Balsam Mountain Preserve has been stripped of control and custody of its development as lenders continue their march toward foreclosure.

The 4,400-acre development in Jackson County owes nearly $21 million to its lender, a private equity investment firm called TriLyn. Balsam Mountain Preserve developers have been in default of the loan for more than a year.

Foreclosure could be a long way off, however, so lenders went to court last week asking that a third party be put in charge of the property in the meantime.

The third party will have full control of the development. It will take over the bank accounts, manage employees and keep up the property. It will even be able to sell lots, with revenue to be turned over to the lender.

The lender will put up the money the third party management company needs for upkeep and operations, although it will be tacked on to the running tally Balsam Mountain Preserve owes. The company selected by the lender, Radco Property Management of Atlanta, will get a fee of $25,000 a month for overseeing operations, known as a receivership.

The lender said the move was necessary to ensure the property is properly maintained, since its only hope of recouping its investment is the equity that remains in the development.

Two-thirds of the 354 lots in the development have been sold. Developers were banking on continued lot sales to pay off the loan, but the pace of sales plummeted due to the national economic downturn.

“There is no good guy, bad guy. It is just a case of the economy. The music stopped,” said George Hendon, the Asheville attorney representing the lender in court last week.

Also last week, Balsam Mountain Preserve got a 30-day extension on a foreclosure hearing. The hearing would decide whether the lender should be allowed to proceed with the actual foreclosure.

Balsam Mountain Preserve is trying to raise money to pay off the debt and needs more time, argued Sylva attorney Jay Coward, who is representing Balsam Mountain Preserve developers. Coward said there has been “substantial success” in raising the funds so far.

“Given more time the entire amount may be raised,” Coward wrote in his request for an extension.

The original loan dating to 2005 was for $19.8 million. While more than $3 million of the principal has been paid off, the total owed on the property has grown to $21 million, mostly due to mounting interest, which totals more than $4 million. Interest is accruing at a higher than normal default rate of roughly $100,000 a month, according to court documents.

Lenders are also tacking on their own legal expenses and costs associated with collecting the debt. And now, the fee paid to the third-party management company and operating costs to keep the development going will be tacked on as well.

Despite the loan being in arrears, lenders say they advanced Balsam Mountain Preserve more than $1 million over the past year to keep the property from decaying. Credit was extended for operating costs, items like payroll for workers grooming the golf course and for sales staff courting prospective lot buyers. The lender even had to pay leases on maintenance equipment to keep it from being repossessed.

“We did that on the assurance they were trying to find additional capital,” Hendon said.

Balsam Mountain Preserve has been in discussions with the lender for a year to refinance the loan, restructure it or arrive at a work-out, but the lender’s patience has been exhausted, Hendon said. The lender’s top concern now is to keep the property from deteriorating since that is the only collateral securing the debt.

“It is a critical time,” Hendon said. “They are down to a skeletal security force with no indications they are improving.”

If the foreclosure drags out, the property could be in jeopardy of losing value and, in turn, limiting the lender’s ability to recover its investment, Hendon said.

Balsam Mountain Preserve countered the suggestion that it wasn’t taking care of the property.

“When (the lender) tries to paint this bleak picture, I don’t think that is fair. We deny it,” said Coward.

The two top managers at Balsam Mountain Preserve filed affidavits in the court record stating their opposition to the lender’s representation that the property was being ill-managed and not taken care of.

If sales continued at the historical average of $500,000 per lot, there is $60 million in revenue yet to be made off unsold lots in the development — more than enough to pay off the loan. But if and when demand for lots in that price range will return is anyone’s guess. The lender is apparently not willing to take a wait-and-see approach.

Meanwhile, property owners are concerned that the third-party overseer won’t uphold the same values as Balsam Mountain Preserve developers.

“The homeowners association is very distressed about the situation,” Coward said. Coward said it has been difficult to “get a read” on the third-party overseer and its track record or experience with resort communities.

Balsam Mountain Preserve is a subsidiary of Chaffin Light, a national company with a reputation for high-end resort communities that cater to the environment and pay homage to the natural resources and scenery of the surrounds.

“The environmental ethic of this development is pretty incredible for Western North Carolina. In other words, they didn’t cut up 4,000 acres into 4,000 lots,” Coward said.

The third-party overseer has full control now, however. It even has the authority to edit marketing materials and the Balsam Mountain Preserve Web site to delete any reference to Chaffin Light.

The development has 354 lots on 1,400 acres, with the remaining 3,000 acres off limits to development under a conservation easement. The conservation easement is legally binding and protections will remain in place regardless of the outcome of the foreclosure. The number of lots is also capped, regardless of new ownership, thanks to covenants on the property.

The Balsam Mountain property owners association had an attorney of its own at last week’s court hearing on the third-party receivership to assert their interests. Property owners bought into the community under certain expectations, which should be upheld, said David Herrigel , the attorney on behalf of the property owner’s association.

“We want them to continue to operate the community the way it was represented to the members at the time that they bought,” Herrigel said.

Property owners hope to intervene by raising enough capital to pay off the loan and assume control of the property themselves, including the well-appointed amenities of an Arnold Palmer golf course, equestrian center, dining hall, swimming pool, tennis court, pavilion and backcountry camp.

“I am just hoping that it all works out for the best,” said Nancy Seidensticker, a homeowner in Balsam Mountain Preserve. “We all love this place. Most of the homeowners I know have committed to put in a certain amount to see what we can do, but I don’t know if it will be enough because I guess the lender is hanging pretty tough.”

Judge Brad Letts, the resident Superior Court judge for Jackson County, had to recuse himself from proceedings since he owns a lot in the development. Judge Dennis Winner presided instead and granted the receivership to Radco. Radco did not return phone calls seeking comment, but a representative of the company — which specializes in taking over distressed commercial properties — was on site at Balsam Mountain Preserve Monday.

Affluent property owners in Balsam Mountain Preserve have raised commitments of $16.3 million in an effort to stave off foreclosure of the development by lenders.

Balsam Mountain Preserve, a mega development on 4,400 acres in Jackson County, owes nearly $20 million to lenders, who initiated foreclosure proceedings earlier this month. A hearing on whether the foreclosure can proceed was scheduled for Wednesday, Oct. 28.

Dave Walters, one of the property owners leading the effort to raise capital, hopes they will get a seat at the table in the dialogue between the lender and Balsam Mountain Preserve.

“We hoped to raise enough capital that would create an environment the lender would want to have serious dialogue with us during this process,” Walters said. “We have a very active and very intelligent and very vested and worldly group of property owners who are engaged and will remain so.”

Ideally, property owners hope to step into the shoes of the lender and get in control of their own destiny, Walters said. Commitments have been raised from 65 property owners — more than a third of the total property owners within the development.

“I think that is indicative of the overwhelming love for the place and the desire to keep the lifestyle what we hoped it would be,” Walters said.

Property owners would rather keep Balsam Mountain Preserve’s parent company Chaffin Light on board as the developers rather than an unknown player, Walter said.

“The ultimate goal has always been to keep the Balsam in Balsam,” Walters said “Balsam Mountain Preserve is a very unique place.”

Lots in Balsam Mountain Preserve have averaged $500,000. The grounds are rife with multi-millionaires and corporate executives who bought into the culture the upscale development embodies: top-notch amenities, an environmental ethos, strict covenants and a woodland estate setting. The conservation ethic is particularly important to property owners, Walters said.

“Nobody knows what a new owner or someone who took over would do,” said Nancy Seidensticker, a homeowner in the development. “It is a little frightening. We don’t want it change. We like it the way it is.”

Balsam Mountain Preserve has been in default of a $19.8 million loan since January, trying the patience of TriLyn, a private equity real estate investment firm based in Connecticut. The property owners knew a foreclosure was in the cards since May and have been working on a plan since then.

They created an LLC, wrote an investment prospectus and solicited pledges from property owners. The deal is twofold, mirroring the two major pieces of equity within the development.

One fund, called the Balsam Mountain Sustainability Plan, would be collateralized with the unsold lots that are still in the developers’ hands — approximately 120 lots. The current developers would remain on board as operators and pay back the loan from property owners through lot sales. So far, $8 million has been raised through that fund.

A second fund, called the Amenity Purchase Plan, would be collateralized through the amenities, including an Arnold Palmer golf course, riding stables, dining hall, pool, tennis courts, pavilion and backcountry camp. The amenities have been shut down for now.

“The amenities are a very large part of keeping the Balsam in Balsam,” Walters said.

Property owners buying into the fund would own the amenities and make money back over time through memberships and any profits off their operation.

Property owners are not willing to take a second position to the current lenders, Walter said. The property owners have fallen a few million short of being able to pay the lender off in full, however. Whether the lenders are willing to take what they can get and walk away, or whether they would prefer to move forward with foreclosure in hopes of eventually making all their money back, is not known.

“In today’s market, it is all about the money,” Walters said. “That is the position the lender has taken since day one. They have a right, it is their money.”

At first glance, it is hard to see why Balsam Mountain Preserve has been unable to satisfy the lenders behind a $19.8 million loan dating to 2005.

The exact amount of the payoff on the loan has not been revealed, but is the only debt Balsam Mountain Preserve is carrying, according to Chris Chaffin, managing partner of the development. Chaffin did say Balsam Mountain is current on the interest portion of the loan.

Since taking out the loan four years ago, Balsam Mountain Preserve has had $65 million in lot sales, according to real estate transactions and records. That’s enough to pay off the principle of the loan three times over.

However, the majority was spent constructing amenities. Chief among them is the Arnold Palmer golf course, a dream course that was no small feat to pull off given the mountainous terrain. The golf course likely ate up much of the revenue from lot sales, but Chaffin did not provide an exact price tag.

In addition, the development boasts an equestrian center, a sports center with tennis courts and a pool, a nature center, a dining room and lodge, guest cabins and a road network.

Of the 354 lots in the master plan for the development, two-thirds have been sold. There are 120 lots left, and with the infrastructure and amenities mostly in place, any profit to be realized would largely rest with the remaining parcels.

Lot sales have declined in 2009 over previous years, but are strong in comparison to what most developments have seen since the recession. Balsam Mountain Preserve sold 12 lots so far this year, bringing in $6.17 million at an average of $514,000 a lot. If the rate is sustained for the remaining 120 lots, the development would realize an additional $60 million in revenue.

That begs the question of why the lenders aren’t being more patient on the undisclosed balance of the $19.8 million loan.

At the 2009 pace of lot sales, it would take three years to pay off the principal, not taking into account the inevitable overhead expense of maintaining a sales presence or the construction of additional road infrastructure, which is still needed in new phases of the development.

Sustaining operations and the additional capital for more road construction would drag out the payoff much longer than basic calculations allow for, and thus make the lender uneasy. The question, it seems, is whether TriLyn is willing to keep waiting or will attempt to take matters into its own hands.

Of the 120 lots that remain, 40 are scattered through existing phases of the development, while 80 are in new phases. The 40 scattered through existing phases require no additional infrastructure in order to market, but are merely waiting for buyers. The other 80 lie in two future phases and would require a capital investment to upgrade old logging roads into development-caliber roads before aggressively marketing the lots.

In some developments, the last lots to sell are likely the least desirable and lowest in value — whether they’re too steep, lack a view or are otherwise unappealing. Some are so flawed they may never sell.

But given the sparse number of lots in Balsam Mountain Preserve — 354 sites on 4,400 acres — the layout and design was likely more thoughtfully considered on the front end, making it less likely that the remaining lots are of less value or won’t sell at all.

Balsam Mountain Preserve, a mega development on 4,400 acres in Jackson County, has defaulted on the terms of a $19.8 million loan, prompting a notice of foreclosure by nervous lenders last week.

Owners of the development say they are hopeful a deal can be worked out with the lender to satisfy their debt and halt the foreclosure, however.

“We are optimistic we can reach an agreement,” said Chris Chaffin, the managing partner of Balsam Mountain Preserve.

Balsam Mountain Preserve has been in default of the loan since January, trying the patience of TriLyn, a private equity real estate investment firm based in Connecticut. The loan dates back to 2005. For now, neither TriLyn nor Balsam Mountain Preserve will say how much is still owed on the note, although it is believed to a substantial amount.

Balsam Mountain Preserve has continued to ask for more time and has searched for additional credit, but to no avail.

“It is a very challenging environment to find capital,” Chaffin said. “Unfortunately we got caught in the economic downturn. Even though we are the market leader for sales in Western North Carolina, it is not enough to satisfy the debt requirements.”

The answer now seems to lie with the uber-wealthy property owners within the development itself.

“They love the lifestyle of Balsam. It is a place where they have invested and they want to make sure the original vision of Balsam is completed,” Chaffin said.

Not your run-of-the-mill development, Balsam Mountain Preserve has attracted affluent and well-connected buyers, among them actress Andie MacDowell, an Asheville resident. The grounds are rife with multi-millionaires and corporate executives who bought into the culture the upscale development embodies: top-notch amenities (including an Arnold Palmer designed golf course), an environmental ethos, strict covenants and a woodland estate setting.

No one is sharing exactly what form a rescue by property owners may take, although the arrangement would likely involve property owners pooling capital. That could mean forming their own LLC and taking over the note in whole, becoming the new primary financial investors of the development.

Or they could merely raise enough money to get the loan out of arrears, taking a backseat position to the original note. How much would have to be raised to satisfy lenders is not being revealed.

“We are working through all of that right now,” Chaffin said.

Mark Antoncic, founder and managing principal of TriLyn, was reached in Connecticut but said he could not comment on the proceedings at this time.

Balsam Mountain Preserve’s development plan calls for only 354 lots on 4,400 acres, with most of the tract protected in a conservation easement. Roughly two-thirds of the lots have been sold.

With the amenities and infrastructure largely in place, the capital investment was largely behind the company. The profit margin for the development would primarily be realized through the sale of the remaining 120 lots, which are now the target of the foreclosure.

BMP joins a long list

Chaffin said Balsam Mountain Preserve is a temporary victim of the recession, but the business model still holds long-term promise.

“It is a timing issue,” Chaffin said. “The fundamentals of Western North Carolina as a second-home market are sound. It is just a matter of working through the downturn.”

Balsam Mountain Preserve is certainly not alone, however. Mountain developments both large and small have been facing foreclosure and even bankruptcy in recent months. As lot sales have dropped off, so did cash flow. Developers no longer had a revenue stream to make loan payments or finance infrastructure like roads and golf courses.

Unable to sustain operations, they hunted for additional sources of credit. But everywhere they turned, credit had dried up, even among the most notorious hard-money lenders, forcing some developers to fold. Another mega developer in Jackson County called Legasus saw a sizeable portion of its development foreclosed on by Macon Bank this summer.

Jackson County Sheriff Jimmy Ashe has had a bird’s eye view of the rash of foreclosures in the region. His office serves foreclosure papers, including the ones to Balsam Mountain Preserve last week. The foreclosures aren’t just among developers, but also among investors who snatched up blocks of individual lots. Rather than continuing to appreciate, there is a glut of mountain lots on the market. Some lot owners are simply choosing to not make payments and watching the property revert to the banks.

“There were more properties out there than people wanted,” Ashe said. “As far as it being swooped up because it is there, it didn’t happen. The mountain property they thought was so valuable, they are finding out what the local people have known for hundreds of years: if you can’t farm on it or build on it and cattle can’t stand up on it, it’s not that valuable.”

Balsam Mountain Preserve was arguably in a better position than most. While lot sales aren’t what they used to be, they are still strong compared to other developments in the region. Balsam Mountain Preserve sold 12 lots so far in 2009, averaging more than $500,000 each. Some developers sold zero.

Balsam Mountain Preserve was one of the first mega developments in the mountains, with the initial land purchase dating back to 1999. The property was part of the vast timber holdings of Champion Paper, which logged the tract over the decades to fuel its paper mill in Canton.

Amenities and infrastructure have largely been completed, unlike relative newcomers that had barely gotten started when the recession hit.

“Balsam is in the fortunate situation that the amenities are mostly completed. The fabric of Balsam has been defined,” Chaffin said.

Legasus, for example, didn’t even have its golf course permitted, much less constructed, when it faced foreclosure.

Balsam Mountain Preserve’s $20 million note with TriLyn is the only debt the company is carrying, while some over-leveraged developers are grappling with a half dozen loans with various lenders.

Balsam Mountain Preserve is one of several large-scale resort developments under the umbrella of the national company Chaffin/Light Associates. Developments span from Snowmass in Colorado to coastal South Carolina, but the model is the same: a recreation-based resort set on expansive acreage in beautiful surrounds and catering to high-end clientele.

Chaffin is the son of Chaffin/Light founding partner Jim Chaffin and took over as managing partner of Balsam Mountain Preserve in January of this year, in the thick of the economic downturn and credit crisis.

Jobs disappear, lights stay on

In an effort to preserve capital and as a result of foreclosure proceedings by TriLyn, Balsam Mountain Preserve has been forced to lay off half the 80 workers — including a security force, golf caddies, stable hands, maintenance workers, dining room staff and sales managers — who had been on the payroll.

“It was a very sad day when we had to reduce operations,” Chaffin said.

A crew of critical security personnel, maintenance workers and office staff remain employed, Chaffin said.

“Our operations are focused on protecting the physical integrity of the community,” he said.

The golf course is closed for the remainder of the year due since there’s no staff to run it. Property owners no doubt aren’t pleased, since the Arnold Palmer designer course was a main selling point to some who bought into the development. But Chaffin said they have been resilient.

“We had a fireside chat or town hall meeting this weekend to address the situation with the members,” Chaffin said. “The members are behind us working toward a solution. There is always the toxic 2 percent, but in large part the members have been very supportive.”

Defining eco-development

Balsam Mountain Preserve is also one of the first self-described eco-developments in the Western North Carolina mountains. While many developers have since made the claim as a marketing strategy, Balsam Mountain Preserve continues to lead the pack in its conservation approach. Despite its giant size, the master plan for the development calls for a mere 354 lots.

“The idea is for the ecosystem to stay intact through the community. The homes are islands within the sea of the preserve,” Chaffin said.

More than half the acreage was placed into a conservation easement to be permanently protected, which also reaped substantial tax benefits for the company. No matter how the foreclosure turns out, the conservation easement will remain intact. It is tied to the land deed, and applies in perpetuity no matter who owns it.

To oversee the large natural areas, the non-profit Balsam Mountain Trust was formed as an independent entity. It has a staff of three naturalists, who care for the ecosystem and operate a nature center. Nature programs are provided for members of the community and the public at large, from guided hikes to school fieldtrips. The naturalists are still on staff and the nature center is still open.

“We’ve got more naturalists than golf pros. The environmental ethic is fundamental to Chaffin/Light Associates,” Chaffin said.

The Balsam Mountain Trust is funded by a portion of every lot sale, including the resale of homes and property. The arrangement that will continue no matter who is the eventual owner of the development, Chaffin said.

The eco-philosophy behind the development has been embedded in covenants that will persist even if the foreclosure proceeds. A new owner of the development could not add more lots, for example, which are capped under the development’s master plan, Chaffin said. Strict covenants that apply to individual property owners, such as limits on cutting trees and stipulations reducing the glare of windows, would also carry over.

Balsam Mountain Preserve, a 4,500-acre development in Jackson County, has been fined $300,000 for ongoing sediment and erosion control violations by the county.

The fine comes on the heels of a dam break that sent hundreds of tons of mud downstream, clogging creeks with a miles-long mudflow and wiping out fish. Surprisingly, the fines have nothing to do with the dam break. Instead, they are a result of erosion from golf course construction.

A dam broke on an irrigation pond at Balsam Mountain Preserve in Jackson County two weeks ago unleashing hundreds of tons of mud downstream.

Walking into the new nature center at the Balsam Mountain Preserve in Jackson County is like walking into a replica of a Southern Appalachian forest, with all the best goodies already uncovered and there for the taking — or rather touching.