NREI Readers Write

Construction Projects Becoming Collateral Damage in Bank Failures

By Edward Kalikow


The Kalikow Group

A growing number of well-conceived, quality construction projects across the nation are becoming collateral damage as successor banks struggle to handle the volume of loans they acquire when taking over the assets of failed banks from the FDIC. Experienced developers who have enjoyed long-term relationships with these failed institutions often find themselves cut off from funding with nowhere to turn as some successor banks show little interest in negotiating with these borrowers and instead move toward foreclosure and rely on shared loss agreements with the FDIC to wipe these loans from their books.

The Kalikow Group is a family-owned real estate development, investment and management company offering the highest standards in the industry for more than 85 years, including residential and retail development; equity and joint venture financing and full-service real estate management services. In this capacity our firm has been involved in scores of residential, commercial, health care and retail projects throughout the U.S., with a focus in the Northeast, Southeast and Texas.

In 2008, we entered into a joint venture to develop a 45-acre retirement community in Hillsborough, NC that would include a 230-unit continuing care campus that included a Duke University Health System wellness center. We had a contract to deliver a pad-ready site to a major, local developer of continuing care retirement communities (CCRC).

By 2009 we were nearly 75 percent complete with the infrastructure construction at the site when our lender, Colonial Bank, with whom we had a long-standing and productive relationship, suddenly went silent and stopped funding the construction loan. Despite assurances from our contacts at the bank that these obligations would be funded, months went by and the bank eventually was closed by the FDIC. In the interim, we were unable to pay the contractor for the remainder of the infrastructure work and therefore unable to deliver the site to the CCRC buyer, who cancelled their contract with us.

The successor bank, BB&T, which acquired the assets and obligations of Colonial from the FDIC, refused to fund the balance of the loan or honor verbal commitments the failed bank had made. Instead, BB&T almost immediately moved to foreclose on the loan. Their actions not only prevented the Hillsborough community from obtaining a much needed retirement community for the area's aging population, but killed hundreds of construction and permanent jobs the development would have generated.

To make matters worse, BB&T was a hometown North Carolina based bank, unlike the original lender.

Recently, in our case of “first impression” in the North Carolina courts, a judge ruled that BB&T could be sued by us or a breach of contract action in refusing to fund the balance of the line item in the Colonial loan for infrastructure work. The damages, however, were not resolved since that exposure laid buried in the Shared Loss agreement between the FDIC and BB&T. We were left with a busted construction job and a cancelled buyer's contract through no fault of our own.

And we are not alone. Currently nearly $100 billion in construction loans are held by banks that are on an industry watchlist for failure. If these banks follow the BB&T example, scores of viable construction projects will be halted as banks foreclose on quality developers for no other reason than lacking the staff to deal with these obligations and preferring to go the easy route – safe in the knowledge that they are protected from significant loss by their Shared Loss agreements with the FDIC.

In the case of BB&T, that means they are covered for up to 80 percent of any losses incurred up to $5 billion on the assets of Colonial they acquired. Above $5 billion, they are covered for 95 percent of their losses. Given this arrangement, successor banks have little motivation to negotiate with the borrowers they inherit.

In this age of bank bail-outs, it begs the question, who will bail out the developers whose projects actually create jobs both during and after construction is complete?

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