Kara plan calls for auction

Sales of Monroe lots to cancel bank loans

By: Stephanie Brown
   MONROE — Kara Homes Inc. says it wants to sell one of its Monroe developments and three others in Ocean County to pay off debt to one of its creditors.
   The East Brunswick-based developer filed a motion with the U.S. Bankruptcy Court Dec. 15 asking the court to allow it to auction off 29 single-family building lots in the four developments to settle its debt with Magyar Bank, a creditor.
   Kara has negotiated an agreement with Magyar to sell the lots to Magyar for a credit that will settle its debt with the bank, plus $300,000 in cash if a higher bid is not offered during a public auction.
   However, Magyar said it will not buy homebuyers’ contracts, leaving 16 prospective buyers and their deposits hanging in the balance.
   There are seven lots in Sterling Acres in Monroe that are under contract but not built. Magyar Bank holds construction loans on five of them. Valley National Bank holds the mortgages on the other two.
   Under the new proposal, which has been agreed to by Magyar Bank, Kara would sell the five Sterling Acres lots, plus five lots in Dayna Estates in Dover Township, 10 lots in Prospect Ridge Estates in Stafford and nine lots in Hartley Estates in Little Egg Harbor.
   Kara Homes filed for Chapter 11 bankruptcy on Oct. 5, citing slowing sales, loss of liquidity and delays in the field that further delayed closings. The company said it had $296.8 million in liabilities, and $350.2 million in assets.
   At the time Kara filed for bankruptcy, the developer said it had about 300 unfinished houses that it had contracts to build.
   Under Chapter 11, Kara will be allowed to remain in business and creditors’ claims will be frozen while it develops a reorganization plan.
   Kara determined that selling the developments instead of completing the construction and sale of the properties is in the "best interest of the estates," according to the court filing.
   Kara’s attorney, David L. Bruck, said completing construction and selling the homes in the four communities would probably not be profitable because the developments are small in size.
   "Kara’s got a lot of real estate and its going to have be efficient about building out its projects," he said.
   Moreover, according to the court filing, the selling entities claim they do not have available construction financing to fund completion of the homes in their development.
   Kara estimates that it will owe Magyar about $8.6 million, plus costs for winterizing the houses, by Feb. 9, 2007, according to the court filing. Magyar Bank has agreed to credit the company’s debt to the bank and pay Kara subsidiaries $300,000 if the properties are not sold to the highest bidder.
   Prospective homebuyers have put up a total of $1.71 million in deposits in the four developments, according to court papers.
   Mr. Bruck said Kara sales representatives and a marketing company will be contacting contract buyers to see if they’re still interested in the property.
   He said that whoever buys the property via the auction will not be bound to previous sales contracts, but that the buying entity could choose to work with the contract buyers.
   "That’s going to be the focus," Mr. Bruck said. "Obviously, Kara’s hopeful that things will work out for these people."
   John Reissner, Magyar Bank vice president and marketing director, said the bank is not buying homebuyers’ contracts, which means those prospective homebuyers may have to negotiate new contracts.
   "The original contract was between Kara Homes and the potential homebuyer," Mr. Reissner said Thursday. "It will be up to those two entities to figure out how it’s settled."
   Judge Michael B. Kaplan is scheduled to hear the proposal on Jan. 8.
   Mr. Reissner said Magyar was satisfied with the proposal.
   "We’re pleased to begin the proceedings," Mr. Reissner said.
   A lawyer for Kara Homes could not be reached for comment.
   If Judge Kaplan grants court approval, the auction will take place Jan. 30.