Debt Load Weighs on Opus Corp.

Refinancing challenges push merchant builder to seek shelter in bankruptcy.

One of the top developers in the country is working to dig itself out of a big financial hole. Minneapolis-based Opus Corp. is stuck with maturing construction loans that are threatening to topple three of its five independent operating companies.

In early July, Opus filed Chapter 7 bankruptcy for Washington, D.C.-based Opus East, and Chapter 11 for its Phoenix-based Opus West. Those filings follow closely on the heels of the April Chapter 11 filing for Atlanta-based Opus South. According to Opus, those voluntary bankruptcy filings are aimed at facilitating an “orderly liquidation” of the property portfolios for those three divisions.

It is a hard fall for a prominent company that reported $2.2 billion in revenues in 2007. Founded in 1953 by Gerry Rauenhorst, the privately held designbuild firm has developed more than 225 million sq. ft. of commercial, residential and public projects over its 56-year history.

So how does such a powerhouse go from building 35 million sq. ft. a year to battling for its financial survival? Certainly, the economic downturn and continued capital crisis have played a key role. The firm's speculative building in hard hit markets such as Florida and Phoenix has only compounded those challenges.

The firm's aggressive style of merchant building has proven costly, leaving Opus holding a large inventory of properties and debt with no exit strategy. Construction loans are almost impossible to refinance in the current market, and buyer interest has stalled.

Merchant builders develop properties and in short order sell the assets to third-party investors for a mark-up. That model worked quite well when the market was hot and investment properties were selling for a premium.

“I think that the merchant builder model is in jeopardy right now because there are very few investors out there paying what Opus would need to recover its costs and make a profit,” says Bernard Haddigan, a managing director in the Atlanta office of brokerage Marcus & Millichap.

The majority of properties that Opus has delivered over the last six to 12 months were underwritten with different assumptions on rents, occupancies and capital costs than what exists in today's market. “We're seeing developers coming to closings with cash because construction loans are larger than what properties are selling for in today's market,” Haddigan adds.

Although Opus declined to disclose its full list of liabilities and assets, bankruptcy documents paint a bleak picture for Opus South. Currently, Opus South has 12 bank loans of more than $324 million, which include four condo loans of more than $103 million, and eight commercial loans of more than $220 million. All of those projects were unable to secure refinancing, and all loans are either maturing or will be in default and callable by lenders in 2009.

Strategy for survival

Opus is scrambling to contain its financial problems and keep the company intact. The immediate problem is a desperate need to pay off maturing construction loans or negotiate new terms with existing lenders.

Although Opus declined to disclose the specific dollar amount on outstanding debt, if Opus South is any indication the company is facing hundreds of millions of dollars in maturing loans over the next two years.

When, or if, Opus gets its house in order, it will be a much different entity. “We will be a smaller company because we have been downsizing to reflect our current portfolio. That is just prudent,” says Winston Hewett, an Opus spokesperson. Opus also will strive for more balance between developing on a speculative basis and cultivating build-to-suit business, she adds.

The company has been steadily shrinking over the past 18 months. “We saw the slowdown coming, but we had a large pipeline of projects,” Hewett says. That development pipeline has dropped from 35 million sq. ft. of new projects that were either planned or under construction during 2008 to the current list of just 4.9 million sq. ft.

In addition, the company has reduced its workforce 60% from 2,200 employees in 2007 to its current head count of 810 with more cuts anticipated.

Although Opus is feeling the pain of a company-wide contraction, the company believes that its other independent operating companies — Minneapolis-based Opus Northwest and Chicago-based Opus North — are better equipped to weather the current economic storm.

Opus Northwest, for example, reported a net profit of $15 million in the first quarter, due in large part to robust condo sales at its 1521 2nd Avenue project, a 400-unit condo tower under construction in Seattle.

Opus hopes that its track record for developing quality projects combined with a strong emphasis on constructing sustainable and LEED-certified buildings will give the company an edge in landing new business and restoring its financial health.

“We are concentrating on going after those third-party build-to-suits, institutional work and tenant improvement work,” Hewett says.

Both Opus Northwest and Opus North have traditionally relied more on build-to-suit business than its counterparts in the South, West and East.

For instance, approximately 30% of Opus Northwest's 2008 revenue came from build-to-suit clients such as Medtronic and Cargill compared with just 5% for Opus South.

Build-to-suit projects have served as the foundation for the firm throughout its history, but even that model is in a tenuous position right now because companies have pulled back on expansion plans to save capital. “Companies are only expanding as an absolute last resort,” Haddigan says.

Pulling up stakes

Although Opus is still exploring options for restructuring its West and East operations, the company plans to exit the South entirely.

“Opus South is an organized liquidation, so we have no plans to go back into that market,” Hewett says.

Opus South stumbled largely due to its ill-timed involvement in condo development prior to the housing collapse in Florida. Three of the four condo projects Opus South built in Florida came on line right as the housing bubble burst in 2007, Hewett notes. As a result, 220 of the 330 units remain unsold.

A Chapter 11 filing is imminent for Opus West. The operating company has been an active speculative developer in Phoenix, which has been hard hit by the economic downturn, overbuilding and a decline in real estate values. Many of those projects were started three to five years ago in a strong economy.

Now as the short-term construction loans come due, even when the properties are cash flowing, there is no capital and no buyers,” Hewett says. “If lenders are not restructuring those loans, there is not much you can do other than hand back the keys,” she adds.

For example, Opus West filed Chapter 11 on the Hill Country Galleria near Austin, Texas in May. The Hill Country Galleria is a mixed-use project totaling about 1 million sq. ft.

The retail portion of the project was developed at a cost of more than $192 million. Ten lenders, including Bank of America, filed suit on the property claiming $160 million in unpaid loans, interest and legal fees.

The retail portion of the project is 72% occupied by anchors such as Dillard's, Cinemark Theater and Dick's Sporting Goods. “Opus did a nice job with the development, but it got caught in a market that was changing,” says Eric DeJernett, a senior vice president of retail in the Austin office of CB Richard Ellis.

Opus East is exploring Chapter 11 options due in part to a payment dispute with the General Services Administration for a 280,000 sq. ft. federal building being built for the National Oceanic and Atmospheric Administration in Riverdale, Md.

Opus has already invested about $35 million in the project, which was initially scheduled for completion in December. “That project in particular has led to liquidity issues of Opus East and compounded the financial strain on that independent operating company,” Hewett explains.

Because of the decline in property values and lack of liquidity, it is likely to be a long, slow uphill climb to recovery for Opus, as well as the broader commercial real estate market.

“You're likely to see more of these bankruptcy cases,” says Haddigan of Marcus & Millichap. “There are still a lot of owners and developers hanging on by threads, and there is no light in the tunnel in terms of the capital markets recovering.”

Beth Mattson-Teig is a Minneapolis writer.


Independent operating company Year established Total sq. ft. built
Opus Northwest 1953 84.8 million
Opus North 1972 47.1 million
Opus West 1979 52.7 million
Opus South 1981 27.3 million
Opus East 1994 13.3 million
Source: Company
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