Lauth needs financing, real-estate recovery to emerge from bankruptcy

The 32-year-old developer Lauth Group Inc. likely will survive in some form if the company can find financing to get it through
a Chapter 11 reorganization and if the real estate market doesn’t take too long to turn around, experts said.

The developer of more than $3 billion in projects has scrambled this year to drop its head count and stave off lenders in
an attempt to keep the lights on at its Carmel headquarters.

But the firm’s future now may be in the hands of a bankruptcy judge. Three Lauth holding companies that control more than
40 properties filed for Chapter 11 bankruptcy protection in early May. The filing did not include the firm’s health care development
and construction arms.

Company officials declined IBJ‘s interview request but said in a statement, "Our advisers continue to sort out what is a very
complex situation which involves a very large and diverse portfolio of properties across the country and we look forward to
a successful restructuring plan.

"While that takes place, the Lauth team will remain focused on running its day-to-day business and serving our tenants’ and
clients’ needs."

Part of the problem for Lauth is that its creditors are clamping down when the company most needs a little breathing room,
a dilemma many commercial developers are facing, said Henry Efroymson, a bankruptcy attorney and partner in locally based
Ice Miller.

The company said an attempt by Chicago-based Inland American Real Estate Trust Inc.—its largest creditor—to push aside Lauth’s
top management and gain control of some of its entities created a state of confusion among other lenders and gave the company
no choice but to file for bankruptcy reorganization.

In 2007, at a time when lenders were eager to put up big dollars for real estate developers, Inland invested more than $225
million to help fund Lauth’s rapid growth. The investment gave Inland an equity stake and a preferred dividend, which Lauth
stopped paying earlier this year as it struggled to stay in business.

In late April, Inland began sending letters to lenders on individual properties in Lauth’s portfolio, claiming it had become
the sole contact for issues relating to the loans and properties.

Lauth contends the agreement does not allow Inland to take control of its holding companies, and that Inland is trying to
change the terms of the deal now that the outlook for real estate development looks bleak. But the agreement for LIP Holdings
LLC, one of the holding companies, also bars a bankruptcy filing without approval from at least one Lauth official and one
Inland official. And by all accounts, the bankruptcy filing came as a surprise to Inland.

Inland would not comment beyond its regulatory filings, and the firm had not responded to the bankruptcy filing by IBJ‘s deadline.

Efroymson said moves by Inland to seize control of Lauth entities before it filed for bankruptcy could be overturned by a
judge, who likely will review whether "those steps were appropriate or destructive" for the business.

It’s not unusual for these types of cases to start with a lot of animosity, Efroymson said, but ultimately the parties typically
begin to focus on solutions. Dealing with Inland actually could be an advantage for Lauth over dealing with a commercial bank;
Inland can do pretty much anything it wants to restructure its arrangement since it is free from most regulations banks face.

"The case begs for patience," Efroymson said. "It’s not in anyone’s best interest to destroy all of the value a strong company
like Lauth brings to the table."

Whether Lauth survives as a developer ultimately depends on the demand and availability of financing for new projects, said
Charles Greer, a veteran Indianapolis bankruptcy attorney who now runs a firm that consults for struggling businesses.

The first step, though, is securing the necessary financing to give the company time to reorganize. Lauth says it is exploring
"various financing options."

The principals of Lauth already have loaned the firm about $7 million to cover operating expenses. It wasn’t clear how much
the principals—including Bob Lauth, Greg Gurnik and Mike Curless—could be on the hook for personal debt guarantees related
to Lauth’s projects.

The troubles began when demand dried up for the speculative office, industrial and retail developments that had fueled Lauth’s
growth. The company doubled its revenue from 2004 to 2005, then doubled it again from 2005 to 2006.

During the same period, its project lineup jumped from $143 million to $592 million. The company started 2008 with about 450
employees but now says it has 88.

Lauth still has businesses outside the bankruptcy filing, including the health care development and construction operations,
said Reed Oslan, an attorney in the Chicago office of Kirkland & Ellis LLP who represents Lauth.

"There’s absolutely no way the Lauth name goes away," he said.

But at the moment, there’s about as much demand for speculative development as there is for the Pony Express. Even financially
sound projects are going into default without permanent financing, Greer said.

"If the market disappears, there’s nothing you can do to change it," he said. "Until the spigot for development money opens
up, this is the sign of the times, I think."

During the boom times, lenders fell over themselves to provide funding for companies like Lauth. The leverage helped fund
the firm’s fast growth, but it also carried big risks.

"All developers use a lot of leverage—you can make a lot of money when you borrow a lot of money," Greer said. "But leverage
goes the other way, too. If all of a sudden you aren’t making money, even a 5 percent downturn on property values comes out
of your pocket."

In a few years, Greer expects the development business will be highly profitable again. In the meantime, trillions of dollars
in commercial loans are scheduled to come due soon, extending the pain. Companies with a cash stash and low debt are making
all the moves.