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Diablo Grande working on finances

Aerial view of the Diablo Grande resort, west of Patterson, taken in June 2006. (Adrian Mendoza/ The Modesto Bee)
Aerial view of the Diablo Grande resort, west of Patterson, taken in June 2006. (Adrian Mendoza/ The Modesto Bee) Modesto Bee

A clearer picture of Diablo Grande's financial problems slowly is emerging from the U.S. Bankruptcy Court and officials at the resort development.

The partnership that owns Diablo Grande, a 33,000-acre property in the hills west of Patterson, filed for Chapter 11 reorganization bankruptcy March 10, after months of rumors and the temporary closure of the resort's two championship golf courses.

The Chapter 11 filing protects the development from its creditors while the partners work to resolve the financial problems. The resolution, Diablo Grande officials say, is the sale of the resort to a buyer who will continue the development.

"We are getting a lot more interest in the project," Dwain Sanders, vice president of development, said Thursday. "On a daily basis, we get letters of interest from parties -- overseas to local, Canada, all over the place. I'm not saying they are bringing cash in their pocket, but they are showing interest, and we are sending information to them."

The resort has been listed for sale for more than a year, at $150 million. According to bankruptcy documents, two potential buyers executed purchase agreements in recent months, but backed out after researching the investment.

Bankruptcy documents paint a picture of an ambitious project that investors put more than $120 million into over 20 years, only to run into liquidity problems as the housing market collapsed in the past year.

Unable to keep the project functioning at a high level to keep it marketable, the partners filed Chapter 11 in order to seek new cash sources, the bankruptcy documents say.

The partnership has negotiated a revolving loan of $1.5 million, which would allow it to continue operating until June 1. The loan has to be approved by the unsecured creditors and the court. Court hearings are scheduled next week.

Diablo Grande's largest creditors are secured by property at the resort. They include the Bank of Scotland, which is owed $20.4 million; Atlas Development LLC and DG Capital, both limited partners in the project, owed $1.2 million; and Oak Valley Community Bank, owed $875,000.

In addition, the water district formed to serve the development -- Western Hills Water District -- issued $57 million worth of Mello-Roos bonds, to be repaid with assessments on the lots in the development. The Diablo Grande partnership missed payments and became delinquent on the property taxes and special taxes on Dec. 10, according to the bankruptcy filings. The water district is obligated to start foreclosure proceedings by Oct. 1 on the delinquent lots.

The partnership's limited partners have contributed more than $50 million to the project, according to the bankruptcy filings. Two of the limited partners, Atlas and Lawrence Ventures LLC, have made unsecured loans to the partnership of more than $10 million.

A couple of the resort's 400 homeowners filed letters with the Bankruptcy Court voicing concern over the personal investment they made in homes and golf club memberships.

Ed Fox of Morgan Hill, who bought a home in Diablo Grande last year as a second residence, told the court that he and his wife feared for their investment.

"I am concerned that, if the development completely goes under, unable to make this particular bankruptcy format work for them, my wife and I will lose a substantial portion of what we have worked for," Fox wrote to the bankruptcy judge.

"The magnitude of the loss, for us, will be of the same proportion, if not greater, than the Diablo Grande partners may face. I believe many of the owners will be in a similar situation," he wrote.

Golf courses reported doing well

Frank T. Daras Jr. wrote the court requesting it list him and his wife as creditors. He contends that the company broke its contract with golf club members by closing the courses in February and part of March, and he is owed a refund of his deposit of $16,500.

Sanders said Thursday that most of the residents understand the situation.

"Bankruptcy is sometimes not a bad thing. The biggest thing, everyone was nervous -- when are we going bankrupt? Now we are, and there's some relief," he said. "The fact that we didn't shut the doors down and run away is a huge commitment. The fact that we are going for a funding plan is another big commitment. It helps ease people's anxiety."

Sanders remained optimistic. "We are hoping to have approval of our funding on April 2. It looks pretty favorable right now."

The golf courses, which were reopened three weeks ago, are doing well under a new management firm, Sanders said.

Diablo Grande continues to work with the state on water issues, he said. The state has cited the water system for exceeding accepted limits for trihalo- methanes, a compound believed to raise cancer risks, and for failing to meet standards for appearance and odors.

In about two months, resort officials will sort through the purchase offers to find those they believe can enhance the development, Sanders said.

"The light at the end of the tunnel is starting to shine," he said. "It's not very bright yet, but it is there."

Bee staff writer Tim Moran can be reached at tmoran@modbee.com or 578-2349.

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