by John Waters
Publisher

Lajitas Resort, the financially beleaguered south Brewster County resort, filed for a Chapter 11 bankruptcy petition on July 2, and has been given 90 days by U. S. Bankruptcy Judge Ronald King to either find new financing or auction the property.

Under Chapter 11, Lajitas may remain in business while the federal bankruptcy court oversees a reorganization plan and grants the resort relief from creditors. A Chapter 11 filing does not liquidate the business.

In late July, according to Daniel Hostettler, CEO of Lajitas, a unsecured creditors committee was formed that “initially appears to be of the opinion that the resort should be shut down during the sale period.”  “Obviously,” Hostettler continued, “we do not agree with this line of thought as it is relatively clear that the value of a going business, any going concern business, is usually far greater than the value of a shuttered operation.”

Hostettler said he believes it is in the best interest of all creditors and the “community which relies on Lajitas’s tax base for a great deal of its funding that we remain operational during this period of reorganization.”

In 2006, Lajitas generated $278,192 in tax revenue for Brewster County and $53,843 for the Brewster County Tourism Council. This represents 3.5% of the county’s total tax revenue, 3.6% of the hospital’s tax revenue, 27.8% of Terlingua Central School District’s tax revenue, and 28% of Brewster County Tourism Council’s total tax revenue.

While Lajitas is a major contributor to the tax base, it is also delinquent in paying – to the tune of $20,955. Last year, Lajitas’ lenders paid the resort’s tax bill to the county, however they refused to pay the late fees and penalty. That amount is still due.

In mid-July the resort and Prime Asset Funding, the Connecticut firm that lent Lajitas $12.5 million in 2006, a loan now in default, agreed to allow the resort to borrow $1.5 million to keep the resort open for 90 days, if such financing becomes available. To date no such financing has surfaced. In the loan with Prime Asset, Lajitas had put the entire 25,000-acre resort up as collateral.

In June, Prime Asset had extended Lajitas one month to repay the $12.5 loan or face a foreclosure auction scheduled for July 3. On the afternoon of July 2, Lajitas filed for bankruptcy in Midland, canceling the auction the following morning.

Despite last-minute efforts to secure a financial rescue package, the resort slid into bankruptcy protection.

Lajitas had sought and received a commitment from Kennedy Funding, Inc. of New Jersey for financing, for an amount of $25 million. The resort was close to avoiding bankruptcy, as court records stated: “Despite having provided a written commitment, Kennedy did not close the advance in time to avoid the July 3, 2007 foreclosure. No agreement could be reached with PA Funding to further extend the time to satisfy the Note.”

In early July, with Lajitas in bankruptcy, Kennedy Funding publically indicated it was still actively perusing lending Lajitas the much-needed cash infusion. However, to date, no loan has been made. Requests for comment made by The Gazette to Jeffrey Wolfer, President of Kennedy, on why Kennedy Funding dropped the loan to Lajitas were not returned.

Under Chapter 11, secured creditors such as Prime Asset Funding have a far better chance of recovering their money than unsecured creditors. Several Brewster County businesses were listed as unsecured creditors including Trans Pecos Land Surveyors in Marathon ($125,820), and Texas River Expeditions in Terlingua ($24,230).

In the bankruptcy petition by Lajitas, it was disclosed that the resort had intended “to be operated with a with a negative cash flow in order to execute development of the planned resort community.” Lajitas also contended a “significant drain on capital caused by the development of the property was unpalatable to the lender.”

In mid-July, lawyers for Lajitas said the resort was loosing about $500,000 per month and was in need of immediate cash.

Court records also state, “the lender restricted availability to the cash to be advanced under the note and as a result Lajitas was unable to implement development of a planned community as scheduled.” Lajitas was also encumbered by late payments to vendors and other creditors.

Stephen R. Smith, owner of Lajitas made this statement about the move: “The action we have taken is a necessary and responsible step to preserve Lajitas’ value and execute a plan which completes the vision for Lajitas.” Smith also said the resort is “open for business as usual and will continue normal business operations throughout the reorganization process.”

In a July interview with The Austin American-Statesman Smith said, “I look at Steve Smith asset-wise, and I’m probably wealthier than I have ever been. This isn’t really about Steve Smith. It’s about Lajitas, and I truly believe we’re going to emerge stronger and healthier than we went in.”

This is the second bankruptcy this year for Smith. In March, CreditMinders, Inc., a business in which Smith and his son Rayner are directors, filed for liquidation under Chapter 7 of the bankruptcy code with $3,875 in assets and $26 million in debt. In bankruptcy court records, Smith is listed as a creditor of CreditMinders; the corporation owes Smith approximately $24 million.

An auction scheduled July 3 by Countrywide Home Loans seeking the sale of Steve Smith’s personal property in Lajitas, was “pulled,” according to a spokeswoman for the Substitute Trustee. This auction was not affected by the bankruptcy filing of Lajitas Resort.

With the evaporation of the possible $25 million loan, and the resort’s inability to yet secure the needed $1.5 million in financing to operate for 90 days, the possibility of a courthouse auction is an increasing possibility.

In the event of a liquidation of the resort, the public water supply, Lajitas On The Rio Grande, operating as the Lajitas Utility Company, would continue to operate, Texas Commission on Environmental Quality (TCEQ) officials confirmed.

Daniel Hostettler, CEO of Lajitas commented, “We are grateful for the continued support of our members, property owners, and suppliers. As Lajitas rises to meet new challenges, our resolve to deliver the highest standards of service will not falter.”