Anatomy of a home builder's liquidation

Kimball Hill Homes CEO Ken Love recently laid out the plans to dismantle the nearly 40-year-old home building company to Builder magazine. What caught my eye (in bold) is that during bankruptcy they still managed to pay of 96% of their subs and suppliers. So how did they do that when I keep hearing tales of other builders stringing their vendors along for months at a time? Read on:

In an interview with BUILDER yesterday afternoon, Love laid out how Kimball Hill intends to close its operations, in three phases. Over the next 120 days, the company intends to complete 450 homes that are in various stages of construction, and deliver those homes to buyers. Within the next six months, Kimball Hill also hopes to be able to sell its 170 homes in inventory and 90 models. (It is returning deposits to around 100 buyers of homes that hadn't been started.)

During the second phases, which will happen simultaneously with the first, Kimball Hill will attempt to "monetize" its land and other assets. As of October 31, the company had 66 owned communities in which there are 3,018 finished lots, 419 lots under development, and 3,740 "paper," or raw, lots. Love says that he would prefer to sell off these assets in bulk to one or a few buyers, even though he admits the demand for land right now is soft. "The gap between bid and ask has widened," he observes. That being said, he believes there are investors looking to buy land they can hold on to for a number of years until market conditions improve. However, if Kimball Hill can't find a single buyer for its real estate, it will sell off assets individually over the next 15 months.

Phase three will involve tying up loose ends, like pending lawsuits. But unlike most other bankruptcies, Kimball Hill is not saddled with a blizzard of mechanics liens. "We’re very proud of what we did during the Chapter 11," says Love, whose company set up a pre-petition liability fund that, to date, has repaid 96 percent of its trade partners and product suppliers. Love notes as well that as employees are laid off, each will receive a "fair" severance that is based on their levels of responsibility and tenure with the company. (Kimball Hill still has $35 million in debtor-in-possession financing it can draw on, as well as cash from the sale of its homes.)

For those people who think it's simply a formality for new home builders to take the place of companies like Kimball Hill because they're essentially 'all the same,' I can assure you many companies would not have acted this fairly and decently towards suppliers/subs and employees.

RIP Kimball Hill Homes

Kimball Hill Homes, which didn't build in Southern California but was a large builder in other markets in the U.S. including Central and Northern California, has decided it won't be able to emerge from bankruptcy and is shutting down completely. The news of the company's demise comes after the death of its CEO, David Hill, earlier this year. From a BuilderOnline.com story:

Kimball Hill Homes, a private builder founded in 1969, has become the latest casualty of the housing and credit crisis: the firm will close its doors after finishing the homes currently under construction, according to a company announcement made yesterday... The news indicates just how difficult conditions have become for the nation’s home builders. Kimball Hill, a BUILDER 100 builder which closed 3,246 homes as recently as 2007, filed for Chapter 11 bankruptcy protection earlier this year. But restructuring proved impossible given the current state of the economy and housing market, and now the company plans to either sell the business or its assets.

The past year has been difficult for the company and its employees financially and emotionally. Kimball Hill also lost its founder David K. Hill to cancer in July. He had named the company after his father, Kimball Hill.

I never knew Mr. Hill well, but I know he was a very well-liked figure in the industry, and his company had a very good reputation among the nation's larger private building companies. Its demise is certainly sad news.

And for those numerous commentators on blogs who says, "Good riddance to the greedy builders, someone else will take their place!" I would urge them to reconsider the wisdom of moving their families into homes built by future amateurs filling the void. Suzuki Samarai, anyone?

Kimball Hill Homes files for bankrtuptcy, plan is approved

Earlier this week, Kimball-Hill Homes, a large builder based in Illinois, filed for bankruptcy, further demonstrating that this current downturn is certainly the most severe in a generation (or two). From a BuilderOnline.com story:

Despite having more than $60 million in cash, Rolling Meadows, Ill.-based Kimball Hill Homes filed voluntary Chapter 11 petitions for reorganization in the United States Bankruptcy Court in the Northern District of Illinois on Wednesday, April 23...

Unlike many companies that file for Chapter 11, Kimball Hill has the advantage of $60 million in liquidity, which eliminates the immediate pressure to secure first-priority, Debtor In Possession (DIP) incremental financing necessary to continue daily operations...

In addition to Kimball Hill, another 29 affiliated debtors also filed Chapter 11. The company’s financial service businesses are excluded from the filing.

The announcement is just another blow for the Chicago area market that has already sent Neumann Homes into bankruptcy and Kennedy Homes into serious financial distress and a lawsuit against its lenders...

Kimball Hill, which is active in five states, has been scrambling to improve operating performance during the downturn. By using aggressive marketing tactics and incentives, it reduced inventory in 2006. That same year, the company pulled out of the depressed Cleveland market to redeploy assets. Management cut cycle time, tightened inventory management, and scrutinized its urban projects in an effort to reduce costs.

But by last fall, when the company delayed filing its 10-K for the 2007 fiscal year-end of Sept. 30, it became clear that the Chicago area institution built by the Hill family was in dire straits. At the time, the company disclosed it was out of compliance with several covenants of its senior credit facility. Although Kimball Hill is a private builder, it carries some public debt, which carries with it an obligation to report financial results with the Securities and Exchange Commission...

A day later, the company's reorganization plan was approved. From another BuilderOnline.com story:

One day after officially filing a petition for Chapter 11 in the U.S. Bankruptcy Court for the Northern District of Illinois, executives of Kimball Hill Homes received court approval for all of the company’s first day motions. Taken together, the approvals allow the company to continue normal operations.

On Thursday April 24, the Honorable Susan Sonderby granted permission to continue customer programs and warranties, pay employee wages and benefits, establish procedures to pay valid lien claims in the ordinary course of business, and to sell homes free and clear of all liens...

In the meantime, Kimball Hill is actively seeking investors interested in buying an equity stake in the company, including private-equity firms, hedge funds, and real estate funds, according to CFO Edward Madell in a court document. About 26 parties “continue to actively evaluate the prospect” of an investment in Kimball Hill, the document says.