The developers of a proposed $515 million luxury condo, office and retail project in Cornelius are being foreclosed on in part because they failed to sign any significant tenant for the first planned office building. It's the latest sign of how difficult it has become for speculative projects to get off the ground.
Known as Augustalee, the project was envisioned by local leaders as a potential recruitment tool that could one day employ 4,600 workers.
The property, 104 acres of former farmland off I-77, is scheduled to be sold under foreclosure Aug. 27, according to a letter sent Monday to Cornelius Mayor Jeff Tarte by one of the lenders, a labor pension fund called The BUILD Fund.
The development group, Cornelius Bromont, is in default under a Fifth Third Bank mortgage and a mezzanine loan made by The BUILD Fund.
A mezzanine loan is like a second mortgage, except it is secured by the stock of the company that owns the property, versus the real estate. If the borrower fails to make payments, mezzanine lenders can foreclose on the stock in weeks, as opposed to the months it can take to foreclose a mortgage.
In its letter, the lender said it expects to be the successful bidder on the property at the August sale. The fund said it is “committed to protecting its investment to the extent commercially possible” and to working with Fifth Third and the town of Cornelius to “stabilize the project and to find a long term, commercially viable solution.”
Cornelius town commissioner Jim Bensman said, “The various investors have a lot of money invested and I would be shocked if they didn't move forward,” Bensman said.
But, he said, it “may move forward in a different way.”
Tarte said he's been talking with the lenders and developers regularly and believes the project will continue. The development group paid about $30 million for the land in spring 2008 and has said it hoped to start construction later this year and have retail shops open in fall 2012, according to the town.
“(The lenders) are trying to understand: Are they throwing good money after bad, or is this a wise investment that should continue?” Tarte said. “Everybody's trying to figure out what's the best path to a successful outcome, who needs to be at the table, who needs to be part of the team to optimize the likelihood of success.”
Josh Rector, senior vice president of Cornelius Bromont, said in a written response to questions that his company is negotiating with lenders for “restructure and capitalization of the project.”
He said there were no planned changes for the project, which includes condos starting at $350,000.
“We remain optimistic,” he said when asked if the project would move forward.
The Augustalee project also involves major road projects that taxpayers would ultimately be paid for. The developers have promised to pay $90 million upfront for road improvements, including widening a section of I-77 and creating a new exit, Exit 27, at Westmoreland Road. They would be paid back through a portion of new property taxes generated by the development. None of that work has started.
The foreclosure was triggered when the developers failed to meet loan terms requiring them to lease a significant amount of office space in the first speculative building, according to Rector and Tarte.
Charlotte attorney Rick Mitchell said defaults in which borrowers make mortgage payments but fail to meet specific requirements are on the rise among developers. That's partly because lenders are asking for more milestones to be met to better protect themselves. Developers, meanwhile, are struggling to sell homes and lease commercial and retail space during a recession that has boosted unemployment rates to new highs.
While the U.S. economy as a whole has shown some signs of improvement, the commercial markets remain mired in lackluster sales and slow leasing activity. And financing is difficult to obtain. The Charlotte-area office and retail markets are expected to drag for at least another year. Office vacancy rates are rising; rents falling.
Though defaults are on the rise, lenders aren't foreclosing often, said attorney Chip Ford, head of the insolvency and restructuring group at Parker Poe Adams & Bernstein.
In the past, lenders were content to let borrowers find alternative financing, Ford said. But as financing dries up, lenders don't want to take over properties, so they are helping borrowers cobble together enough financing to make some payment. And then they wait, hoping the economy improves, he said.
The BUILD Fund, in its letter to the mayor, said it was looking for “alternative public financing sources,” and will seek additional equity financing from investors and developers with experience in similar projects.
Staff writer Joe Marusak and staff researcher Maria David contributed.