Posh Harborwalk files for Chapter 11

HITCHCOCK — The developer of 625-acre luxury community Harborwalk will ask a bankruptcy court judge today to allow it to obtain $2.5 million in financing to keep its marina and yacht club open and to take measures to keep the lights on as it battles with lender Compass Bank about a $30 million note.

Today’s hearing comes after Harborwalk LP filed for Chapter 11 reorganization Monday in U.S. Bankruptcy Court for the Southern District of Texas.

Harborwalk LP, which developed 380 lots, a 150-slip marina and yacht club 2.4 miles west of Interstate 45 on state Highway 6, warned earlier this month it likely would be forced into Chapter 11 when it filed a lawsuit against Compass Bank seeking to stop the lender, now doing business as BBVA Compass, from foreclosing on some property used as collateral.

Harborwalk LP, whose principal is Lynn Watkins, said it had not defaulted on any provision of an amended $30 million note. The developer had made timely payments when Compass Bank sent a notice of default, according to the lawsuit.

Officials with the development firm, who said they were “stunned” by the bank’s actions, have laid off about 25 employees after Compass Bank refused to allow the company to draw more money to cover project costs, officials said.

Harborwalk, formed in 2002 and known for $1 million waterfront homes, has been relatively successful, selling about 300 lots that generated $50 million, the developer has said.

But in 2007, the once-sizzling real estate market began to cool, and in 2008, lot sales slowed drastically, according to the lawsuit.

Developers expected a long-term depression of real estate prices and demand and in 2008 reached an agreement with Compass whereby the developer would contribute $10 million in equity to reduce the principal amount of a development loan to $20 million.

In consideration of this equity contribution and pay-down, Harborwalk LP requested Compass extend the loan five years, reduce the interest rate and allow the developer to make draws on the loan up to a $30 million cap. Compass accepted the offer, according to the lawsuit.

At the time, Compass Bank engaged an appraiser to assess the fair market value of property that would collateralize the loan. The appraiser said the property was worth $62 million.

Compass Bank officials have not returned phone calls or responded to written requests for interviews.

But in a Dec. 23 letter to Harborwalk LP, Compass Bank blamed declining value of property used as collateral for its decision to call the note.

On Dec. 7, when Harborwalk submitted a draw for various expenses, Compass Bank began to process it but then stalled, according to the lawsuit. Harborwalk sent an e-mail demanding the bank fund the draw in accordance with the loan agreement, according to the lawsuit.

That’s when Compass informed the developer of the “adverse change” in the financial condition of the loan. The most recent appraisal performed for Compass Bank, dated Sept. 21, puts the value of the remaining parcels owned by Harborwalk and used for collateral at $25.3 million.

But in the lawsuit, Harborwalk asserts Compass omitted almost half the assets owned by Harborwalk. The appraisal excluded more than $26.7 million in reimbursements owed to the developer through Tax Increment Reinvestment Zone and Municipal Utility District financing, according to the lawsuit.

Harborwalk, which lists its assets at about $60.4 million, has kept a skeletal staff to keep the marina, store and yacht club going, Evan Watkins, president of Harborwalk LP, said.

According to court filings, Harborwalk has entered into substantive discussions with Klein Equities LLC for $2.5 million in financing. The developer also is seeking permission from a bankruptcy court to make deposits from separate funds that would prevent interruption of utility services, according to documents.

If a bankruptcy judge approves the outside financing, Harborwalk could rehire about 10 people, Watkins said.