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More developers filing for personal bankruptcy

Add would-be downtown Milwaukee office tower developer John Kuhn to a growing list of southeast Wisconsin real estate developers who have filed for personal bankruptcy.

The ongoing flood of commercial real estate mortgage foreclosures is taking its toll on the personal finances of Milwaukee area real estate developers. Developers typically provide personal guarantees on their commercial mortgages, which means banks eventually pursue the developers personally for judgment, attorneys said.

The best strategy for nearly all developers in that situation is to file Chapter 7.

Filing for bankruptcy enables some to remain in their primary residence if they can renegotiate their home mortgages with their banks but many have to trade down or sell of second and third homes, attorneys said.

Waukesha bankruptcy attorney Bruce Lanser said he has handled "a ton" of Chapter 7 bankruptcy liquidations over the past two years for developers in southeast Wisconsin.

"When people come to me, their concern isn't for the business anymore." Lanser said. "The greater issue is about me, what about my home." No statistics are available on personal bankruptcies filed by developers, but anecdotally, the number of cases definitely has increased and shows no signs of abating, bankruptcy attorneys said.

Two of the most high-profile personal bankruptcies of developers involved Jeff Klement of Icon Development, Franklin, who filed in January and Scott Fergus of Oconomowoc, who was one of the first to file in April 2008. Klement's case is pending. Fergus, whose largest project was 5th Ward Milwaukee condos now known as The Point on the River, was discharged from personal bankruptcy in July 2008.

Kuhn, whose company is JBK Properties, did not return a call seeking comment. His attorney, Dayten Hanson of Milwaukee, declined to comment on the Kuhn case, but said he has represented a number of real estate developers who have been scorched by the slowdown in residential and commercial development.

Many developers never missed a payment on their commercial mortgages, he said. But when their loans came due, the value of their collateral - vacant or slightly developed land or buildings - had dropped to below the value of the loans. The banks then called the loans and the developers couldn't pay, leading to foreclosure on the development loans.

Kuhn, whose office is in Whitefish Bay, gained notoriety in local commercial real estate when he proposed at 42-story, $207 million mixed-use building adjacent to the U.S. Bank Center in downtown Milwaukee. Dubbed Lake Pointe Tower, the building plan included condominiums, a hotel, retail and office space. He sold the development rights to Hammes Co., Brookfield. Kuhn also is a former vice president with Mandel Group of Milwaukee. He listed assets of $960,751 - primarily his Fox Point home - and liabilities of $13.2 million in his April 2 personal bankruptcy filing.

The filing shows he has three mortgages on the home, two with Guardian Credit Union and one with Park Bank. He listed unsecured claims, including those against his limited liability corporation, of $11.7 million, including a $6.6 million claim by M&I Marshall & Ilsley Bank and a $325,000 claim by Milwaukee commercial real estate broker Bill Bonifas.

Lanser said most cases he's handled involve developers of land for residential use, subdivisions and condominiums. They are able to exempt their homes for liquidation in Chapter 7 cases, but still can face a lien by the bank that holds the mortgage. That can lead them to return their home to a bank or attempt to restructure the mortgage.

Homeowners have a somewhat improved chance of protecting their homes under a change in Wisconsin law that took effect in December 2009. A married couple can claim up to $150,000 in home equity as an exemption compared with $40,000 before the change.

Attorneys said they don't believe the change in exemption has increased the flow of personal Chapter 7 filings by developers. Attorneys pointed out that many developers face judgments of far more than $150,000.

Either out of pride or desire to not burn business partners, some developers refuse to file for personal bankruptcy until they have no other choice, attorneys said. Indeed, friends and acquaintances of developers who invested in projects typically lose any recourse for getting payment when a developer files for bankruptcy.

But with the real estate values dropping, developers are more likely to be able to retain their homes, if not their business, if they file, said Richard Check, a Milwaukee attorney.

Source: Milwaukee Business Journal, April 23, 2010