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Wednesday, 14 October 2009 15:43

One of area’s first mega developments in trouble

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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.

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