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Cash crunch or day of reckoning?

Cash Crunch Or Day Of Reckoning?

The Crestwood Co. Defaults On $25 Million, And Creditors Grow Anxious With Millions More Hanging Over The Highly-Leveraged Enterprise

James P. Matthews won't hold any warm memories for the month of August although he isn't likely to forget the heat of back-to-back foreclosures

totaling $25.3 million. Even under more pleasant circumstances, Matthews abhors the public spotlight, and the type of scrutiny that accompanies multi-million dollar lawsuits has only served to fan the personal fires that drive this volatile businessman.

As the managing partner of The Crestwood Company and president of General Properties, Matthews holds dominion over a real estate fiefdom covering more than 850 acres of commercial property. The size of Crestwood's realm expands further when dozens of residential lots and tracts are added to the mix of apartments, condominiums, office buildings, warehouses, restaurants and retail centers located mostly in North Little Rock.

Land and the projects that have sprouted from it have been the primary source of wealth for Matthews and his siblings thanks to a huge real estate legacy created by their grandfather Justin Matthews.

This family heirloom along with Matthews' ability to control it is threatened now that Boatmen's National Bank in St. Louis filed a $17.5 million foreclosure suit on the Lakewood Village Shopping Center and Northwestern Life Insurance Co. and a subsidiary followed with a $7.8 million foreclosure suit on the Lakewood House, Northeast Business Center and Vali-Hi Shopping Center.

With millions more in debt hanging over the highly leveraged company, these two defaults have the potential of triggering more foreclosures. An allegation contained in Boatmen's lawsuit not only questions the economic viability of the Lakewood Village project but also questions the future viability of The Crestwood Company itself:

"The Crestwood Company is insolvent: the total liabilities of the partnership exceed its total assets; the partnership is unable to pay its bills as they come due."

With such ominous allegations and the current financial reversals, some wonder if the day of reckoning is at hand for Crestwood and Jim Matthews.

Faltering Financial Strength

The real estate rich firm purported to have total assets of $128 million and a net worth of $75 million six years ago. Matthews hasn't disclosed such specifics, but in a rare public statement, he attempted to counter Boatmen's allegations that Crestwood and General Properties are insolvent.

"It is undisputed that the value of our property greatly exceeds our debt," reports the press release that Matthews sent out after the second foreclosure was filed.

In general terms, many agree with that assessment. However, Crestwood's financial strength isn't as great as Matthews might believe. If Crestwood were to liquidate enough property to pay off all of its debt, no one is certain how much or how little the remaining assets would be.

Land provides the muscle at Crestwood, but it is burdened with a heavy debt load that tips the scales at upwards of $60 million. More conservative types place the company's net worth at maybe $30 million today, and that figure could be inflated depending on the full extent of Crestwood's debt and how overvalued its assets might be.

Why the disparity in viewpoints? Insiders indicate that Matthews' perspective on the market value of his family's holdings doesn't jibe with current market conditions.

For example, the 47 acres that contain Lakewood Village is valued by Crestwood at $9 million or about $4.40 per SF. That rate appears to be inflated by at least 30 percent when compared with Crestwood's pending land sale on the McCain Village site, estimated at about $3 per SF.

In another instance, Crestwood assigned an appraised value of more than $40 million to the acreage in the Springhill Commercial Park while an independent source placed the value at less than $20 million.

Those types of disparities have heightened the concern that Crestwood is carrying more debt than it can support. The crisis has reached a head now that some financiers have grown weary of Matthews' efforts to correct the imbalance and expressed their reservations about his ability to ever straighten things out.

Under Matthews' leadership, Crestwood has been siphoning off positive cash flow from profitable properties and borrowing money to cover millions of dollars in debt service and losses at ill-advised projects such as Lakewood Village, the Holiday Inn City Center and Fones Brothers.

That practice provided a temporary solution for the past few years, but the financial woes have reached the point that Crestwood has been forced to sell land in an effort to lower debt and ease the cash crunch. It has also required Matthews to change his long-standing attitude that commercial property was meant to be owned and not sold.

"Normally, if we had our druthers, we'd keep the property and develop it ourselves," Matthews said in an interview with Arkansas Business, (July 31-Aug. 13, 1989) adding, "At this point, we're more interested in cash than leases."

So are the bankers. Pressured by lenders, Crestwood began what has been described as a five-year plan in 1989 to sell off $20 million worth of property. The company has already closed on more than $6.1 million of land sales since last year, and Crestwood should soon cash in on its biggest single deal to date.

Folmar and Associates of Mobile, Ala., is slated to pay a reported $4 million-plus for more than 30 acres that will be developed into McCain Village.

This tract is among a slew of Crestwood properties that are cross-collateralized with the Lakewood Village debt, creating the setting for a domino scenario should the disagreement between Matthews and Boatmen's escalate. The bulk of those proceeds from Folmar are likely to go to National Bank of Commerce in Memphis and First Commercial Bank in Little Rock, which have about $14 million tied to this and other property in the Springhill Commercial Park area.

Although Boatmen's has a claim on the property, the bank has no intentions of exercising that option -- at least for the time-being.

"We have a third mortgage on that, and it would be to our interest to see the property sold," states an exec at Boatmen's. "We really don't have any expectations for the next 6-9 months. It's really contingent upon what action Crestwood might take. With a debt this size, it's usual to anticipate a Chapter 11 filing. I have no doubts they will file Chapter 11, or I should say I wouldn't be surprised if they did."

Fighting Back

When Boatmen's lowered the boom on Matthews in federal court, he reportedly grabbed a plane for Dallas to consult with lawyers in hopes of countersuing the bank. Matthews is said to be dealing with a gunslinger attorney who has made a name for himself in lender liability suits.

Tom Thomas of the Kolodey & Thomas firm in Dallas confirms that he has been approached about such a suit, but he says it is too early in the game to discuss any potential action against Boatmen's.

Matthews, known as a ruthless and at times arrogant negotiator, is unaccustomed to anyone dictating the terms of a deal other than himself. He didn't take kindly to Boatmen's decision to cut him off from further operating capital for Lakewood Village as well as putting the squeeze on the project's existing cash flow. Matthews hasn't serviced the debt since March, according to the foreclosure suit.

Lakewood Village is generating a net operating income of $45,010 per month, according to Boatmen's. That performance, dated April 30, 1990, falls woefully short of supporting the $17.55 million debt claimed by the St. Louis bankers.

Leases would have to generate $146,282 in monthly net operating income to cover that kind of exposure, which clicks off a daily interest charge of $4,829.

Boatmen's isn't the only lender at risk on the Lakewood Village project either. Third National Bank in Nashville, Tenn., is also on the line for about half of the loan.

It's taken awhile for Matthews to come to grips with the severity of his situation. In fact, would-be buyers recall days in the not so distant past when Matthews was demanding a premium price of $2 per SF above comparable market rates for land he desperately needed to convert into cash.

Matthews also commanded a steep price that enticed no takers when he quietly offered to sell developments that included Northeast Business Center, Crossroads Warehouse, Vali-Hi Shopping Center, Somers Village, the 2500 and 2504 McCain office buildings, Lakewood Shopping Center, seven Bonanza restaurants and two Mazzio Pizza outlets.

The properties, which carried $13 million in total debt in 1989, could be had individually or bought as a package price of $23 million.

Matthews has directed The Crestwood Company since 1975, and insiders are casting a critical eye on his leadership. It wasn't that long ago that the company was scrambling to come up with enough cash to cover its property taxes. Others remember that when Matthews sold the family's majority interest in First American Bancshares in an $18 million deal most of the money went to pay down debt.

Four years later, Matthews has leveraged the family fortune even more, and some wonder if he will ever be able to work his way out from under the debt.

By all accounts, Matthews would prefer to be behind the wheel of a tractor bush-hogging his 38-acre spread near Roland rather than sitting at the helm of Crestwood Co. At the least, insiders expect Matthews to be effectively removed from the development business for years to come.

PHOTO : IN DEFAULT: A battle is shaping up over the Lakewood Village Shopping Center after The Crestwood Co. defaulted on the project. Boatmen's National Bank of St. Louis has filed a $17.5 million foreclosure suit.

PHOTO : UNDER SIEGE: The Crestwood Co. is fighting to retain control of the 16-story Lakewood House, North Little Rock's tallest building. This property was included in a $7.8 million foreclosure suit filed by Northwestern National Life Insurance Company.
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Title Annotation:Crestwood Co.
Author:Waldon, George
Publication:Arkansas Business
Date:Sep 10, 1990
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