Investors can't pay bills; liens pile up

Architects, engineers, contractors are taking developers to court

Triangle developers, desperate to trudge through a frozen lending landscape, are facing new pressures: mountains of unpaid invoices from contractors, suppliers and consultants who need to pay bills of their own.

Architects, engineers and contractors are increasingly heading to court, seeking payment for services rendered to developers before lenders shut the spigot on construction loans. These companies have led a surge of lawsuits and liens filed this year detailing expenses for fancy renderings, complicated foundations, lumber and paint.

There have been at least 9,355 lien claims filed in Wake County Superior Court. That's a five-year high and 35 percent more than the annual average over the previous three years. In Durham County, claims are up 34 percent over the three-year average, reaching a four-year high of 3,162.

"A lot of people aren't getting paid," said Lisa Strickland, a deputy clerk at Durham County Superior Court. "And that's kind of sad because these people need their money for Christmas, too."

The spike in liens -- which are monetary claims against properties that must be settled before a residential or commercial property is sold -- is the latest indicator that the development community is anticipating a painfully drawn-out recession.

Two years ago, contractors were less likely to file liens in part because the free-flowing credit markets made it easy for consumers to buy homes and for companies to expand into commercial space. That offered confidence invoices would be paid.

Also, contractors were reluctant to sour relationships for fear of losing future business. So they waited it out amid the building boom, letting other projects cover expenses.

But developers -- particularly those with residential projects -- are in a tight spot these days. As home sales have slowed, lenders have become more cautious. That has slowed land sales and made it harder for many developers to pay bills quickly, putting contractors in a more defensive position.

"Creditors are having to enforce their rights more now than they have before," said David M. Warren, a bankruptcy lawyer at Poyner Spruill in Raleigh. "They need to pay mortgages. They need to buy groceries."

Soleil Group's debts

Hunter Roberts Construction Group of New York is still owed about $931,320, plus interest, for equipment, materials and services from Soleil Group. The developer's plans for a 43-story condo-hotel tower in Raleigh's Crabtree Valley were stalled when lenders backed out.

The debt is among the $1.6 million in unpaid invoices facing the company's Southeast division, said Bob Ferguson, the executive in charge of the division.

That division had to lay off 12 workers in August. If developers had paid all their bills, Ferguson said, half the pink-slipped workers would have been spared.

"We've never seen anything like this, and I don't think most people have," said Bruce Long, president of Long Foundation Drilling in Hermitage, Tenn.

His company recently settled a $791,000 lien claim with Soleil, one of three projects in Long's Southeast pipeline to have stalled because of lending issues.

Long had to dip into reserves to make up for unpaid invoices on other projects. Paying his people is more of a concern than spoiling future deals.

"If I can't get paid by a guy the first time, the future relationship isn't as big a deal," Long said. "It's like having a girlfriend that you're fighting all the time. How long do you want to be in that relationship?"

Smaller debts are adding up.

In September, Little Diversified Architectural Consulting of Charlotte filed a lien in Wake County saying it was owed $109,321 for work at Waverly Place in Cary. The property was bought amid the boom. But lending challenges nixed a planned redevelopment.

The developer was able to sell the property to an investment group that paid cash. That enabled the seller, Todd Zapolski, to pay the architect.

Bending balsa wood

Others haven't been as lucky.

The John R. McAdams Co. of Durham, for instance, filed suit in Wake County against eSuites Hotels. McAdams is seeking $97,000 for engineering, planning and surveying work it did in Morrisville, where the hotelier once planned a 300-room hotel.

Stewart Engineering of Raleigh also filed suit recently, hoping to collect $180,000 for mapping, surveying and design work for Pantlin Development.

Some suits may be futile. The more money contractors and consultants seek, the harder it may be for them to receive payments -- especially if they pile on, Warren said.

"The question is: How hard do you push? Do you push to collect to collect some or all of your debt? And if you push too hard, are you going to push your debtor into bankruptcy, where you may not get as much?

"It's like balsa wood," he added. "It will bend. But if you bend it too much, it breaks."

Warren is a trustee representing lenders in bankruptcy cases. He says he has handled bankruptcies of about eight builders in the past nine months -- more than twice what he dealt with last year.

And he doesn't expect the scenario to change until lenders are willing to free up cash, or until plummeting property values head north again, enabling developers to pull equity out of a property to pay off debts.

"I don't think we're at the bottom of the trough yet," he said.