A week before posting third-quarter results showing a loss of $58.4 million through continuing operations, troubled Tarragon Corp., a New York-based multifamily builder and owner, announced that it is restructuring its debt.

"We have agreements with major creditors to implement this plan to convert notes to equity," says CEO William S. Friedman, who led the company as it got overextended in the Florida condo market.

The holders of Tarragon's $125 million of corporate-level unsecured subordinated notes have agreed to support this financial restructuring of Tarragon and to refrain from exercising any of their rights under the terms of the subordinated notes through June 30, 2009. Friedman and Robert P. Rothenberg, Tarragon's president, also get some relief under the plan, with $38 million of guarantees restructured to become obligations of reorganized Tarragon or an affiliated issuer.

Larry Comegys, managing director of Atlanta-based The Algon Group, a financial advisory and investment banking firm, can understand why the note holders restructured the terms. "The assets continue to be worth more being managed by the original developer than if they foreclose of them," he says. "They're not set up to manage the assets. They have to figure out how to manage them or foreclose upon them. The asset just drops in value when the noteholder takes over."

Tarragon's plan could be implemented through a voluntary petition for Chapter 11 bankruptcy protection. If that were to happen, some Tarragon debtholders would receive shares of reorganized Tarragon's equity, representing a controlling interest in the reorganized company. "Bankruptcy is one of the principal options were evaluating," Friedman says.

In most cases, Comegys says Chapter 11 happens when there's a disagreement between the two parties. "A lot of builders who have been trying to get their bank's attention to work on their problems have found that after banging their heads against the wall, the only way to get their bank's attention is by filing Chapter 11," he says. "That gets the process rolling."

Despite the difficulty that lies ahead, Friedman wants his company, which owned 7,392 apartments as of Sept. 30, 2008, to emerge from restructuring with, "our portfolio of income properties supporting the overhead, while we wait out the market to resume redevelopment and make advantageous acquisitions."

But first, Tarragon needs to slug through the current downturn and work through its for-sale inventory. In the third quarter, it recorded sales of 70 homes representing $30.2 million and 29 new net orders totaling $8.6 million. The company's active for-sale communities (including backlog) totaled 919 homes in 11 communities, representing about $288.3 million in projected revenue.