January 28, 2009 - Fulton Homes, Tempe AZ

Fulton Homes seeks protection from creditors, files Chapter 11

A home-building company founded by one of the Valley's most generous philanthropists sought legal protection from creditors Tuesday by filing for Chapter 11 bankruptcy reorganization.

Tempe-based Fulton Homes Corp. is one of the largest home builders based in Arizona, with 21 subdivisions selling homes in the Valley.

Like many builders, Fulton has struggled to keep up with its debt payments as banks demand additional capital so their loan values don't exceed the builders' declining property values, market analysts say.

Fulton Homes was founded 35 years ago by Chairman and Chief Executive Officer Ira Fulton, a prominent community figure and one of the state's best-known philanthropists.

The engineering college at Arizona State University bears Fulton's name, and its Mary Lou Fulton College of Education was named after his wife in May. The couple's Fulton Foundation has contributed more than $160 million to ASU.

Doug Fulton, Ira's son, is the company president.

Neither the Fultons nor company bankruptcy attorney Mark Roth returned calls seeking comment. Court documents show that Fulton Homes owes $100 million to $500 million to more than 100 individual creditors, including lead creditor Bank of America.

The company's estimated assets are listed as $100 million to $500 million, the documents show.

The company is scheduled to have its court-mandated meeting with creditors on March 3.

Companies filing for protection under Chapter 11 of the U.S. Bankruptcy Code typically remain in operation while the court reviews creditor claims and resolves debt issues.

Though it's likely Fulton Homes will continue as a company, bankruptcy creates new challenges in securing credit to build homes - and persuading consumers to buy them.

Future lenders undoubtedly will require Fulton to secure its credit with company assets and will charge higher interest rates, making it more difficult to do business in an environment that is already putting many builders out of business.

2008 was a dismal year for home builders everywhere. Companies such as Fulton that were heavily invested in the outer edges of urban sprawl - places like Queen Creek, Maricopa and Casa Grande - fared the worst.

Phoenix analyst Jim Belfiore of Belfiore Real Estate Consulting said home builders were expected to pull only 6,000 to 10,000 building permits in the coming year, a far cry from the 55,000 permits issued in 2005.

Fulton, like many Valley home builders, had a backlog of speculatively built homes from 2005 to '07. It has been aggressively trying to sell those homes and get contracts on new ones by lowering prices, market watchers say. But the builder had started few new homes recently.

Fulton took out 61 single-family permits to build new Valley homes last year, said RL Brown, a housing-market analyst.

The builder reported 428 closings or sales, so the numbers suggest that most of those sales came from Fulton's speculative inventory, built in past years.

How many more spec homes Fulton has on its books isn't clear. The builder pulled only two Valley building permits in December.

Brown said Fulton's financial situation is most likely a direct result of the housing market's problems and not a product of mismanagement.

"It's bloody out there," he said of the Valley's housing market.

The Arizona Department of Real Estate's most recent list of home builders in financial trouble includes 41 projects by a variety of builders that have filed for bankruptcy protection since the housing market hit a stucco wall in 2007.

Those bankruptcies include Trend Homes, KB Home, Americabuilt Communities and Engle Homes.

Bankruptcy erodes customer confidence, especially since many bankrupt builders stop honoring past customers' home warranties. Belfiore said Fulton customers' warranties could be voided by the court even if the builder wants to continue honoring them.

"Some of the control is not going to be in their hands anymore," he said. "Lenders have a say because they're the ones writing off part of the debt."

Brown said Fulton behaved like every other big builder in Arizona. It bought land during the boom and built houses based on speculation that demand for them would continue to grow.

But home sales and construction have continued to slow in the Valley, and land values have sagged.

Fulton Homes started operations in 1974 and grew to become one of the Valley's biggest private home builders.

In December, Doug Fulton told The Arizona Republic that the coming year would bring about "natural selection of the building industry."

Original Story - Arizona Republic

Update January 29,2009

Fulton Ranch, the crown jewel of long-time home builder Fulton Homes, is losing some of its luster.

The Tempe-based builder filed for Chapter 11 bankruptcy petition this week. Now it wants to build smaller homes in the sprawling master-planned development in south Chandler.

The moves are leaving homebuyers questioning whether they made a good investment.

Jennifer Cassavant and her husband, Joseph, closed on their $1.05 million home in the Aegean Cove section of Fulton Ranch less than two weeks ago.

Cassavant beat a caller to the punch Wednesday when explaining why she was being contacted.

"I'm showing that I was the last sucker who bought in this development?" she asked, laughing.

Despite the bad news, Cassavant said she isn't worried about Fulton living up to warranty work on her home.

"I was a tad bit shocked," she said. "But as we were doing the walk-through, my mom, who's sold real estate for 30 years, was very impressed.

"We have only expectations that in the future they will continue to service us the same way they have the last couple weeks."

Neither Doug Fulton, the company's former president and son of founder Ira Fulton, nor Norm Nicholls, its current president and Ira Fulton's son-in-law, returned calls seeking comment.

But the company issued a prepared statement Wednesday saying the company would continue to honor home warranties.

Fulton Homes is still selling homes in three sections of Fulton Ranch.

The company has 20 home sites plus 15 spec homes at Gallery, which start in the $390,000s. It has 18 home sites plus 13 spec homes at Aegean Cove, which start in the $760,000s.

The company also is selling custom home sites in The Island at Fulton Ranch, which is where company founder and CEO Ira Fulton owns a custom home.

His presence there gives new Fulton Ranch resident Cassavant peace of mind.

"That was always our ace in the hole," she said. "If it was his investment, that (the development) would be something he watches."

The company, which platted the development in 2004, wants to sell smaller homes there.

It has requested city approval to sell homes it originally designed with 2,310 square feet to contain 1,973 square feet. It also has asked that models with 5,103 square feet be downsized to 4,802 square feet.

In addition, the developer has asked for permission to cut the separation between two-story homes to 15 feet from 20 feet. The change would affect only two parcels, said Jodie Novak, a senior city planner.

The Chandler City Council is expected to consider the requests Feb. 12.

Update Story - Arizona Republic

Update February 11, 2009

Fulton, banks disagree on debt payment

Bankrupt home builder Fulton Homes will be allowed to continue doing business while a judge decides how - or if - it should repay more than $160 million it owes a group of banks.

Documents filed this week in U.S. Bankruptcy Court by Fulton and its creditor banks, led by Bank of America, present opposing views about how much consideration, if any, the lenders should receive in the Tempe-based builder's Chapter 11 reorganization proceedings.

Creditors Bank of America, JPMorgan Chase Bank, Compass Bank, Guaranty Bank and Wachovia Bank said they should receive the bulk of any future Fulton Homes earnings, and that it might make more sense to simply shut down the company and force it to sell off all assets to repay debt.

Fulton argued that the banks are unsecured creditors, and thus they should not be able to put the company out of business or control its destiny.

Doug Fulton, chief executive officer, did not deny his company borrowed the money and said it should be expected to repay it. He said Tuesday that Fulton Homes had gone to great lengths to work out an agreement with the lenders before seeking refuge in bankruptcy court on Jan. 27.

It was the reappraisal of mortgaged properties at a much lower value, and not missed loan payments, that landed the builder in default, he said.

Commercial mortgage borrowers are expected to maintain a certain ratio of equity to debt for the properties they buy on credit. If the property's value drops significantly, as Fulton's did when the banks reappraised it in August, the borrower is forced to repay a large portion of the loan immediately.

Fulton said he had offered the banks a repayment plan that would have wiped out the entire debt within eight years, but the banks wanted the loan paid off in no more than three years.

"They're the ones who forced our hand," he said.

Phoenix attorney Christopher Bayley, representing creditors Bank of America, JPMorgan Chase Bank, Compass Bank, Guaranty Bank and Wachovia Bank, said the lenders had been patient with Fulton since the builder initially defaulted on its loan agreement in August.

They had agreed to several loan modifications to spread out the required payments instead of invoking a clause in the loan agreement that would have allowed the lenders to seize all of Fulton's real assets.

Then, in January, Fulton Homes stopped paying, and the banks decided to go after the land. Fulton filed for bankruptcy before they could get their hands on it.

"We realized we were going to bleed to death here if we don't stop making these payments," Fulton said.

Bayley said the banks were invoking their contractual right to force Fulton to put up land as collateral for its unsecured debt in the event of default. He argued that the court should treat them like secured creditors, who are the first in line to be paid in a bankruptcy case.

Still, he said it doesn't matter that much whether the group of banks is treated as secured or unsecured.

"They have the debt, and the company has to pay it back," Bayley said. "The creditors of the company really kind of own the company until they get paid."

Fulton disagreed.

"The banks are the ones that are going to take the hit, because they're unsecured," he said, adding that the court must let it pay off $600,000 owed to various contractors before giving a dime to the banks.

Both Bayley and Fulton agreed that the lenders do not currently have a right to force the sale of Fulton's assets, which include vacant land and dozens of unsold homes in Maricopa and Pinal counties.

Fulton said he believes the company will survive the bankruptcy and come out even stronger.

However, Bayley questioned whether Fulton Homes could even make enough money this year to pay its own operational expenses, much less repay past debts.

"There aren't many people out buying houses anymore," he said.

Both sides said they expect the bankruptcy case to conclude in about two months.

Update Story - Arizona Republic

Update February 13, 2009

Creditors halt Fulton charitable contributions

One question left unanswered in the Fulton Homes bankruptcy is the impact it will have on company founder Ira Fulton's celebrated philanthropic endeavors.

Fulton is responsible for the single largest donation ever pledged to Arizona State University, $100 million, and in all he has pledged nearly $160 to ASU.

He also has made large contributions to Brigham Young University in Utah, Hurricane Katrina recovery efforts and other causes.

Fulton has appeared regularly on BusinessWeek's annual list of the country's 50 most generous philanthropists.

Fulton Homes CEO Doug Fulton, Ira's son, said his father was forced to cease all future donations when the company he started in the mid-70s found itself unable to make its debt payments.

"The banks have barred us from making any payments to any charities," Doug Fulton said.

Large donations such as the one Fulton already has pledged to ASU are paid in increments over a period of years, Doug Fulton said.

The details of those arrangements are between the donor and the recipient, he added.

Now that Fulton Homes has hit upon hard times, with the housing market in an unprecedented slump, Fulton's beneficiaries realize the donations won't continue as planned.

"They totally understand," Doug Fulton said.

Still, he said the company and its owners are confident they will emerge whole from the bankruptcy and resume their charitable giving.

Fulton Homes filed for protection from creditors on Jan. 27 under Chapter 11 of the U.S. Bankruptcy Code. The company owes more than $160 million to a group of banks that includes Bank of America, JPMorgan Chase Bank and Compass Bank.