In 1999, with the home building industry in thundering overdrive, producing record volume and revenue, Hearthstone took a huge loss in the form of a $50 million writedown.
The strength of the market had produced enough successes, particularly in California, to hide the fundamental problems, says Tom Bruin, Hearthstone's COO.
It worked for a few years because builders were so desperate for capital." The model was to give small companies as much as 100 percent equity financing and for Hearthstone to guard its investment by zealously managing the project's finances.
These were primarily small, local companies that got from Hearthstone nearly all, if not all, of the capital needed to buy land.
"In a lot of cases, the smaller companies didn't have the organizational strength or capacity to execute the projects they were bringing to us," explains Bruin, who came to Hearthstone in 1999 from Town & Country Homes in Chicago.
Hearthstone had a reputation in those days for inflexibility.
Pugash recalls that the firm required builders to use a voucher system for payments that involved sending Hearthstone copies of every invoice.
For the sake of its survival, Hearthstone made some decisions of its own, and the result was a corporate metamorphosis.
The record painfully showed that working with small, cash-hungry builders meant Hearthstone attracted those with the fewest finance options.
A few years ago, Hearthstone did no business with public builders.
For those builders, Hearthstone offers what Bruin calls balance sheet treatment.
"That's the way the world works." In addition, he adds, Hearthstone's deal structure offers builders valuable capital gains treatment on land.