Some home builders are flying as others stumble.

K&B deal illustrates widening gap among developers

Kaufman & Broad Home Corp. reported it has acquired the remaining 89 lots within the Paloma/Maravilla single-family home development in Glendale's Rancho San Rafael master-planned community from Calprop Corp.

The transaction, terms of which were not disclosed, illustrates a financial dichotomy emerging in California's home building industry.

With its primary lender refusing to extend loan terms, Marina Del Rey-based home builder Calprop is struggling to reduce its corporate debt and survive the residential real estate downturn. The American Stock Exchange-listed corporation lost nearly $23 million during its 1990 and 1991 fiscal years (combined) and another $6.1 million for the nine months ended last Sept. 30.

On that date, the corporation's debt was $68.5 million, its financial statements indicate. Through the Dec. 18 Glendale transaction, Calprop was able to reduce its debt level by $25 million, according to Chairman Victor Zaccaglin.

In contrast, California's largest home builder, K&B, acquired more than 3,000 California lots at substantial "discounts" last year from financially strapped builders struggling to meet their debt obligations, and from lenders that had foreclosed on under-performing developments, a spokesperson explained.

Among these were home sites in some of Calprop's Northern California developments, both firms confirmed. Publicly held K&B has made each purchase from Calprop through its corporate credit lines, the spokesperson added.

Calprop began building the 131-unit Glendale community's first 21 homes in 1989, with escrows on all but one having closed by the end of 1991, documents filed with the Securities and Exchange Commission reveal. Prices in the initial phase, called Paloma, ranged from about $400,000 to $475,000.

Last January, Calprop commenced construction of another 19 homes, having redesigned product under the Maravilla name for the balance of the project. The new target prices ranged from $375,000 to $420,000.

The firm had secured construction financing on this first phase of Maravilla through First Interstate Bank. Calprop's SEC filings don't mention construction financing for the balance of the project, but indicate that it had negotiated a "workout" arrangement with First Interstate on a "land loan" secured by the remaining lots.

Interest on this loan would continue accruing until escrows on home sales closed, with about $23.5 million in principal and interest outstanding as of Dec. 31, 1991.

K&B's spokesperson noted that the new developer would redesign and reprice the subsequent phases to most appropriately meet the current market environment.

The transaction illustrates the "absolute competitive advantage" well-capitalized builders with access to "corporate" funding are commanding over smaller developers who finance construction on a project-by-project basis, noted Steve Friedman, western regional director of real estate services at accounting firm Ernst & Young.

Their financial positions are allowing the big players to acquire improved lots at huge discounts during the downturn as "shallower pocketed" builders struggle under the debts of slow-selling developments, he added.

Calprop's fortunes have declined as the state's residential real estate market cooled. The corporation, incorporated in Delaware, posted net earnings exceeding $5.1 million in both 1988 and 1989, but lost more than $12.2 million for 1991 and more than $11.7 the previous year.

Its financial health deteriorated further last summer when Bank of America indicated it planned to foreclose on -- rather than renew -- a $14 million loan secured by four Southland developments. BofA had indicated it would extend the loan, which was not tied to the Glendale project, but initiated foreclosure proceedings after it merged with Security Pacific Bank. In response to the action, Calprop recorded a $5 million "non-cash charge" during the third quarter to increase its reserves.

As of Sept. 30, the company had 11 projects in various stages of development, with five of these containing completed homes. Calprop had also been negotiating with its other primary lenders, Bank of California and First Interstate, to extend loans that matured during the second and third quarters of 1992, public filings reveal.

Calprop's stock traded as high as $7.25 per share during 1990's second quarter. On Jan. 4, it closed at $1.19.