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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.