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Tuesday, 03 June 2014 22:56

Picking up the pieces proves costly, time-consuming for local governments

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coverIn a region still reeling from damaged land and dented lives in the wake of the real estate boom and bust, signs of salvation are few and far between. But here’s one for the history books.  

Twice in the past year, Haywood County has used a little-known clause of financial legalese to hold developers’ feet to the fire after they walked away mid-stream. It’s a minuscule but unprecedented victory in a rocky world of marred up mountains and abandoned developments.

Dozens of developers across the mountains landed in foreclosure and declared bankruptcy when the boom went bust starting in 2008. What they left behind wasn’t always pretty.

Miles of dirt roads were roughed in, zigzagging up mountainsides, over ridges and across farmland in the quest for prime house sites that were supposed to make the developers’ rich. But the seemingly insatiable thirst for mountain getaways dried up as the global mortgage crises widened, and developers’ luck ran out.

“It was risky business,” said Gavin Brown, one of the top real estate attorneys in Haywood County. “They were buying on credit, but didn’t have the credit to buy it, and nobody was checking. But it didn’t matter because the prices were going up. It was a no-fail proposition. Most people never saw the risk.” 

The boom was built on the faulty premise of never-ending, ever-appreciating real estate sales, and Brown was trapped in the echo chamber right along with the rest of the bankers, Realtors, attorneys, developers — and most of all, the buyers propping it all up.

“I thought Haywood County land prices were immune. I was dead wrong on that, and here I am an experienced real estate lawyer,” Brown said. “I was feeding the frenzy.”

Subconsciously, however, something seemed amiss.

“I thought, ‘How can this be?’” said Jay Coward, a real estate attorney in Jackson County. “I felt like there was something wrong with the whole economy when residential lots were going for $250,000, $300,000, $350,000 — and it was just acre lots. But it was crazy everywhere.”

With real estate sales occuring fast and furious, there was little time to worry about the nagging doubt. Coward’s office ballooned to a staff of 26 to handle the volume. But by 2010, he was down to six employees. 

“The market was frozen stiffer than a lake in Minnesota in the winter time,” said Brown.

The no-fail proposition had soured. 

“The buyers were saying, ‘Wait a minute, something is wrong here. We aren’t buying any real estate today,’” Coward said.

Loose lenders collectively backed hundreds of millions in loans for developers, banking on the sure bet of future lot sales to make it all work.

“If you could fog up a mirror you could get a loan,” said Jack Debnam, the owner of WNC Properties, one of the leading real estate firms in Jackson County. 

“Loans were being made to developers that just didn’t have the wherewithal,” said Chip Killian, Haywood County attorney. “They were left with lots they couldn’t sell.”

And bank notes they couldn’t pay. 

Developers took down their shingles, folded up their tents and walked away, many of them bankrupt and foreclosed on, with no means to polish off the vast network of dirt roads, culverts and cleared land they’d engraved on the mountains during the short-lived heyday.

 

Flash forward

Miles of roads now languish on the land in various stages of disarray and disrepair, some still bleeding silt down the mountainside years later. If the developer is out of business, there’s little recourse to fix the environmental damage stemming from half-built roads.

Enter men like Marc Pruett.

Last week, Pruett was scouting a three-mile gravel road leading to Crabtree Bald, a 5,000-foot high rolling meadow in Haywood County that was once destined for million dollar houses with million dollar views until the bust drove the developer out.

Twice, Pruett stopped to inspect denuded banks scoured by a recent rainstorm. The gouged out banks were so steep they were crumbling and collapsing like an ocean wave folding over on itself, but in a slow motion. 

“You just about can’t build it good enough to keep things like this from happening,” said Pruett, Haywood County’s lead erosion control inspector. “You’re battling natural forces.”

And so far, gravity held the winning hand.

Soil had sloughed off by the dump truck load on the down-slope side. Inching toward the edge, it was soon apparent the road’s shoulder wasn’t a shoulder at all — just an overhang supported by nothing at all after the bank caved in below.

“I wouldn’t stand there if I were you,” Pruett said.

The vertical walls of soil, with nothing to hold them back, would keep on tumbling it seemed until equilibrium was reached, decades or perhaps even epochs from now.

Pruett, a geologist by training, discusses the mountains from a historical perspective, noting that they were formed more than 450 million years ago.

“The Appalachian mountains were in relative harmonic balance until 500 years ago. Then we come in and manipulate the topography in ways that may be attainable — and may not,” Pruett said.

For a man who loves the mountains, Pruett’s job can’t be easy. The boom was no doubt taxing. All day, every day, he traveled the back roads, winding through far-flung coves and over mountain gaps to bear witness to the legions of bulldozers, backhoes, track hoes and excavators digging up the land.

“I remember saying, ‘On any given day there are probably 100 people right now sitting on equipment grading land in Haywood County,’” Pruett said.

It’s an uncanny image — 100 engines cranking up each morning, scattered across every corner of the county like 100 dice thrown on a map, ripping and ramming their way through the mountains.

And when machinery failed, they turned to dynamite, blasting roads through stubborn terrain to reach the prime high-elevation home sites.

“Some of the mountain roads in the 2000s were $1 million a mile,” Pruett said, citing the widespread use of dynamite.

Pruett was often the only outside eyes to see the scope of development playing out tract by tract, but collectively adding up to an unprecedented era of human impact on the land.

“People didn’t understand what was going on in the hinterlands,” Pruett said.

The workload in Pruett’s office is a good barometer for the development boom and bust — the “very busy” time going from about 2000 to 2008.

“It absolutely ran without a breath,” Pruett said.

Pruett works in a much different landscape now. He’s the main mop-up crew for defunct developments with lingering erosion issues.

But Pruett is hardly a foe to developers. He doesn’t throw the book at them. He doesn’t judge. He doesn’t put the screws to people he doesn’t like. Because Pruett, a Grammy Award-winning mountain banjo player and long-time Boy Scout leader, likes pretty much everyone. 

Pruett technically doesn’t care what a developer does to his own land. Mar it up as much as you want, but just don’t let it run, slide, slip or spill onto other people’s land or into the creeks — according to state erosion laws.

“It does not tell you what you can or cannot do on your own property. It tells you what you cannot do to property owned by others, to public property and to natural resources owned by all,” Pruett said.

Pruett is a realist, however.

“We know we are going to lose some mud,” Pruett said. 

Crabtree Bald is one of the rare cases, however, where Pruett’s amiable nature and soft-spoken ways were unable to win compliance.

 

Caught in the lurch

The Crabtree Bald tract was one of several amassed by Atlanta-based developer Robert Ullmann in the mid-2000s. Ullmann bought up more than 4,000 acres in Haywood, Jackson, Macon and Swain counties with plans to carry out half a dozen big-time developments, all concurrently. 

But they came with big-time bank loans, and his mountain development empire built on borrowed money came crashing down when lot sales dried up, landing him in foreclosure on at least three of the projects.

Ullmann did not return messages seeking comment for this article.

Crabtree Bald was one of Ullmann’s development endeavors, a 760-acre tract straddling the saddle of a high but gentle ridgeline. He envisioned up to 250 homesites on the tract, but never sold a one before the bust hit.

Ullmann was staring down foreclosure when a buyer emerged. For a cool $3.4 million, Bill Sansom, owner of the Knoxville-based Hackney Company, a successful wholesale grocery distributor, bought the sweeping Crabtree Bald tract in 2010. The sale likely fell short of what Ullmann had put in to the property, considering the cost of building a three-mile road to the top and the initial price tag for the land itself.

Sansom is like many buyers stepping in to buy abandoned or foreclosed subdivisions these days. They aren’t the next wave of developers. Instead, they just want a pretty piece of mountain property to hang on to. And Sansom, one of Tennessee’s wealthiest executives and a heavyweight in the state’s business, political and civic circles, had the means to do it. 

He owns an even larger tract bordering the one he bought from Ullmann.

And for now at least, there’s no development plans on the horizon for either, according to Ricky Mull, a local caretaker for the property on Sansom’s payroll. 

 

A muddy trail

Meanwhile, however, the issue of steadily eroding road banks wasn’t settled.

“It got really complicated,” Pruett said. “The property had transferred to a new owner, but the previous owner was the one who conducted the grading work and signed the sediment plan as being financially responsible.”

Pruett tried cajoling Ullmann to come back and fix the erosion problems.

“We had repeatedly requested that certain areas be stabilized,” Pruett said. “A big gulley opened up in a road ditch and sediment has been running off into a tributary that feeds Crabtree Creek.”

Months went by, and soon a couple of years.

Pruett finally issued erosion citations in late 2012.

“The site work appears to be abandoned, and eroding areas have not been repaired,” Pruett wrote in an erosion inspection report in October 2012.

The inspection noted seven violations of sediment and erosion control laws.

Among them: “graded slopes too steep,” “unprotected exposed slopes,” and “insufficient measures to retain sediment on site.”

Pruett had outlined these same issues in past inspections, including one six months prior, but to no avail.

It was finally time to pull the trigger on a never-before-exercised clause in the county’s sediment and erosion law: cashing in a financial guarantee large developers must post before they start grading. It’s a safeguard in the event developers walk away. The county can tap the financial guarantee and use the money to fix erosion problems. The developer can do it one of three ways — put up cash in an escrow account, take out a surety bond from an insurance company, or post a financial guarantee through a bank.

It had been on the books for 15 years, but never before tapped.

“Before the recession we never had any problem. Then we started having developers going under,” said Chip Killian, an attorney for Haywood County.

The county set the wheels in motion to call in the erosion guarantee from Ullmann, about $40,000 in all. The money is now finally in the county’s hands, with a contract pending for work to begin this summer.

There’s a downside, however. Haywood developers only have to put up $2,500 for every acre of soil disturbed, and it only applies to larger developments. 

“We will never have enough money from the bonds to fix all the problems up there,” Pruett said. “But it will go a long way. At least we have some level of bonding and can fix the problems that speak to environmental damage.”

The resolution for Crabtree Bald is the best of a bad situation, said Lynn Sprague, executive director of the Southwestern Resource and Development Council, which was contracted by the county to oversee the erosion repair.

“It will not fix the entire problem,” Sprague said. “There is erosion and sediment occurring and it is getting in the waterways. But it is good we can get up there and stabilize what we can.”

While rare, Haywood isn’t the only county to use a surety bond to fix erosion violations. Macon County, which makes developers post $3,000 per disturbed acre, called in the financial guarantee for a small development in the Nantahala area.

“It got to where the owner wasn’t responding,” said Matt Mason, Macon County planner. “They went bankrupt and lost the property, so we went through the legal steps to get the bond called in.”

The money, about $15,000, paid for seed and straw to sew groundcover over bare areas that were washing away. At Crabtree Bald in Haywood, the problems are more costly due to underlying stability issues. Road banks will have to be recontoured with a gentler slope before seeding has a hope of stemming the erosion.

In the worst case scenario, unstable roads can be triggers for dangerous landslides, witnessed by a host of such slides in Macon, Jackson and Haywood over the past decade that stemmed from road cuts. 

 

Holding the bag

Unstable roads pose an ecological conundrum, but they have a human side-effect, too. 

Buyers who paid top dollar for mountain home sites were counting on developers to build the roads that would lead to their dream lots. But if the road was never built — or was built so shoddily it is barely passable — their dream lot is rendered worthless.

Developers in Jackson County regularly sold lots that had no road leading to them, often to out-of-state buyers who would snatch them up sight unseen during sales blitzes held in big cities across the country, from Miami to Chicago to Las Vegas.

“A lot of real estate got moved that way. People signed a contract to buy a piece of property they had never even seen,” said Jay Coward, a real estate attorney in Jackson County.

“I feel sorry for people who bought lots at some of those sales,” said Jack Debnam, a Realtor in Jackson County. He occasionally fields calls from out-of-state buyers who got stuck with lots that have no road leading to them.

The plan, of course, was to build the roads later. But developers went broke and walked away.

“A lot of them went into foreclosure before all the roads were built,” said Gerald Green, Jackson County planner. 

And now, buyers have no recourse.

“I’ve gotten calls from a lot of lot owners asking what could be done and can the county do anything,” said Green. “But without having any kind of bond or financial guarantee, there is nothing we can do. We can’t do anything about it.”

Surety bonds to safeguard against erosion issues have been on the books in most counties since the late 1990s or early 2000s. But those don’t address roads promised by developers yet never delivered on.

That problem needs a separate type of financial guarantee — one that covers road construction itself. Few counties had that mechanism in place, but in hindsight they wish they had.

“It would have helped,” Green said. “It would have protected the people who bought lots in those developments to ensure the infrastructure they were promised was provided.”

Road building guarantees weren’t required in Jackson County until 2007 when its first-ever development ordinance was passed. By then, however, it was too late. The county was already awash in subdivisions put in during an anything-goes era, with no rules governing the quality of roads, let alone financial guarantees. 

Now, at least, Jackson County requires developers to pony up a financial guarantee, but it’s doesn’t help those who bought during the boom.

Macon County, likewise, didn’t require financial guarantees when it would have mattered most. Macon’s first development regulations came along even later than Jackson’s, not until 2008, and it was only then that developers had to post a bond to ensure roads got built as promised.

 

Ounce of prevention

Haywood County was one of the few counties that required developers to post financial guarantees for their road network. 

“It protects the person buying the property, buying the lots,” said Kris Boyd, Haywood County planner. “If the developer fails to do it we have money posted to be able to complete the project.”

Only once has Boyd had to call a developer’s hand to finish road work, however. That developer was once again Ullmann, but this time for a different development in his self-described “resort property portfolio” in the WNC mountains. 

For this one, Ullmann had amassed 500 acres from various owners for an upscale development known as Avalon, which borders Junaluska Highlands.

He launched Avalon in 2006 and sold about 30 lots — most in the $180,000 to $200,000 range — before the bust hit. When it did, lot sales screeched to a halt and Ullmann fell behind on his financing with SunTrust bank. 

When SunTrust foreclosed against Ullmann in 2010, Ullmann owed SunTrust more than $4 million, including interest.

By the end of the year, the bank had unloaded it to a group of local developers for just $900,000.

Keeping the name Avalon, they picked up the development where Ullmann left off. But Ullmann had departed without the final road paving required under the county’s subdivision rules.

“The people who bought the lots were assured the roads would be paved,” Boyd said. “In order for those folks to get what they were supposed to be getting when they bought their land, we exercised the right to collect surety bonds in the absence of the developer.”

Ullmann had posted $143,000 in cash to an escrow account with the county and took out surety bonds totally another $167,000. Ullmann fought the county when it tried to cash in the escrow account, however.

“He requested his money back, but the work had not been completed and so the request was denied,” Boyd said.

The county also faced resistance from the insurance company that held Ullmann’s surety bonds.

“It took a long time to get the money from the bond company,” Boyd said. “You file a claim and then there’s the legal stuff that goes back and forth.”

It took nearly two years for the county to claim the $310,000 initially posted by Ullmann and put it toward Avalon’s road work. The money was finally secured last August, and the road work is now done

It was the first time a developer in the seven western counties had been called on the carpet through surety bonds.

Randy Best, a local contractor hired to finish out Avalon’s roads, is glad the county did it.

“It had to be done right and if the developer didn’t do it right they could recall the bond money and hire somebody to do it right,” Best said. “It protects those people who bought lots. They paid high dollar for those lots. When Ullmann went under those people would have been stuck.” 

Best is ultimately one of three partners who bought Avalon out of foreclosure.

Today, Avalon is among the rare club of rescued developments. It’s wide roads are pristinely paved, it has an active sales office, and a present developer who’s on site daily. The confidence of lot owners has returned.

“People were waiting to see what was going to happen. Before we took it over it looked like a ghost town in there,” Best said. “They are very glad we took it over.”

 

Better late than never

While Haywood has only pulled the trigger twice, the financial guarantees it requires proved a handy tool on several occasions. The threat of calling in surety bonds helped compel developers to step up.

Macon Planner Matt Mason said surety bonds aren’t failsafe. Surety bonds are a type of insurance, and as with most insurance claims, the company holding the policy fights over the payout.

“They want to take it to court and settle it for 50 percent of the value,” Mason said. The payout can fall short of what it really takes to shore up and finish out the development roads.

And, there was another problem.

“When the market crashed, nobody could get bonded to do a subdivision,” Mason said. War-torn lenders are leery of putting up a financial guarantee for developers.

The more common route for developers now is to post cash in an escrow account with the county — with an extra 25 percent cushion tacked on to engineering estimates for the roadwork.

It certainly ups the ante for developers. Only the most cash-endowed developer could afford that kind of upfront capital. In Jackson, the developer of the new Cullowhee River Club is one of the few new developments to be launched post-recession. The developer is posting $1.25 million in cash in an escrow account with the county to guarantee completion of the road system, Green said.

The climate is certainly more arduous for developers these days, but perhaps that’s as it should be.

“Hopefully as development starts back up again, people will think things through a little more,” Sprague said.

Read 1134 times Last modified on Wednesday, 18 June 2014 14:40