Rhodes Homes faces uphill climb to emerge from bankruptcy

By Buck Wargo (contact), In Business reporter

Fri, May 8, 2009 (2 a.m.)

If Rhodes Homes wants to emerge from Chapter 11 bankruptcy, it will have to overcome tough odds.

Nancy Rapoport, a professor at Boyd School of Law at UNLV who specializes in bankruptcy, says that 15 percent to 30 percent of companies that file for Chapter 11 emerge from bankruptcy protection.

Rhodes Homes owes more than $370 million to a group of lenders led by Credit Suisse. It filed for bankruptcy March 31, and creditors have been at odds with the company, accusing it of mismanaging cash.

A request to oust President Jim Rhodes has been put on hold because the creditors say they are satisfied with their financial oversight of expenses and contractors.

Former homebuilder executive Richard Dix is working on behalf of the creditors in that capacity.

The creditors have accused Rhodes of diverting millions to finance companies not covered by the loans.

Those companies that tend to survive bankruptcy are ones dealing with cash flow problems that can be remedied with restructuring, Rapoport says. When problems are caused by a big shift in the market, that is more difficult to overcome if it doesn’t bounce back quickly, she says.

“Where we have seen other successes in Chapter 11, it is where the economy changed dramatically,” Rapoport says.

The company’s plan for getting out of bankruptcy is expected in the next two weeks. Bankruptcy Court judges give companies every chance because of the people they employ, Rapoport says. But it’s too soon to say what will happen because judges also realize if a company is doomed to fail, it’s not good to delay the inevitable.

“They will give them every reasonable chance,” Rapoport says. “If they look at the business plan and it doesn’t make sense, the cool thing about bankruptcy judges is that they have business smarts.”

Rhodes Homes is able to operate by cash flow generated from home sales. It is not making any payments to its creditors at this time. The plan will need to incorporate how it will pay creditors and still have enough money to operate.

“It is going to depend on how realistic is their forecast,” Rapoport says. “We are not going to be in a recession forever. We have already been in one for 16 months. But we have a serious slump. People are not buying, and it makes it that much harder.”

The Rhodes family started Harmony Homes, which is not covered by the bankruptcy proceedings, but Rapoport says there is still an “ego thing” about building a company and not wanting it to fail. She says she doesn’t envision any scenario at this time that would prompt Jim Rhodes to turn over the company to creditors.

If that were to happen, the creditors would have to decide whether it makes sense to keep running the company and waiting for the market to rebound before selling the assets or selling the assets in this market.

Rapoport says there have been bankruptcy cases where creditors have made accusations against management for misusing cash, and judges have ousted it.

If the creditors think there is fraud, they can file a lawsuit and try and go after Rhodes’ assets, she says.

“It would depend on how angry they are and willingness to pay their own lawyers,” she says.

Mountains Edge No. 1

Despite the slump in new-home sales in Las Vegas and the rest of the nation, Mountain’s Edge, Focus Property Group’s master-planned community, retained its No. 1 national ranking for sales in 2008.

Providence, another Focus master-planned community in the northwest valley, was No. 4 in 2008. Providence was fifth in 2007.

Mountain’s Edge sold 879 homes in 2008 while Providence sold 514, according to a survey by RCLCO, a real estate advisory firm. Mountain’s Edge had 1,740 sales in 2007, while Providence had 726.

The survey shows that master-planned communities appeal to those looking for long-term value, Focus CEO John Ritter says. He says buyers are attracted to environmentally friendly features such as lessened water use on landscape.

In its survey, RCLCO says the reason for the strong showing by Mountain’s Edge and Providence are affordability, location, open space and lifestyle.

Mountain’s Edge has sold almost half of its 14,500 homes planned for the community. Providence has sold 1,471 of the 7,500 homes in its plans.

Homebuilders at Mountain’s Edge are Amstar, Beazer, Engle, KB Home, Meritage, Pardee, Philips, Pulte, Ryland, Toll Brothers, Warmington Homes Nevada and Woodside.

Builders in Providence are Beazer, KB Home, Lennar, Meritage, Pulte, Ryland, Toll Brothers and Woodside.

Other master-planned communities on the list were Cinco, a Newland Communities in Houston, ranked second, and the Woodlands in Houston, ranked third. Houston had five of the top 10, Phoenix and Las Vegas had two spots, and Tucson had one.

Brian Wargo covers real estate and development for In Business Las Vegas and its sister publication, the Las Vegas Sun. He can be reached at 259-4011 or at wargo@lasvegassun.com.