Caruso Homes files Chapter 11

Builder plans to reorganize and rebuild company

Friday, June 27, 2008

Click here to enlarge this photo Staff photo by GARY SMITH A new Caruso house is for sale on Kilburn Court off Tottenham Drive in the High Grove subdivision in White Plains. E-Mail This Article | Print This Story

The Chapter 11 status will protect the Crofton-based company against paying a portion of its $100 million-plus debt until it can reorganize the business in hopes of becoming profitable again. Sales in the company’s Charles communities, Bucks Run in Hughesville and High Grove in White Plains, have been showing signs of a slowdown for at least a year.

Caruso settled on one home in High Grove this year, 14 in 2007, 17 in 2006 and 14 in 2006. Currently there are two spec homes, a model home and an empty lot with no contracts pending there. The company settled two homes in Bucks Run this year and two in 2007. There are nine lots and two spec houses available there, said Christopher Block, vice president of operations for Caruso.

Since the fallout of the housing market last spring, Caruso has lowered prices on homes in various communities it developed throughout Maryland and Virginia to get them sold. But sale prices didn’t cover debt on the land, leaving significant deficiencies, Block said. During the past five months, Caruso laid off most of its employees but Block said he knows of no displaced workers in Southern Maryland.

During the reorganization period the firm will work with creditors to modify loan terms and work out new payment plans with creditors.

‘‘It allows us to lower the sales prices so we can get volume again. We need to be able to lower prices to a point that there are buyers that can go and settle on the houses. Right now there’s not enough profit on houses to cover burden of debt. We need to reorganize so we can function in this kind of market environment,” Block said. ‘‘Some builders are paying to sell houses. You can’t do that very long.”

‘‘Caruso tends toward the bigger homes. The problem is you got homes like Ryan [Homes], priced at $340,000 or $360,000, and it’s impossible to compete,” said Jonathan Benya, a Realtor with Century 21 New Millennium in Waldorf, who has been following new construction trends in the region.

Homes in Bucks Run sit on one- to four-acre lots and start from the mid-$500,000s, and those in High Grove sit on quarter-acre lots and start from the mid-$400,000s.

Foreclosures on large, expensive and fairly new ‘‘McMansions” made by big builders like Ryan, Marrick or Caruso aren’t helping them deplete inventory, Benya said, because they’re listed as pre-foreclosure or real estate-owned properties for as much as $100,000 less than builder models.

‘‘So now the builder gets to compete with their own product,” Benya said.

Contracts with vendors and suppliers will remain unaffected by Caruso’s bankruptcy status, but payments due to contractors before filing will be paid when the bankruptcy court sees fit. Aside from bank creditors, Caruso owes contractors significant amounts of cash, including 84 Lumber, to which it owes almost half a million dollars.

‘‘Our intention is come out of Chapter 11 in 90 to 120 days,” Block said. ‘‘Anything that’s under contract we intend to complete and settle. We are trying our best not to build spec houses anymore. Right now lenders aren’t funding spec homes anymore. We will continue business as usual. The reorganization is truly reorganization. Hopefully we’ll be a stronger company and we can be profitable again.”

Caruso will deliver homes under construction or under contract throughout the Washington, D.C., area and said the reorganization will make sales on almost 50 other vacant new homes easier.

A statement on the company’s Web site to customers said Caruso will work with lenders to ‘‘provide a solution” and it intends to ‘‘stand by the commitments” to add infrastructure like paved roads or other facilities that were promised.

But the bankruptcy court will have to approve all of Caruso’s significant business decisions, including the reorganization plan.

Caruso’s notice came only a few months after KB Home, one of the country’s largest builders, decided to cease operations and displace 17 employees in the mid-Atlantic region, which includes Maryland, because of poor market performance.

New home sales are down nearly 70 percent nationally from 857,000 in May 2007, to 512,000 in May this year, according to U.S. Census Bureau data. New home inventory was at about 450,000 last month — down only about 100,000 since May 2007 and at the current sales rate, it would take nearly double the time it would in a stable housing market to liquidate new home inventory — about 11 months.

‘‘The mid-Atlantic is feeling pain of the downturn but not as severe as southern Florida, Nevada and California. In general, more of the national home builders are choosing to withdraw from some of the weaker markets, which is a benefit to the remaining companies because there’s less competition,” said Bernard Markstein, senior economist and director of forecasting for the National Association of Home Builders. ‘‘Some builders are choosing to exit altogether. That’s not uncommon in a downturn like this, given the weak demand and supply overhang. Some of them are filing for bankruptcy, which is something we don’t like to see but we have to admit it’s happening.”