For the past four months at the corner of Duke and Union streets in Alexandria, a group of luxury town houses has been a desolute sight. Windows swing open or lean unhinged against their frames. Shredded tarpaper drifts to the ground.Some buildings are swaddled in burnished red brick; on others, the cinder block is exposed.
The 18 houses are in a project called Waterford Place, which overlooks Alexandria's waterfront. Under construction since September, the project is a victim not of degernation and neglect but of high interest rates, its developers contend.
Started in September 1979, the units overlooking Alexandria's waterfront were to be priced from $200,000 to $220,000. The only two completed houses were sold, and deposits were placed on at least five others before National Capital Developers filed under the Chapter 11 of the federal bankruptcy act, court papers show.Under Chapter 11, a company seeks court protection from creditors' lawsuits while it works out a plan to pay its debts.
"High interest rates were the prime thing that caused the collapse of the whole project," says Robert J. Garner, general partner of National Capital, which owns several other residential and office developments in addition to Waterford Place.
Court papers show National Capital's liabilities standing at about $9.6 million; the firm's assets have an estimated value of $9.8 million. Meanwhile, work on all its projects has stopped, and the partnership has had to discharge its employes. The company's officers are working out of a small office in Northeast Washington.
Builders here and elsewhere say that the high cost of borrowing money has dealt them a cruel one-two punch. Potential buyers are discouraged by mortgage rates that now top 16 percent. And builders themselves, who take out loans to buy their materials, find the strain of interest payments hard to bear.
"I have never seen the guys crying so loud," says Robert Johnson, executive vice president of the Northern Virginia Builders Association. "I've been here nine years, and I've never seen the frustration level so high."
The National Capital project accrued more than $5 million in loans from the Newark-based Midlantic National Bank and the Bermuda-based Selassa Co. In the relatively low-interest environment of late 1979, National Capital budgeted for an average interest rate of 12 percent. Instead, he says, the average rate has been above 20 percent, with the interest rate pegged at about 2 percent over the prime rate. "That made for an interest cost of $80,000 a month for the Waterford project alone," he says.
Delays added to project costs by forcing the company to pay extra months of interest. The city of Alexandria forced a shutdown when inspectors questioned the use of a type of building support, company attorney Thomas Stanton says, and another delay came after utilities installed by a subcontractor had to be replaced. The company stopped making the interest payments early this year.
Although Waterford Place is National Capital's biggest and most expensive project -- valued in court papers at $5.5 million, with 36 homes planned originally -- the company was active at other sites. Its Tivoli Square office complex in Alexandria, about 85 percent complete, is valued at about $3 million, and smaller residential projects in Northern Virginia have a combined value of over $2 million.
Company officials decline to talk about precisely what forced National Capital into the bankruptcy proceedings, but Stanton says the problems at the Waterford site were pivotal. "Tivoli Square was ahead of schedule, and it has good prospects," he says.
At Waterford Place the problem appeared to be the cost of the builder's financing, not lack of a market. At one point National Capital had buyers' commitments on 16 of the 18 units that have been started, according to Stanton.
National Capital representatives stress that their difficulties are not unique. "The problems that we had are indicative of what faces the industry," says James Curtin, spokesman for one of the other partners in National Capital. "You're being pulled from both ends at the same time. Interest rates have been sky high," he says, and home buyers have difficulty meeting banks' increasingly stringent requirements for financing.
Prospects look bleak for the industry as a whole. Johnson of the Northern Virginia Home Builders Association says a survey of members four months ago showed that employment was down 60 percent from 12 months before. Moreover, earlier this year the association projected 3,800 housing starts in Fairfax, which is itself about 50 percent lower than last year. Now, he says, "I'll be absolutely stunned if we hit even 3,800."
Bankruptcy statistics paint a similar picture. The number of real estate firms in Washington and the eastern judicial district of Virginia filing under Chapter 11 probably will double this year, according to Francis P. Dicello, trustee for the bankruptcy courts in the two jurisdictions. During all of 1980, 13 builders and developers filed, compared with 17 so far this year.
But some say the number of bankruptcies understates the problem. Rather than filing under Chapter 11, which generally halts work on a project before it can be completed, most builders instead give their bankers a share of the project in return for continued financing, Johnson says.
Industry observers say the current building slump -- which they date from late 1979 -- is both better and worse than the similarly severe slump in 1974-75. Builders apparently learned their lesson in the last recession and have not been caught with the huge, market-glutting inventories they had six years ago. But this slump already has lasted longer, and interest rates are taking a heavier toll than in 1975, says Louis Thompson, senior vice president of the National Association of Home Builders.
A number of NAHB members are no longer building houses, but have turned to related work, such as renovation and contracting, Thompson says.