Once One Of The Largest Private Developers Is Making A Comeback

The family behind Opus, once one of the largest private developers in the country, is making a comeback after settling years of messy battles with creditors and former employees.

The Rauenhorst-family-controlled Opus, reorganized and renamed Opus Group, recently announced plans for a 33-story rental-apartment tower in downtown Minneapolis. It is constructing a fully leased headquarters for household-products maker Church & DwightCo. in Ewing, N.J., and is developing a 120-unit student housing and retail property in Minneapolis.

The family is building on a far smaller scale than at its peak. But the gradual re-emergence of Opus comes as other “merchant builders”—who develop and quickly sell commercial properties, rather than holding them—are slowly coming out of hibernation induced by the downturn.

Companies such as Alliance Residential Co., Fairfield Residential Co. and Trammell Crow Cos., which pulled back in the recession, have been picking up development again, following in the footsteps of some of the better-capitalized companies that both build and hold property.

To be sure, there has been some pain for Opus and the founding Rauenhorsts, but they have been partially insulated from larger claims due to the interlocking network of companies they set up in the boom years.

The company established five regional subsidiaries to do developments around the U.S. Each individual development took on debt, which was typically backed by the unit but not the parent.

So when the economy turned and projects were valued at less than their debt, the parent and family opted not to fund or rework the troubled projects at three subsidiaries. Those subsidiaries—Opus West, Opus South and Opus East—sought Chapter 11 bankruptcy protection in 2009 and are now liquidating.

Creditors of Opus West filed a lawsuit against the parent and the family charging that more than $150 million in dividends were improperly paid to the parent between 2006 and 2008. The lawsuit alleged the subsidiary was insolvent during that time.

The defendants denied they did anything improper and settled last year for about $45 million, according to people familiar with the matter.

Former employees of Opus West fared worse in their lawsuit against the family and parent. Those employees, including Opus West’s former chief executive, filed a suit claiming they were owed more than $30 million in deferred compensation and benefits. They settled in December for $500,000, people familiar with the matter said.

A suit on behalf of creditors of Opus East against the parent and family, seeking tens of millions from allegedly improper transfers to the parent, is pending. Opus has denied wrongdoing.

Rauenhorst-family members declined to comment. The company said that it still is committed to the merchant-builder model and that it has shifted course in a number of ways, including by centralizing decision making in Minnesota and bringing in financial partners on some projects.

“The model works when risk and leverage are managed appropriately,” Opus said.

Still, as Opus embarks on a fresh start, its debt will once again be backed by the new projects and Opus subsidiaries rather than the Rauenhorsts or the parent company, says Dennis Ryan, an attorney for Opus.

A high-risk, high-reward strategy dependent on a strong demand for newly developed properties, merchant building was particularly hard-hit by the recession. When demand evaporated for projects under construction or in the process of being leased up, builders such as Fairfield and Trammell Crow Residential, a separate company from Trammel Crow Cos., were forced to pull back and deal with heavy debt loads.

“The merchant builder has a lot less financial wherewithal than a major owner,” said Hessam Nadji, a managing director of research at commercial brokerage Marcus & Millichap. “A merchant builder usually has a lot more at risk.”

Opus, based in Minnetonka, Minn., was one of the highest-profile casualties of this model. Having used the same technique of construct-then-sell for years, the company had 35 million square feet of space in planning or under construction at its 2007 peak. Building everything from condos in Florida to the upscale mall Shoppes at Chino Hills in Orange County, Calif., to an office building in suburban Chicago, it used high levels of debt that led to many of its assets falling under water when values plunged in 2008 and 2009.

Mr. Ryan, Opus’s attorney, points out many merchant builders faced similar battles with creditors and former employees. “They just did it more quietly outside of bankruptcy,” he said.

Closely held merchant builders like Opus are reviving slower than real-estate developers that both build and hold properties.

Public real-estate investment trusts, in particular, are better positioned to build because they have enough cash flow from existing properties that they can tap public and private markets for unsecured financing. “We all started building much sooner than the merchants,” said Richard Campo, CEO of Camden Property Trust, a real-estate investment trust that owns apartments. “Then the merchants started getting their legs.” ( credit to e, brown, wsj)

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