five to seven years ahead of when they should have been buying. They were going into a house with no money down; people were buying houses with no money left for furniture.”

Knapp said that the good times in the market resulted in people entering the development arena who should have remained on the sidelines. When the economy slowed in 2006, it resulted in a glut of unsold houses on the market.

Knapp noted that the boom economy in housing crumbled in a hurry.

“It seemed to me like it fell off the cliff pretty fast,” he said.

Knapp is convinced that the market will turn around. He noted that Regency’s Michael’s Landing development is located in an area that will continue to see growth.

The key in the current slow economy is to be able to sit on land and wait for the residential housing market to return to good health.

“You’ve got to have some pretty good equity and cash flow to ride through those dips,” Knapp said.

Knapp said he could not predict what the future holds for Regency.

He pointed out that in deals that have involved millions of dollars in property, “if they’ve owed us money, they’ve paid us.

“If there’s any way for them to get through this, they will,” he said.