As more commercial developments stumble in a weak economy, an increasing number of lenders are taking over projects - even if the borrower is not in financial trouble.

Banks are aggressively looking to cut loans made in earlier go-go times, and friction is emerging between borrowers and lenders over previously minor contract issues, say attorneys and others involved in real estate.

In Charlotte, this conflict is illustrated by a lawsuit filed by condo developer Ray "Rip" Farris III. Last month, Farris sued his lender, First Horizon Home Loans, and parent company, First Tennessee Bank National Association, saying the companies acted in bad faith when they stopped paying on a $24.4 million loan. The money was being used to build Hagood Reserve, a luxury townhome and condo project at Colony and Carmel roads in south Charlotte.

Farris also claims the bank wanted out of the construction loan business so badly it paid loan officers incentives for "engineering 'defaults'" that increased borrowers' obligations, according to the lawsuit, filed in Mecklenburg County. The bank declined to comment and has not yet responded to the suit.

Farris joins a growing chorus of borrowers who say banks are unfairly breaking promises as they look to exit the construction lending market.

To be sure, disagreements have always existed between developers and banks. But now, the differences are more profound. And more is at stake.

As condo sales have stalled and property values plummeted, an increasing number of banks are withholding advances on real estate loans, leading some developers to default. Because developers often guarantee loans with personal property, more borrowers are finding themselves unexpectedly on the hook for millions.

As of the end of June, about one in six construction loans were in trouble, according to the Federal Deposit Insurance Corp.

First Tenneesee has sued Farris, his wife, Blair, Hagood Reserve and Farris' company, Tuscan Development, seeking about $4.2 million in a missed mortgage payment, interest and penalties. Farris says he mailed the payment.

If Farris loses the case, the lender could go after his family's assets, including his home and savings.

"Banks are feeling the pinch, and they're looking out for themselves, which is fine," said Farris' attorney Gary Jackson, with Jackson & McGee. "But they've gone too far."

Covenants strictly enforced

There are many ways borrowers can default on a loan. Construction loan agreements typically include covenants borrowers must meet or risk defaulting. Covenants may require developers pre-sell a set number of units, for example. They can also cover seemingly mundane details, such as how the borrower is to communicate with the lender.

In boom times, lenders often overlooked covenant breaches if the borrower promised to fix the problem, says Tony Plath, a finance professor at UNC Charlotte.

Today, lenders are viewing those same breaches as a default. A lender can accelerate a defaulted loan, meaning the borrower must pay back the entire amount owed in a single payment.

"It never worked like this," Plath said of the rising defaults due to covenant breaches. "You could go back and renegotiate a loan covenant easily. The intent of a covenant was not to accelerate debt payments."

Charlotte attorney Rick Mitchell said he has more than three dozen developer clients who have filed or are filing for bankruptcy protection because lenders are seeking repayment on defaulted loans. In some cases, loan advances "dried up overnight," forcing projects to stall, he said.

"You're free to sign away your life, and you're free to reap the benefits," Mitchell said.

According to court papers, Farris secured a $24.4 million loan from First Horizon on Dec. 3, 2007. His goal was to build 36 luxury condos and townhomes on nine acres . The $40 million project is slated to include a two-acre pond and 4.5 acres of woods and trails.

Farris says the lender "actively and aggressively" sought to lend him the money, according to the lawsuit.

Construction started January 2008. In fall 2008, a subcontractor filed a lien against the property, violating a loan covenant. First Horizon stopped paying advances when told of the lien and said funding would resume when the lien was removed, according to the lawsuit. Farris says he resolved the lien within months, yet First Horizon never resumed payments.

Because the bank cut off his funding, Farris later ran out of money and wasn't able to pay his general contractor, he says. Construction stopped last April.

Charlotte-area condo sales, meanwhile, have slowed dramatically.

Local attorneys say they are hearing more from developers and real estate owners who feel lenders unfairly pulled the plug on their financing.

Real estate attorney Bob Turner of Horack Talley said he knows of one shopping center owner in northern Charlotte who feels he was forced to default even though he'd been regularly paying his mortgage. The loan documents required a supplemental payment at the end of the year based on a percentage of annual sales and put the burden on the borrower to calculate the payments. In practice, Turner said, the lender had calculated the amount and mailed the borrower a bill for nearly 10 years. The extra payments were typically small, in the hundreds of dollars, and paid promptly, Turner said.

The loan, however, was sold and the new lender didn't mail a bill. When the deadline for the extra payment passed, the lender told the borrower he'd defaulted. The borrower scrambled and was able to find alternative financing, Turner said.

Personal ruin for developers

When a commercial borrower defaults, it can lead to personal financial ruin.

The father-daughter development team of suburban office developer First Colony Corp. of Charlotte each filed for personal bankruptcy protection in August and put three of their holding companies into bankruptcy protection after banks and other lenders filed multi-million dollar claims against them. Colony Development Partners chief executive officer Cynthia McCrory personally guaranteed more than $67 million in business debt, according to court filings.

A call to Colony Development, which bought asset management contracts from First Colony and hired employees from there, was not returned.

In boom times, developers risked relatively little by personally guaranteeing a loan because projects sold or leased quickly. Now, as office buildings and condos sit vacant, banks are aggressively going after borrowers' personal assets, attorneys say.

Mitchell, the attorney, said his clients opted not to sue their lenders because such cases can costs millions of dollars to pursue and are difficult to win, particularly in North Carolina, where laws favor financial institutions.

Still, lender liability lawsuits tend to rise during economic downturns as banks restrict credit.

In this recession, which was largely brought on by overzealous lending, banks have been under increasing pressure from regulators to shed bad loans. They also have an obligation to shareholders to cut their losses, says UNC Chapel Hill banking professor Lissa Broome.

"You can see how the banks would be thinking 'Let's nip this thing in the bud and get out right now while the getting's as good as it's going to get,'" she said.

Bank cuts back on loans

Farris' lender, First Horizon, has been praised by banking analysts for exiting the construction loan business after watching loan losses mount.

Last year, the bank said it was winding down construction lending and loan servicing outside of Tennessee to preserve capital.

Farris says the bank last year started "engineering 'defaults'" to accelerate debt repayment, according to the lawsuit.

Farris says the bank told him on May 14 that Hagood was in default because it had not provided an interest payment that month and its required insurance had lapsed. Farris says he sent the check to the bank's Charlotte office on time and that the insurance policy wasn't due to expire for months. Farris said he did not know the bank had closed its Charlotte office in April and that the bank's representative "refused to assist Hagood in tracing or locating the payment which had been sent."

He also claims he would have been able to pre-sell 12 units as the lender required, but that the lender prevented that from happening by withholding funding for the project, delaying construction. He said he would like to finish Hagood, noting construction costs have fallen, making the project cheaper.

"But for (the bank's) calculated efforts to manufacture events of default, Hagood would have been able to satisfy the presale requirement...," the lawsuit says. "(The bank's) wrongful acts were designed to frustrate presales and to 'trigger' a phony and self-serving event of default."

The bank has until mid-November to respond to the lawsuit.