By late 2009, just three years after construction began, Hampton Lake LLC was in trouble.
The parent company of the Hampton Lake development was hemorrhaging cash and nearly out of money, documents show. Lot sales had ground to a halt as the local market struggled with short sales, foreclosures and excess inventory. The few lots that did sell moved at a steep discount.
According to a September 2009 letter to investors, developer John Reed, whose company operates Hampton Lake LLC, secured as much as $9 million in new financing to keep the project afloat, including $2 million of his own money.
The turnaround plan also called for an end to twice-yearly payouts to investors. Despite the bad news, Reed reassured investors in the letter that they still could get all their money back.
"We are very disappointed about this news," he wrote, adding that "if there was no legitimate hope, I would stop now."
Investors never saw another payment, and last year, two lawsuits were filed against Hampton Lake LLC for failing to repay the loan. The company filed for Chapter 11 bankruptcy last month, shielding it -- at least temporarily -- from the lawsuits. The bankruptcy filing lists $48.4 million in liabilities, compared to $23.3 million in assets.
'A BRILLIANT IDEA'
Greater Bluffton was nearing the end of a decade-long housing boom in the mid-2000s when Hampton Lake was conceived.
The 900-acre development surrounding a 165-acre manmade lake was a novel concept in an area becoming saturated with golf communities.
Reed, whose other projects include Belfair, Colleton River Plantation and Hampton Hall, attracted 65 investors willing to pay $350,000 apiece for a share in the new development. They also were required to buy a lot, some of which cost more than $300,000 at the time, according to two local investors.
Hampton Lake LLC gave investors a promissory note signed by Reed that promised twice-annual interest payments of 12 percent on the principal and twice-annual principal reduction payments of $17,500. A balloon payment covering all outstanding principal and interest was due Dec. 31, 2010.
For a while, the project seemed like a winner. Lots were selling, albeit slower and for less than expected, and investors were getting paid back on time with interest.
"It was a brilliant idea until things went bad," said one investor, who lives on Hilton Head Island and asked not to be identified because he lost nearly $500,000.
SIGNS OF TROUBLE
Construction on homes began in Hampton Lake in 2006, but by 2007, the development was already losing money.
By the end of 2009, the development had sustained three consecutive years of negative cash flow, according to a 2011 letter Reed sent to investors. The project seemed to hit bottom in 2009, when just 14 lots sold.
An investor group began meeting in early 2010 to discuss the deteriorating situation.
Notes from the investors' February 2010 meeting obtained along with court records acknowledge that Reed's $2 million loan to the company would be repaid before any investors received repayment. The notes also show that even as the development was running low on cash, Reed Development was being paid a $100,000-a-month management fee "to cover the cost of individuals whose time is spent on the development and management of Hampton Lake."
Reed, who declined to be interviewed for this story, said through a spokeswoman that management services "were/are being performed by Reed Development in accordance with the original operating agreement of Hampton Lake LLC for a fee that is significantly less than originally approved by the owners."
The investor committee briefly discussed a bankruptcy filing at its February 2010 meeting, but Reed warned against it, noting that investors would lose their money and lot prices would plummet "from their current depressed levels," according to the meeting notes.
By the end of 2010, conditions in the development seemed to be improving. More than 50 developer lots sold for an average price of $125,000, according to Reed's March 11, 2011 letter to investors.
But the lots weren't selling fast enough, or for enough money, to keep up with the $22 million debt and the development's annual operating costs.
"If Hampton Lake is unable to improve its absorption and reach a sales pace in the next two years of 125 units versus the current absorption of 53, then it will not be possible to return any further money on your investment," Reed said in the letter.
Dave Bianchi, a Bluffton resident who invested in Hampton Lake, gave up hope long ago of getting his money back. To date, he and other investors have been repaid just $87,500 each in principal.
Bianchi and other investors acknowledge they went into the deal fully aware that they could lose money. They also say nobody, including Reed, could have predicted the market would collapse so precipitously.
However, Bianchi says he and other investors were left in the dark as the project unraveled.
"I don't think that Reed communicated with the charter investors anywhere near as much as he should have," Bianchi said.
He's also not happy that Reed will be repaid his $2 million with interest before any of the investors see a dime.
"I have communicated that to him," Bianchi said Friday. "I think it very unfair that we put up a very large amount of money, then the bank required him to come to the table, and he made our debt subordinate to his debt."
Reed, who did not specifically address these investor concerns, is not at the front of the line for repayment, and there is no guarantee he will be made whole in the bankruptcy process. His debt is subordinate to a $19.5 million note owed to Sabal Financial of Newport Beach, Calif., according to the bankruptcy filing.
Any reorganization plan must be approved by a judge, a process not expected for some time.