Friday, December 18, 2009

900 Kiely Developer Fairfield Residential Files Chapter 11 Bankruptcy

Real Estate Market Turmoil Comes Home to Santa Clara

In what the Wall Street Journal called "the latest casualty of the turmoil engulfing the U.S. real-estate market," Fairfield Residential, developer of the Gallery on Central Park project at 900 Kiely (the former Kaiser hospital site), filed for Chapter 11 bankruptcy reorganization on Dec. 13, 2009.

Chapter 11 bankruptcy lets businesses continue to operate negotiate a plan with creditors to restructure the business or reduce debt. During this time, creditors can't collect payments and debts owed prior to the Chapter 11 filing. When the plan's conditions are met, businesses are said to be “reorganized” and no longer under bankruptcy court protection.

The bankruptcy was precipitated by the privately-held company's inability to refinance its existing debt or sell properties to recoup investments -- declining real estate value declines left the company owing more, in some cases, than the real estate was worth. This, in turn, created snowballing liabilities that could reach $1.5 billion or more, according to Fairfield's December 13 press release. Local Fairfield contacts declined to discuss the news, and calls to Fairfield's designated spokesman were not returned as of this writing.

The affects of Fairfield's financial collapse will be far-reaching. The company and its 14 affiliates reportedly have $958 million in assets and $835 million in liabilities. In 2008 Fairfield reported net losses of $108 million on revenue of $953 million. As of September 30, Fairfield had lost $49 million on revenue of $507 million in 2009.

Fairfield's top creditors are Wells Fargo/Wachovia ($130 million), Bank of America ($84 million), and Capmark Financial Group ($80 million). Capmark itself is in Chapter 11million), and in the process of selling its mortgage banking and servicing business to Berkadia Commercial Mortgage (owned by Berkshire Hathaway and Leucadia National Corporation). Other creditors include Compass Bank ($64 million), Regions Bank ($52 million), Principal Global Investors Bank ($47 million), Freddie Mac ($46 million), Cigna ($41 million), Nationwide Life Insurance ($37 million), JP Morgan Chase Bank ($29 million), Massachusetts Mutual Life ($28), and Fannie Mae ($26 million).

Fairfield filed Chapter 11 with a pre-negotiated agreement, which will enable a "quick exit" from bankruptcy, according to the company's website, "not a closing or liquidation of the business.

"The filing enables Fairfield to continue to operate our business effectively with minimal disruption and loss of productivity. Employees will continue to receive their regular wages and benefits. Company facilities will stay open. Property management and construction will continue. Goods and services purchased by the company after the filing date will be paid for in the ordinary course of business."

The company's assets will be managed in a trust whose goal is "to maximize value for the beneficiaries [creditors]." Decisions to sell or retain assets will be made based on whether a sale "would produce maximum value for the beneficiaries." In addition to its real estate and ongoing income, Fairfield's assets include the company's low income housing tax credit portfolio.

With 2,000 employees, San Diego-based Fairfield has interests in roughly 200 multifamily projects, including undeveloped land, projects under construction and recently completed developments. The company has investments in metro areas across the U.S. including Boston, Washington, D.C., Atlanta, Dallas, Denver, Las Vegas, Los Angeles, San Francisco, and Seattle; and has built about 64,000 apartments, condominiums and off-campus student-housing units in the U.S.

While the impact of Fairfield's bankruptcy on Santa Clara has yet to unfold, there's no question that its impact on California will be significant. The California State Teachers' Retirement System (CalSTRS) will lose $64 million, according to a recent report in the Sacramento Bee. "It's been written off at this point," CalSTRS spokesman Ricardo Duran told the Bee's Dale Kasler.

The case is Fairfield Residential LLC, 09-14378, in the U.S. Bankruptcy Court, Wilmington, Delaware District. You can find court documents at

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