Reappraisals, Market Changes Slash Values

Not so long ago, Bill Schwyhart held court with businessmen in his sixth-floor Rogers office overlooking The Pinnacle Group’s real estate empire and neighboring fiefdoms.

From his vantage point atop the J.B. Hunt Parkway Tower, the former BMW dealer surveyed a corridor of commercial development along Interstate 540 that he called the Billion-Dollar Mile.

Today, the marketing moniker’s valuation isn’t what it used to be.

The view of the Benton County landscape remains impressive, but bank-owned property, foreclosures, financially strained projects and broken partnerships have joined the scene.

The recent Chapter 7 bankruptcy of John David Lindsey has heightened the real-life drama of the real estate meltdown in Northwest Arkansas and has people wondering: Who’s next?

“Maybe me,” said Collins Haynes of Rogers, real estate developer and architect. “Maybe another bank. Who knows?”

Bank-ordered reappraisals have gashed valuations, sometimes erasing millions of dollars and transforming a good loan into an upside-down mortgage. That’s what happened with an undeveloped 64-acre commercial tract at the southwest corner of Interstate 540 and Whitaker Parkway.

Known as The District at Pinnacle Hills, the property is at the center of a $27 million foreclosure suit by Bank of America. The site, owned by Schwyhart and longtime partner Robert Thornton’s Pinnacle Hills West LLC, was reappraised at $6.1 million below the debt it secured.

Not good.

Schwyhart and Thornton, a retired Wal-Mart executive, also are battling a $41 million foreclosure action by Little Rock’s Metropolitan National Bank on their Pinnacle Point Properties LLC, which owns a 22-acre development with more than 269,000 SF of office and retail space in 11 buildings.

“We’re still working in negotiations,” Schwyhart said of the legal travails.

These days, he and Thornton are no longer part of The Pinnacle Group, the investment cadre who drove so much development and helped spark still more. The 105,000-SF Hunt Parkway Tower, named in honor of the late trucking magnate and Pinnacle Group partner, is no longer their home.

J.B. Hunt’s wife, Johnelle, and partner Tim Graham continue working to untangle their ties with debt on the Schwyhart/Thornton projects, a task that has proven harder than dividing ownership of properties.

Hunt, backed with her considerable financial resources, is committed to keeping her family’s real estate holdings out of harm’s way. Some wouldn’t be surprised if she ultimately ended up with the Schwyhart/Thornton properties.

Deeds forfeited in lieu of foreclosure, with borrowers turning property over to banks, have become the high-dollar transactions of the hour. More bankruptcies are expected.

“I don’t think we’ve seen the end,” said Bill McClard, senior vice president at the Rogers office of Lindsey & Associates Inc., which is owned by John David Lindsey’s father, Jim Lindsey. “There will be a few more who will be toast before it’s all over.”

 

Grim Days

Haynes is sitting on an 80-acre mixed-use commercial development in Rogers called The Farms that is going nowhere fast. The meter of time and money is ticking on improvements and land cost without a buyer in sight.

Six possible development schemes are ready and waiting to accommodate potential clients. And waiting. And waiting.

“It’s grim,” Haynes said. “Nothing is happening with that at all.”

He thought his first deal was going to break with a physician’s clinic circling on a 1.5-acre location. The response from the lending community slapped that would-be development out of the air.

“They wouldn’t lend him the money,” Haynes said. “If I remember it right, there was a call for 35 percent collateral. This is a doctor with a 10-year track record of running a successful practice, and they’re requiring him to put up 35 percent equity.

“That’s what we’re having to deal with. There is nothing coming out of the ground in the way of office [space].”

Across the road from Haynes is Little Rock developer John Rees and his equally empty 40-acre Walnut Creek commercial development. Rees couldn’t be reached for comment.

Haynes and Rees teamed up to develop a five-lane extension of Promenade Boulevard that cuts through their land and links New Hope Road on the south with Walnut Street on the north.

The developers invested more than $4 million in the new roadwork and infrastructure, which included a bridge across Turtle Creek that the city of Rogers helped fund.

“It’s destined to be a commercial thoroughfare,” said Pat Morrison, owner of the Rogers commercial realty firm of Morrison Wanger. “We’re keeping our fingers crossed that when this market turns around these properties will be among the first to see activity.

“We’re hoping folks can hang on, and we can get back to better times.”

Carmen Lehman is among those who couldn’t hang on. Her C.R. Lehman Properties Ltd. filed for Chapter 11 reorganization last year and has since been liquidated.

Arvest Bank of Fayetteville, which held a first mortgage claim of $32.9 million, now owns the Village on the Creeks. The 64-acre office and retail complex was among the first commercial developments to crop up in the I-540 corridor in Rogers.

Once home to a minnow farm with 21 ponds, the 64-acre property required extensive redevelopment to transform it into a thriving 250,000-SF mixed-use project. Opportunities to sell before the real estate market fell came and went while the project was leveraged with more and more debt.

Many investors in Northwest Arkansas believed their development was going to be a legacy project, a long-term holding of ever-increasing value.

“All of them had a chance to sell, but they held on too long,” one observer noted.

 

Wishful Thinking

Butch Gurganus, a principal with Colliers International in Bentonville, has crunched the numbers on more than a few distressed projects in Northwest Arkansas. He’s convinced that some were doomed to failure from the outset.

“It wasn’t even close, and I don’t know how they rationalized it,” Gurganus said. “Maybe they just didn’t know. The lending was so loose; there were people getting in the market who shouldn’t have been.”

Other developers made the mistake of keeping their properties too leveraged, he said.

“Generally speaking with the older properties, if they paid down their loan, they probably would’ve been in a position to compete,” Gurganus said. “But a lot of people didn’t do that.”

Everyone is feeling the squeeze of rival projects willing to cut bargain deals to fill space and generate cash flow.

Owners who had to put zero money in to launch a project a few years ago often have to come up with big bucks just to keep their property and maintain their mortgage. Sometimes triggered by loan renewal time, investors are confronted with a double whammy of a devalued appraisal and a lender requiring 20 percent equity.

With a bank unwilling or unable to keep the previous terms in place because of regulatory pressure, even a good loan can become untenable.

Adding to the financial pain is a market twisted by distressed sales used for comparison in the near absence of normal transactions. Stories of banks sometimes assuming worst-case values in the absence of comps provide an added degree of darkness to the scene.

“A lot of people say that any property bought during 2005-2007 isn’t worth what it was paid for,” Bill McClard said. “That’s probably pretty accurate.

“Demand is very low. There are a lot of people who have problems, and a lot of people aren’t able to work out of their problems. Raw land is especially troubling, and if it’s a little bit rural, then it’s probably in even bigger trouble.

“Nobody knows when we’ll reach the other side of the river and return to a normal 1997 market. It was a gloried market during 2000-2006.”

With all that’s happened, Schwyhart still believes the Billion-Dollar Mile is intact.

Back in the day, the value of construction on the Pinnacle Group holdings alone was pegged at $1 billion. But that was in 2006, and the Northwest Arkansas real estate market painfully bears that out. 

 

 

Combs Still Flying

Gary Combs of Springdale once was a player in the broader Northwest Arkansas real estate market, but his range isn’t as wide as it used to be.

“I’ve turned all the property I had in Benton County back to the lenders,” Combs said.

Among the last to go recently was the 22,208-SF Van Dyke Center in Rogers. Combs returned the property to Wallace Fowler’s Liberty Bank of Arkansas, which entered the ownership picture in a 2007 foreclosure action against Landquest Holdings.

In 2008, Combs agreed to take the two-story building off the lender’s hands in a $1.15 million transaction backed by a $2.2 million note to finance and update the property.

According to him, a tiff arose after he discovered the property had a floodway/floodplain issue that affected his ability to sell the 2.7 acre development.

“I wouldn’t have agreed to take the property on if I had known that, and they didn’t want to take it back,” Comb said. “I told them, ‘I’m done,’ and I sued them.

“They took everything back, the helicopter, the building and 20 houses in Sundowner,” referring to the Sundowner Ranch neighborhood in Prairie Grove.

Helicopter?

“It’s like everything else,” Combs said of the eight-seat helicopter bought in 2007 for $3 million. “You can buy a new one for $2 million.”

He flew his Eurocopter 130 B4 to Jonesboro as part of his settlement with Liberty Bank, left it at Wallace Fowler’s hangar and rode back to Northwest Arkansas aboard his Learjet 31.

“I had my jet pick me up,” Combs said. “That pisses them all off that I still own a jet.”

Combs estimates his net worth, built largely on real estate holdings, stood at $250 million in 2009. What would that number be today in light of market conditions and a string of jettisoned property as part of lender settlements?

“I wouldn’t even venture to say,” Combs said.

– George Waldon