A mega developer in Jackson County has landed in foreclosure due to sluggish lot sales in the down real estate economy.
Legasus development company saw a portion of its massive land holdings auctioned off on the courthouse steps last week. The company’s business plan is not uncommon among developers: borrowing money to buy the land, market lots and build roads, meanwhile banking on revenue from lot sales to pay the debt. But lots sales haven’t been forthcoming, and the company couldn’t make its payments.
Over-extended developers have been on the rise, according to Rick Boyd, the trustee handling the sale.
Just five years ago, Boyd did an average of three to five foreclosures a month. Now, he may see as many as 40.
The day of the Legasus’ sales last week, Boyd had 20 foreclosures in one day, dashing from Haywood to Jackson to Macon counties all before lunchtime to read out lists of foreclosure notices on the courthouse steps.
While most are single homes and lots, developers with large tracts have been turning up in the mix as well.
“I have done quite a few of the developers that have over-built and got caught,” said Boyd, a real estate broker with Beverly Hanks in Waynesville. “They needed to sell so many lots per quarter to maintain their payments, and when those slowed down they didn’t have the reserves to keep up with the payments. People never foresaw they would build four or five spec homes and have them sit on the market for over two years.”
The foreclosure proceedings against Legasus are for two large tracts: a 368-acre tract on Cullowhee Mountain that’s part of the River Rock development and a 630-acre tract in Whittier called High Grove. They are two of the largest tracts Boyd has seen go into foreclosure.
In both cases, the opening bids were made by Macon Bank, the lender that initiated the foreclosure. Bidding on the tracts can, and likely will, continue for weeks. Buyers have 10 days to submit an upset bid through the court. An upset bid has to be at least 5 percent more than the previous bid.
Phone calls to Legasus’ president, Legasus’ project developer and Legasus’ primary owner were not returned.
Bidding war ahead
Few large tracts of this magnitude have changed hands since the housing boom tapered off two years ago.
The final selling price could be a sign of whether investor confidence has returned in the real estate market, according to Todd Baucom, a real estate broker with Western Carolina Properties in Cullowhee.
“This will be a big signal,” Baucom said. “The question will be how high it goes.”
Baucom predicts the current bid of roughly $5,300 an acre for the Cullowhee Mountain tract could approach $7,000 an acre by the time bidding tops out.
As for the Whittier tract, the rock bottom opening bid of $357 an acre could make for a wild ride.
“That is going to upset and upset and upset. It could go through upsets for the next year,” Baucom said. “It will be very interesting to see what plays out with that.”
It is highly unusual to see an opening bid that is so low compared to the assessed value of the property. Typically, the opening bid is put down by the bank or lender that initiated the foreclosure — in essence buying up their own debt to protect their investment.
What makes the foreclosure unusual is that Macon Bank was owed so little — only $305,000 — on a tract worth millions. Macon Bank’s initial loan to Legasus was for $400,000 in 2004 to fund development activity on the tract. Legasus had paid off some of it, leaving a debt of just $305,000.
Given the small sum that was actually owed, it seems Legasus would try hard to come up with the money and hang on to the land. Baucom surmised Legasus wanted to divest themselves of the tract anyway and therefore didn’t fight to save it.
There’s another possible explanation: more outstanding debt associated with the High Grove tract. Even if Legasus got out from under its small debt to Macon Bank, there was a much larger lender waiting in the wings: a lender of last resort known as Kennedy Funding.
Legasus had borrowed $9.5 million against the property from Kennedy Funding last April. It’s not known exactly how much of the $9.5 million Legasus ever saw, however. Kennedy only made a portion of the full loan available through draw downs. Legasus apparently never realized the full amount of the loan promised by Kennedy.
Whatever Kennedy is still owed will come out of the final sale price.
Collateral for loans
Until recently Legasus owned more than 4,000 acres in Jackson County. The majority of the holdings were in the Tuckasegee and Glenville area, where plans called for 1,800 lots in five separate gated communities spanning 3,500 acres.
In addition to the foreclosures last week, Legasus sold off 300 acres to a private investor for $10.1 million two weeks ago.
The first sign of financial trouble for Legasus appeared in late 2007 when Legasus sold off 850 acres to a private investor for $16 million.
A few months later, the company sought financing from hard-money lender Kennedy Funding for $30 million: $9.5 million using the High Grove development in Whittier as collateral and $20.5 million using a portion of River Rock as collateral.
Legasus has been adept at using its land holdings to leverage financing. Legasus has used various parcels as collateral for more than 50 loans from at least two dozen different banks and lenders to finance property, according to a search with the Jackson County Register of Deeds Office.
It is difficult to figure out just how much outstanding debt Legasus has on all its property. For starters, the loans aren’t all in Legasus’ name. Legasus sometimes created subsidiaries to run the loans through, making it impossible to search for all of them unless you know the names of the subsidiaries.
In addition, there is no way to tell from the deeds of trust how much Legasus has paid back versus how much it still owes on each loan.
Aside from the two big tracts under foreclosure, Legasus is facing foreclosure on a few small lots as well. Last week, two lots of two acres each in the Water Dance development between Tuckasegee and Glenville were sold at foreclosure. The two lots went for a total of $325,000, purchased by Macon Bank, who was doing the foreclosing. Legasus still owed on a $423,000 loan made by Macon Bank in 2006.
There are pending foreclosures against five additional lots in Water Dance.
Legasus developers have been attracting attention from Jackson County residents for almost two years.
When news of the plans got out in early 2007 — calling for 1,800 lots on 3,500 acres between Tuckasegee and Glenville — Legasus evoked the ire of locals. While Legasus developers pledged to create a high-quality, environmentally-friendly development, locals feared the loss of viewsheds, degradation to water quality and an eroding sense of place from the growth of gated communities.
Residents of Tuckasegee publicly raised concerns about what would happen if the developers got part way into the project only to realize they didn’t have the capital to see it through.
“Two years ago I said, ‘What if the housing bubble bursts?’” recalled Jeanette Cabanis Brewin, a resident in Tuckasegee. “What if they get up there and start ripping the top of the mountain off and they run out of money? What is going to happen to the rest of us?”
That fear has indeed played out in some places.
“Legasus is definitely not alone. There are so many right now that have folded,” said Bryan Tompkins with the U.S. Fish and Wildlife Service in Asheville.
Tompkins has seen developers make an initial foray into development, cutting roads and grading lots, only to find out there isn’t a market for those lots after all.
“When they go bust, they have all these roads cut and they are not there to maintain it,” Tompkins said.
Environmental agencies are left trying to figure out what to do and who is responsible. In Madison County, a development abandoned by its owner needs $750,000 in work to get it back in compliance, Tompkins said. Tompkins wonders if a new owner would be able to take on such a liability.
“Who can do that and what bank is going to give you money to do that?” Tompkins said.
Rumors of Legasus’ plans in early 2007 helped spur the creation of a comprehensive development ordinance in Jackson County. The county adopted some of the most stringent development guidelines in the mountains.
The very development that led to the creation of the ordinances was ultimately grandfathered in, however. Legasus received vested rights, allowing it to proceed with development plans exempt from Jackson County’s new rules.
The vested rights most likely will be passed on to any new owner, according to Michael Egan, an attorney in Hendersonville who advised Jackson County during the creation of its development ordinances.
“It would be my opinion that common law vested rights would run with the land,” Egan said.
Vested rights are intended to protect developers caught mid-stream by new ordinances. Legasus argued they’d already spent a great deal designing a master plan and marketing the development to prospective buyers. If they had to start over again, they would be unable to recoup the investment they already had in it, they argued.
The same still holds true, Egan said. If the vested rights don’t pass to the new owner, it would devalue the selling price of the land, and put Legasus back in the same spot of being unable to recoup its investment, he said.
There is one catch, however. Legasus’ argued that all 3,500 acres were entitled to vested rights, even though development forays were further along on some of its tracts than others. Legasus claimed that the disparate tracts shared a common marketing theme. Residents of each development could use the amenities of the other properties, from a clubhouse at one to the golf course at another.
“If a sale of the property would somehow interfere with that common promotional plan then it is possible it might affect the vested rights,” Egan said.
Vested rights aren’t good forever. In this case, the county granted vested rights for five years.
“The clock is ticking,” said Jeanette Cabanis Brewin, a resident in Tuckasegee who has expressed concerns about the mega development. “They have used up almost two and half years of their five years.”
The economic slump may have given the community a reprieve, said Mary Jo Cobb, a Tuckasegee resident who was opposed to the scale of the development.
Most of all, “I hope this has bought us some more time to step back,” Cobb said. “There is so much interest in our environment now than there ever was before. I think that is good. We need to be aware and preserve these mountains.”
Cobb hopes the foreclosure will sideline Legasus’ plans for a golf course.
“That would be fine with me,” Cobb said.
Indeed, the foreclosure throws the fate of a controversial Phil Mickelson-designed golf course on Legasus’ property into question. A tract currently in foreclosure encompasses some of the land slated for a golf course in Legasus’ original plans.
The buyer of the tract could decide to partner with Legasus, in which case the golf course could still be pursued. If the buyer goes off on their own, Legasus could be forced to redesign the course on a different portion of the property or scale it down.
The golf course has yet to receive its state and federal environmental permits. The Army Corps of Engineers and the N.C. Department of Environment and Natural Resources had several concerns with the original design. Legasus’ application has been on hold until it could address those issues — for nearly 18 months now.
“They have not made any effort to address those concerns,” according to Bryan Tompkins with the U.S. Fish and Wildlife Service.
Legasus has lined up a biologist to conduct a bat survey of old mine caves on the property in the fall, but that has been the only movement Tompkins knows of.
Thompkins said it was abnormal to go so long without hearing from Legasus. Tompkins monitors environmental permits from developers all over Western North Carolina and often has to send them back to the drawing board.
“When things were going like gangbusters we would have gotten a response a month later,” Tompkins said of typical developers. “They would turn around with a response on a dime to speed up the permitting process so they could get on with their project.”
The recent news that part of the property is in foreclosure could explain Legasus’ silence, Tompkins said.