Monday, January 08, 2007

Local Bank Enters the Home Building Business

Magyar Bank is publicly traded. Ticker = MGYR.

TRENTON — Kara Homes can sell four of its developments at an auction to repay one of its lenders, Magyar Bank, a judge ruled today.

The decision by U.S. Bankruptcy Court Judge Michael B. Kaplan could set the stage for another builder to finish homes for 14 buyers who have contracts and already have spent thousands of dollars in down payments.

The developments, which include a total of 29 single-family lots, are: Danya Estates in Toms River; Hartley Estates in Little Egg Harbor, Prospect Ridge Estates in Stafford and Sterling Acres in Monroe.

Full article...

31 Comments:

Blogger karajokeski said...

Wow, Sterling Acres will never be the same without those barren lots & unfinished houses, you know? The unoccupied homes & the mud provides that certain ambiance one seeks when dropping a million plus on a house. It's like your whole neighborhood is a playground and every day is FUN day! I think I will buy up all those properties at the auction, so I can preserve the site as a memorial to sound business practices and wise investments. I shall call it, "Zudiful Acres" & I will establish upon my preserve a combination halfway house/museum where the public can view broken developers and unemployed loan officers in their more or less natural state. I will probably use a Buckingham, but only if I can get the breakfast nook.

Tuesday, January 09, 2007 1:52:00 AM  
Blogger SCProfessor said...

Interesting article in today’s App.com that describes yesterday’s Bankruptcy court action. See:
http://tinyurl.com/yyp7b7

I like attempting to read between the lines. The first part of the article focuses on the “sale” by “auction” of the four (4) developments to Magyar Bank. I guess all you can say is “once a politician, always a politician.” Judge Kaplan knows full well that he can’t, as part of the Court’s ruling approving the sale, impose on the successful bidder (obviously the only bidder at the sale) Magyar Bank, the requirement that they honor contracts with existing home buyers. I certainly wouldn’t bank on the fact that he “strongly suggests” that the contracts be honored. Yeah, the Bank is smart enough in this buyer’s market not to ignore the potential to sell to these purchasers. But I wouldn’t expect them to adopt the old price (unless it is a good deal for the Bank) and honor the purchaser’s deposit given to Kara as applying towards the purchase price.

The next item discussed was the withdrawal by BS of its proposed "maybe" offer of a $40 million loan secured by a priming lien. My guess is someone finally woke up to the fact that you can’t get a first priority priming lien absent providing what is called “adequate assurances” that those junior secured creditor who are being subordinated to the priming lien won’t be in worse shape as the result of the subordination. That’s probably impossible to do on projects that are already financially under water. Nice try BS and Bruck, but unless you look at each project separately this just isn’t going to happen. Back to the drawing board on this one. Oh and you can bet that BS was tipped off that the Judge wasn’t going to let this fly. Much easier to withdraw the motion because it doesn’t count in the minds of BS and Bruck as a loss.

It looks like other lenders are starting to take a look at Magyar’s lead and “buy” their collateral. You may recall I characterized this as a great way to go if the Judge would approve this because it resulted in Magyar leaving the bankruptcy behind at a cost of less than 4% of the amount it was owed. Investors Savings Bank and Riverside Capital Management appear to be following this path, proposing to remove two additional projects through a similar auction sale. Expect other lenders to follow this escape path.

So where does this leave us? I suspect a slow and steady wind down until all the projects are sold at “auction,” with the complete and total demise occurring when it becomes apparent that Traxi can’t drain any more money from this Debtor estate without jeopardizing BS’s security interest in the money it has loaned to pay Traxi and the Debtor’s expenses needed to keep the doors open during this death spiral.

My guess is we’ve got about 90 days until Kara’s death to coincide with the reprieve Zudi’s creditors gave him so he could focus on running the affairs of his company. I’d be willing to bet that Zudi’s Chapter 11 petition was already prepared and creditors are holding off only because he would simply file and they couldn’t go forward because of the automatic stay, and they realize from a practical standpoint he is pretty much a financial carcass.

Take care,

SCProfessor

Tuesday, January 09, 2007 9:52:00 AM  
Blogger fingaz said...

Good analysis, scprofessor. I was thinking the same thing about Zudi's 90 day reprieve. At least it looks like this mess could be over in a few months.

Tuesday, January 09, 2007 10:09:00 AM  
Blogger bubby said...

Thank you for the analysis professor. Speaking as a buyer it would be preferable to see some action on behalf of the creditors to 'take the bull by the horns' and bring this to a conclusion... one way or the other.

I can't help but to think if this was a mass scale, national builder (i.e. pulte, centex) that there would be some sort of bailout from a gov't entity. Say instead of 300 contracts there were 10,000 or more (pulte delivered 45,000 homes in 2005, centex 39,000). Say it was a combination of builders and the number was much larger. After all we bailed out Chrysler almost 30 years ago! I am just amazed that our gov't can watch hundreds of persons' life savings just vanish becuase of the carelessness of how one man ran his company.

Tuesday, January 09, 2007 9:02:00 PM  
Blogger SCProfessor said...

For those who are interested, there is an update on the Unsecured Creditor's Committee Blog relating to yesterday's Court proceedings. Unfortunately some of the comments are so brief that it is difficult to ascertain what issues were involved. Makes you wonder why they even bothered. If anyone has questions on the matters presented, raise them here and I'll try to give you my ideas of what's going on.

Bubby, I hope the information helped you. I've said this a number of times, but in my opinion the best way to address this in New Jersey is for you to contact your State legislature and get legislation passed that would require buyer deposits to be held in a neutral third party escrow account until the sale closes. That is the way we do it here in California and buyers would not have been facing such a difficult situation if the law had been that way in New Jersey. Funny that is the way most consumer protection legislation is created. Consumers get burned and complain. Legislature reacts......

Take Care,

SCProfessor

Tuesday, January 09, 2007 10:08:00 PM  
Blogger fooledatlandings said...

I'm looking for a good attorney that is already representing some home buyers at Landings at Manahawkin. My current attorney is showing little interest in this case and I feel he has to be replaced. I have read that some attorneys have already filed claims for their deposits with the bonding company and would like to proceed with that sooner than later. I feel that the buyers at the Landings are protected because of the bond in place, but am afraid that if the proper procedures are not filed, something could go wrong. I'm surprised that no attorneys have used the bankruptcy filing to obtain the names of the homebuyers as a way to solicit and/or represent the 67 contract holders at the Landings.

Wednesday, January 10, 2007 12:03:00 AM  
Blogger SCProfessor said...

It may be in your best interests to do some active research and find one of those attorneys who is already pursuing the specific bonding company that issued the bond providing assurances relative to your deposit. Problem you may encounter is that if the total claims exceed the amount of the bond(s), there could potentially be a prorata distribution to claimants. In other words it may be better for you individually if other potential bond claimants sleep on their rights.

Wednesday, January 10, 2007 12:20:00 AM  
Blogger fooledatlandings said...

The Landings has bonds totaling $4 million and from the filings I was able to identify approximately $2.5 million of deposits listed as unsecured creditors. So I don't think this should be a problem. I would like to use an attorney that is already familiar with this case and specifically with a Landings customer. Any help would be appreciated.

Wednesday, January 10, 2007 8:57:00 AM  
Blogger SCProfessor said...

It may well be worth your time then to contact the other buyers and put a group together that can select competent legal counsel (or select an attorney who is already pursuing the bonding company(s) on behalf of a purchaser). Obviously there is benefit in numbers both in terms of claimants and the total amount of claims.

Wednesday, January 10, 2007 10:52:00 AM  
Blogger Zounds said...

The big deadbeat Zudi Karagjozi weasels out of paying for landscaping on his own property because he let someone from marketing take pictures of it once. Scumbag. If there was still anyone out there that seriously believed this guy cared even slightly about your respective plights, you see this is clearly not true. He's always about "more money & more time" but no matter how little or how much of either you give him, the end results are always going to be the same. Here's a guaranteed method to determine if he's lying: his mouth will be moving.

Wednesday, January 10, 2007 4:47:00 PM  
Blogger SCProfessor said...

The following is an interesting bit of news:


http://tinyurl.com/yayjps

Associated Press
Kara Homes Seeks Court OK for $5M Loan
Associated Press 01.10.07, 3:41 PM ET

Kara Homes Inc., a New Jersey-based home builder, is seeking bankruptcy court approval to borrow $5 million from Connecticut-based hedge fund Plainfield Special Situations Master Fund Ltd.

Kara Homes already has permission from the bankruptcy court overseeing its Chapter 11 case to tap a $2.6 million debtor-in-possession loan from New York investment bank Bear Stearns (nyse: BSC - news - people ).

However, Kara Homes said in documents filed with the U.S. Bankruptcy Court in Trenton, N.J., on Tuesday that the Bear Stearns loan isn't enough to keep its operations going during the case.

"In the absence of additional financing, the debtors' operations will likely cease and the debtors' estates will likely suffer immediate and irreparable harm," Kara Homes said.

With the court's permission, Kara Homes said the Plainfield loan would replace the Bearn Stearns loan and also be used to pay expenses such as rent, utilities, wages, insurance and security, and the fees of certain professionals hired by the company.

A hearing on the company's request is scheduled for next Tuesday.

Kara Homes' DIP loan request is part its greater quest to get the money it needs to restructure and fund its operations, winterize homes and complete construction of houses under contract.

The company made strides toward its goal this week when the court on Tuesday gave the final OK for a Kara Homes affiliate, Kara at Enclave II, to borrow $1.3 million from First Constitution Bank, a pre-bankruptcy lender to the company.

Kara at Enclave II intends to use the DIP loan to winterize and complete construction of homes at a development it owns called Country Meadows.

Wednesday, January 10, 2007 7:08:00 PM  
Blogger SCProfessor said...

Well I’ve had a few hours to digest the Motion filed by the Debtor for new debtor-in-possession (DIP) financing. Those of you who would like can find the .PDF file available for viewing at:
http://tinyurl.com/v25rj

I have to tell you that it is really interesting. As pointed out by one of the anonymous posters on our friend Zudi’s Blog ( http://zuhdisworld.blogspot.com/ ), it even provides the specific salary information for Kara employees (annual and weekly salaries). Curiously noteworthy is the fact that Zudi’s take home pay isn’t as much as I thought it would be. His salary is listed at $100K a year. The highest paid employee is Patrick Turner at $175,000 a year. Oh and Rose, Zudi’s mom is listed as making $692 a week ($36K a year).

Now as to my thoughts on the motion, I first have to wonder why BS is backing out of the picture. My initial thought is they have determined, after doing their due diligence, that there just isn’t the sort of asset values that make this whole thing worth their time given the existing secured debts. These guys were interested in making a killing at the expense of the Debtor and the unsecured creditors. Most likely the total secured liens on the real property assets are larger than the property values. In the trade we call this being upside down. Real valuation (as opposed to Zudi valuation), likely resulted in a conclusion by BS that they were not going to loan additional funds to keep the carcass on life support and hence the need for a new lender.

Now in terms of what this new lender brings to the table, I think that we can make some quick assumptions. Let’s start with the total amount of this new loan and then start making some deductions.

The total loan is $5,000,000. Right off the top we have to deduct the amount paid to BS for their advances under the $2,600,000 loan. It is estimated that the entire loan amount will have been consumed by January 19th. This loan carried a $52,000 loan fee. A fair estimate of interest, based upon an initial disbursement date of 11/24/06 with a total term of approximately 2 months would be based upon interest over that period of time on half of the total borrowing ($1,300,000 * .15 * 2/12) or $32,500. Based upon this information, the total payoff would be approximately $2,684,500.

This computation leaves an available remaining new loan balance of approximately $2,315,500. Specific loan conditions reduce the borrowed funds available for use amount to $1,875,500, based upon the following deductions:
1. Interest Reserve ----- $300,000
2. Annual Administration Fee--$40,000
3. Loan Origination Fee ---$100,000

One interesting thing is how the bankruptcy professionals take care of themselves. This application carefully and rather quietly provides that the new loan shall be secured by a super-priority lien on all the debtor’s unsecured assets, “with the exception of obligations owed to the United States trustee, the Clerk of the United States Bankruptcy Court, and professionals retained and employed pursuant to Bankruptcy Code Sections 327 or 1103 and possessing a claim in the maximum amount of $500,000.” This effort is designed to insure that there is at least a half-million dollars to pay all these attorneys and bankruptcy professionals.

My sense in all of this is that if this motion is approved, there are going to be specific parties that benefit and specific parties who are hurt. Benefits will result obviously to Kara employees and bankruptcy professionals who will continue to make money. Perhaps some benefit may result for a few home buyers (Mr. Bruck estimates 30) in that their purchases may close. However, there will obviously be losers. They include unsecured creditors whose claims are being effectively subordinated to these new borrowings and secured creditors who continue to be jerked around by the lingering death of this Debtor that should have been put out of its misery months ago.

What do I expect? Sadly that the Court will go along with this slow death, somehow hopeful that the experts from Traxi whom he has already placed his reliance upon will pull a rabbit out of a hat and somehow convince everyone that their effort was both valiant and just, albeit ultimately unsuccessful.

Take care,

SCProfessor

Thursday, January 11, 2007 12:33:00 AM  
Blogger Zounds said...

Here's a story about the REAL Kara Homes, Zudi Karagjozi CEO. Once he gets your money, you are on your own.

http://tinyurl.com/ygfbx9

Oh good heavens, we wouldn't want something terrible to happen to the debtor's estate, would we? God forbid it should end up in the hands of those mean, nasty creditors. It'd be a real tragedy if the debtor were to cease operations, losing such a brilliant executive team would be a real shame. Anyone who loans them more money would get better returns by just running it all through a shredder.

Thursday, January 11, 2007 12:51:00 AM  
Blogger karajokeski said...

Can anyone explain why Kara Homes feels the need to keep hauling around that ridiculously bloated payroll? It's totally absurd, the company has not "re-organized" EVEN ONE BIT! The exact same guilty parties are still being paid despite contributing NOTHING to Kara Homes right now. That money could be used for something constructive instead of subsidizing a few nitwits & their lifestyles.

Thursday, January 11, 2007 12:37:00 PM  
Blogger SCProfessor said...

Did some research on this new “White Knight.” Headed by Max Holmes (see: http://tinyurl.com/y2p8jt ), Plainfield is clearly a knowledgeable player in DIP financing. Expect it to extract what few remaining assets exist in this case. This is sort of like the terminal patient who has signed an organ donor card. Difference here is that the organs are harvested while the patient remains alive but is on life support. Then again maybe that is the way our medical establishment does it.......

An interesting side note. Professor Holmes teaches a graduate level course at NYU titled, "Case Studies in Bankruptcies and Reorganizations." Sounds interesting. You can find its syllabus at:
http://tinyurl.com/v6qot

Take care,

SCProfessor

Saturday, January 13, 2007 11:03:00 AM  
Anonymous Anonymous said...

Wow, the Kara people sure have gotten quiet lately. It sure is interesting how their loans keep falling through, I guess after a prospective lender takes a good look at Kara's management, they can't get away fast enough. Can't fault them for that. Businesses don't usually maintain success by giving away money to crooks and scam artists.

Sunday, January 14, 2007 12:50:00 PM  
Anonymous Anonymous said...

Hey, Zudi has his own Myspace page...

http://www.myspace.com/bankruptbastard

Check it out~!

Sunday, January 14, 2007 2:04:00 PM  
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Anonymous Anonymous said...

Latest News on Kara.

TRENTON — A judge today allowed Kara Homes Inc. to replace a $2.6 million loan from an investment bank with one borrowed from a hedge fund, and he will decide later this month whether an additional $2.4 million can go to the beleaguered home builder.

Kara will use the $2.6 million to pay off investment bank Bear Stearns and to fund its operations through the end of the month.

On Jan. 29, U.S. Bankrupcy Court Judge Michael B. Kaplan will consider whether Kara can receive the balance of a proposed $5 million line of credit from Plainfield Special Situations Master Fund Ltd., a hedge fun based in Greenwich, Conn.

The money that Kaplan approved today will be used for administrative expenses, such as employee wages, rent and utilities.

The Plainfield loan would be the second loan Kara Homes has received since it filed for bankruptcy in October. In early December, Kaplan approved a $2.6 million loan from Bear Stearns. Of that amount, $1.85 million has been spent, Kara's lawyer, Joseph J. DiPasquale said in court today.

East Brunswick-based Kara filed for Chapter 11 bankruptcy Oct. 5, saying the real estate market downturn prevented it from paying its debts. The company reported $350 million in assets and $227 million in liabilities. The filing left about 300 would-be home buyers, and their millions of dollars in deposits, in limbo.

Plainfield Special Situations Master Fund is a multibillion-dollar hedge fund. H. Jeffrey Schwartz, a lawyer for Plainfield, said the hedge fund is interested in providing money to fund Kara's reorganization plan.

In court, Kara's lawyers said that while Bear Stearns provided money at a time when it was needed most, the companies' relationship didn't work out. Warren A. Usatine, a lawyer for a committee of unsecured creditors, said Kara has been "encountering obstacles and roadblocks'' in getting approval for any future financing from Bear Stearns.

Kaplan also gave Kara approval today to sell two developments: Woodland Estates in North Edison and Kara at Monore. The sale is subject to an auction, but already a joint venture between Fenix Investment and Development, a Morristown home builder, and Riverside Capital Management, a Shrewsbury investment company, has agreed to pay at least $11.6 million for Woodland Estates and $2.8 million for Kara at Monore, according to court papers.

The money would pay off debt to Kara's lender on those two projects, Investors Savings Bank. Kaplan must approve the results of the auction, which will be held March 1.

Tuesday, January 16, 2007 2:21:00 PM  
Anonymous disgruntled goat said...

This objection filed with the court summarizes the entire case very well. Of particular note are the comments regarding the unsecured creditors committee.

http://www.app.com/assets
/pdf/B357048116.PDF

Tuesday, January 16, 2007 6:45:00 PM  
Anonymous Anonymous said...

Yes, the Creditors Committee stance amazes me. I wonder whether its decision to support this motion is more about the fact that it carves out a source of funding its attorney's compensation rather than doing what is best for the creditors of this case. In other words, the rhetorical question for Warren A. Usatine, attorney for the Creditors Committee, is was your decision to support this motion based upon what's best for the unsecured creditors of this case, or what's best to insure that you will get paid?

SCProfessor, care to comment....

Tuesday, January 16, 2007 8:59:00 PM  
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