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UVA-QA-0727 Crawford Development Co. and Southeast Bank of Texas
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UVA-QA-0727 Rev. Dec. 31, 2008
CRAWFORD DEVELOPMENT CO. AND SOUTHEAST BANK OF TEXAS In late August 2007, Peter Kloeckner, a longtime business loan manager at Southeast Bank of Texas, was looking through a recently updated analysts’ report for trends in Houston’s real estate market. The new data he saw were not as gloomy as those from other regions of the country, yet they still led him to believe that a business loan he was about to approve—a threeyear business loan of $38.375 million to Crawford Development Co.—would not be as profitable for the bank as he had originally thought. The loan had a bullet structure1 and required a 7% annual interest rate payable at the end of the loan’s life.
Crawford Development Co. In an industry where hundreds of practitioners had made and lost fortunes, Andy Crawford stood out as one of only a handful of Texas developers who had never filed for bankruptcy. In his 30-year career, Crawford developed more than $1 billion in successful real estate projects and survived some of the worst real estate markets in America’s history. Starting as a contractor in the suburbs of Houston, Texas, in 1972, he quickly grew his business and became a residential builder in 1977. By the late 1990s, he turned his company, Crawford Development Co. (CDC), into a major Texas real estate market player that had a presence in a variety of real estate assets including office buildings, industrial distribution facilities, retail shopping centers, and residential neighborhoods. Crawford had earned the title of the luckiest real estate developer in Texas, but he believed his success was due largely to the understanding of the risks associated with real estate developments.
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A loan with a bullet structure did not require any intermediate interest payments, thus principal and accumulated interest were repaid at the maturity date.
This case was written by Assistant Professors Anton Ovchinnikov and Elena Loutskina as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. The authors thank Assistant Professor Casey Lichtendahl, Jayson Lipsey (MBA ’08), and Brian Burke (MBA ’08) for their help in preparing this case. Copyright © 2007 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to
[email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Rev. 12/08. ◊
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UVA-QA-0727
In 2005, nearing retirement age, Crawford decided to downsize and spend more time with his wife of 35 years and their four grown children and nine grandchildren. He pooled most of the equity capital from his business and decided to work on one deal at a time. He thought that his longstanding business connections and experience would give him the upper hand in the market and allow him to continue to be active in a business he dearly loved and completely understood. In March 2007, with $8 million left in company equity, Crawford decided to pursue a new investment opportunity.
Development Opportunity On July 17, 2007, CDC signed a purchase agreement for a 50-acre parcel of land, the Huntley Farm, located on the outskirts of Houston. To gain control of the land, Crawford made a $500,000 nonrefundable earnest money deposit with the Huntley family, which gave him the exclusive right to perform due diligence on the parcel for 90 days. At the end of the 90-day due diligence period, Crawford would have the option to purchase the parcel for the predetermined value of $4.875 million or forfeit the earnest money deposit. Crawford considered the Huntley Farm a very attractive investment because it provided him a lot of flexibility in terms of choice of construction. First of all, the investment was about the size of deal he was shooting for. Second, it was close to his house in Houston and did not require much travel. But most important, the land allowed him flexibility in choosing the type of development to undertake. A thorough analysis of the Houston real estate market, the location of the Huntley Farm, access to the site, and area demographics suggested that either an office park or a residential neighborhood could be attractive projects to pursue. The only thing left to do was secure the remainder of the financing for the purchase of the parcel of land and development. Crawford could decide later whether to continue with his plans to do the office development or instead switch to residential.
Southeast Bank of Texas The Southeast Bank of Texas (SBT) was not a big bank by U.S. standards, but its smaller size and inherent flexibility allowed bank managers to develop closer contacts with customers and to be more selective in the deals they financed. Though the bank had a presence in the residential mortgage business all over Texas, its main market share was in commercial and industrial (C&I) loans and real estate development lending. Peter Kloeckner, in his 15 years with SBT as a business loan manager, got to know the most and least successful Texas entrepreneurs. He saw the rise and fall of big developers and new entrepreneurial firms. He suffered their losses and celebrated their gains—which were also losses and gains for his department at the bank. He got to know the people who never won, as well as those who never lost. His experience allowed him to distinguish between the two, though his MBA degree from a well-known Southeastern business school did not hurt either.
