America's Newest Land Baron: FDIC
By Michael M. Phillips
The Wall Street Journal
November 17, 2009
In the waning days of the Great Recession, the federal government is still jumpstarting the economy and propping up financial markets.
It is also trying to sell Dresden Heights, a failed condo development on a noisy freeway ramp next to a Motel 6, a Waffle House and a Do-It-Yourself Pest Control.
For more than a year, the Federal Deposit Insurance Corp. has been seeking a buyer for 36 partially built condos it inherited from a high-flying, short-lived Atlanta bank. The agency has been fending off vandals, haggling with architects and uncovering the developer's blunders, all in a bid to dispose of this condo project, just one of the 2,554 foreclosed assets dumped onto its books. "These are properties with a bad story," says Jim Gallagher, a senior official in the FDIC's Division of Resolutions and Receiverships. "What we're trying to sell is something that is rundown or not completed or has some property damage."
The financial crisis started with Americans buying homes they couldn't afford. It is ending with the government struggling to sell buildings it never wanted.
In the past two years, the FDIC has taken over 150 failed banks. In the process, it has seized more than 5,000 houses, subdivisions, buildings, parcels and other foreclosed assets. The current backlog of property stuck on the agency's books, with an appraised value of $1.8 billion, ranges from an $18,700 clapboard home with stained carpets in Birmingham, Ala., to a $1.7 million mountainside lodge with a heated driveway in Steamboat Springs, Colo.
Taxpayers will be grappling with this flotsam for years to come, one example of how the crisis will linger long after the economy begins to revive. At a recent FDIC auction in Atlanta, the agency offered a four-unit condo building it had already sold once before -- after the savings-and-loan crisis two decades ago.
These days, it takes the FDIC on average six to eight months to sell a property. Dresden Heights, tied up with unpaid bills, a lawsuit and complex right-of-way questions, is among its toughest prospects.
The project was the brainchild of Quantum Homes and its chief executive, Ramsey "Jim" Salahat. In March 2006, just as Atlanta's housing market was peaking, Mr. Salahat took out a $3.78 million, 18-month loan from Main Street Bank in Covington, Ga., to purchase and prepare 5.3 acres abutting an interstate entrance ramp.
The developers brought in a crane, knocked down soaring oak trees, installed sewers and laid out two short roads, Heights Way and Quantum Lane. They planned 80 residential units and seven buildings.
At the groundbreaking in May 2007, Mr. Salahat and Quantum President Eyal Livnat posed for photos, wearing white hardhats and digging red Georgia soil with shovels festooned in blue ribbons. They threw a cocktail party, serving wine, roast beef, quiche and cookies.
"Future homebuyers are quickly reserving space at Dresden Heights...so interested homebuyers should act fast to ensure they have a home at this great community," Mr. Salahat said in a news release afterwards.
The release quoted Deanna Helie, a "prospective home buyer" who attended the event, as saying: "When this area begins to grow, I want to be in on that growth at an early point."
Ms. Helie, who lives adjacent to the Dresden Heights property, said she was talking about the neighborhood only, and stopped by out of curiosity, not to shop. She wondered about the wisdom of building homes next to a pest-control outlet. "I was thinking, 'This isn't going to fly,'" said Ms. Helie, a computer programmer.
A few days after the groundbreaking, Mr. Livnat signed a two-year, $6.75 million loan from Alpha Bank & Trust, a startup bank in nearby Alpharetta, Ga., to finance construction of the first three buildings. Two dozen customers, most of them first-time home buyers, put down $500 to $1,000 deposits on the condos, which started at $194,900. The developers told the early buyers they would likely be able to move in within a year, according to Kristy Jeffries, who at the time was Quantum's saleswoman.
In early 2008, work on the project slowed, Ms. Jeffries recalls. People started asking for their money back, "and the builders weren't giving it to them," she says. In her office, located in the basement of a model home, she started receiving calls from disgruntled subcontractors complaining they hadn't been paid. She says one unhappy supplier repossessed Quantum's construction trailer, which still contained file cabinets with records of potential buyers.
That spring, Mr. Salahat closed Quantum's headquarters in a lavish Atlanta office complex. He moved the company into a cramped, low-budget space behind a chiropractor's office outside of town, where Ms. Jeffries says she went for her paychecks.
The last time Ms. Jeffries saw Mr. Salahat was over a Tex-Mex meal in May 2008, when the developer told her the company was going bankrupt. Former associates say he has moved to Jordan. Neither they nor the FDIC could provide contact information. Mr. Salahat's listed phone numbers in the Atlanta area have been disconnected.
During a brief interview on his stoop, Mr. Livnat, Quantum's former president, declined to discuss details of the Dresden Heights project. "It was an unfortunate time to start a company," Mr. Livnat said. "Things were at a peak, and it went down quick." Mr. Livnat was skittish about answering the door, and he said he is worried the FDIC or creditors might come after him.
Alpha Bank foreclosed on the three partly finished buildings a year after Messrs. Salahat and Livnat broke ground. On May 6, 2008, a bank representative stood outside the Dekalb County courthouse and offered the property for sale. No one was willing to beat the bank's $4.692 million minimum. Alpha Bank now owned Dresden Heights.
The buildings sat exposed to rain, sun and wind through the summer of 2008, prompting bank officials to sign an agreement with McGuire Properties Inc., of Kennesaw, Ga., to finish construction. The company is run by George F. Nemchik, Jr., who was also an Alpha Bank shareholder, according to his attorney and Ms. Jeffries. Mr. Nemchik didn't return calls seeking comment.
Alpha Bank retained Ms. Jeffries to sell units. When she went to pick up her paycheck one day in October, a bank executive told her the lender was on the brink of collapse. He suggested the FDIC might want to keep her on as a sales agent for Dresden Heights. She demurred. "I think that property is cursed," she says now.
The American government came to own Dresden Heights on Friday, Oct. 24, 2008, about six weeks after the collapse of Lehman Bros. Georgia regulators closed Alpha Bank and turned it over to the FDIC. That weekend, Stearns Bank of St. Cloud, Minn., took over Alpha's branches. It acquired just $39 million of the $354 million in assets. The FDIC took possession of the rest, including Dresden Heights.
The FDIC inspector general's post-mortem blamed Alpha Bank's failure on "management's aggressive pursuit of asset growth concentrated in high risk" residential real-estate development and construction loans. Former Alpha Bank chief executive Joe Briner, now a consultant with a corporate-turnaround firm in Atlanta, didn't return calls seeking comment.
The FDIC wanted the property sold quickly, despite a series of obstacles, including hundreds of thousands of dollars in liens filed against Dresden Heights by building-material suppliers and McGuire Properties, the company that was finishing construction. If enforced by a court, any potential buyer would have to cover those bills before taking possession.
In January, the FDIC's outside property-management firm gave the listing to Atlanta real-estate broker Rob Jordan, a 40-year-old who had spent 10 years as a commercial banker before joining his father in the family firm. These days, Jordan Co. does virtually all of its business selling foreclosed commercial properties.
Mr. Jordan and his colleague, David Walmsley, pulled the county records on Alpha's construction loan, a routine step. They stopped cold at the surveyor's description of the property put up as collateral. "Said tract of land contains 6,776 square feet," the documents said of the first parcel. The other two parcels were similarly small.
Messrs. Jordan and Walmsley realized that Alpha Bank and now the federal government owned the three buildings and the land immediately beneath them -- but not an inch more. "What about the sidewalks? The stairs? The stoops?" asks Mr. Jordan. "They're all on someone else's property." The brokers checked with the county and confirmed that even the two small streets running through the subdivision belonged to someone else.
That someone else was BB&T Corp., a Winston-Salem, N.C., bank. BB&T had bought Main Street Bank, which made the original loan to Quantum that allowed the developer to buy the Dresden Heights land. When Quantum went bust, BB&T foreclosed on that land and put it up for sale for $1 million.
Rifling through court records, Messrs. Jordan and Walmsley discovered that Quantum had signed an easement allowing passage between the two properties. But it wasn't clear if the agreement would be legally binding on future owners.
The murky right-of-way made the sales job far more difficult. The FDIC would have to inform potential buyers there was no guarantee they could gain access to their property without trespassing. The brokers next sought to obtain the building plans, vital documents for anyone hoping to finish the development. In January, Mr. Jordan called Bill vonHedemann of Niles Bolton Associates, the principal architect on the project, to ask for copies. Mr. vonHedemann declined, politely. The developers, he said, owed his firm more than $60,000 in fees.
Anyone who wants the 85 or so computerized drawings will have to pay for them, he told Mr. Jordan. "We don't give the plans away," Mr. vonHedemann said in an interview.
Mr. Jordan didn't worry, initially. Alpha Bank should have had plans on file and regularly sent an agent to the site to check progress. But the brokers found no evidence Alpha had kept such records.
Meantime, the property was beginning to deteriorate. Over the winter, the outside pipes froze. In March, thieves broke into a model unit and stole the refrigerator, the range and the dishwasher. The FDIC boarded up the ground-floor windows on all of the townhouses, changed the locks, stowed the air conditioners in the garages and hired a full-time security service.
Messrs. Jordan and Walmsley fielded nearly a dozen offers, but none was close to the $2.8 million asking price. By May, the brokers worried the FDIC was shooting too high.
The FDIC ordered two new appraisals, a process that took almost five months. The brokers put off would-be bidders by saying the FDIC was undertaking "internal adjustments," an intentionally vague phrase intended to keep shoppers interested without responding to offers.
McGuire Properties, the company that had agreed to finish the Dresden Heights construction on behalf of Alpha Bank, dropped its liens on Aug. 17 in the face of a federal law making the FDIC immune to such claims. Instead, McGuire sued the FDIC in federal district court. McGuire contended that after seizing Alpha, the agency had directed the builder to continue work on the condos, and reneged on a promise to pay. The company demanded $653,014 plus interest.
In court filings, the FDIC denied the main allegations and asked the court to force McGuire to cover the government's legal costs. The two sides are in settlement talks. In September, the agency cut Dresden Heights's asking price 25%, to $2.1 million, and the brokers called the serious prospects.
One repeat bidder was 39-year-old Ho Hyun Chung. Mr. Chung moved from Seoul to the U.S. in 1996 to study business. He stayed to work for the U.S. cell-phone unit of LG Group, a South Korean conglomerate. Frequently up late on conference calls with headquarters, Mr. Chung became hooked on TV infomercials touting DVDs and books that promised riches through foreclosed real-estate. "I bought most of them," he says.
In 2007, as the real-estate market was tanking, Mr. Chung quit LG and started a business with his wife. Their niche: Buying unfinished foreclosed townhouses and completing them. He says he owns 42 units in 11 properties around the Atlanta area, including five townhouses he bought from the FDIC in December. He says he makes money on some, and loses on others.
Mr. Chung spotted Dresden Heights on the FDIC Web site. He liked that it was inside the perimeter beltway and near two universities.
He figured he could make a good return if he put no more than $1.5 million into finishing the project and then sold the units for $130,000 to $145,000 each, generating almost $5 million in gross revenue. It's a plan, he says, that depends heavily on the federal government's $8,000 first-time homebuyer tax credit. The credit, just extended by Congress, expires at the end of April. "If that goes, I don't know how the market will react," he says.
In October, almost a year after the FDIC seized Dresden Heights, the FDIC and Mr. Chung signed a sales contract giving him 30 days to conduct due diligence. Neither side would disclose the price.
Only then did Mr. Chung's lawyer notice that the FDIC's buildings were islands surrounded by BB&T's land. Mr. Chung acknowledges the FDIC disclosed the information, but says he "didn't quite understand" the problem until his lawyer raised it.
"I need to clean that up first," he says. He also wanted to make sure the person who buys the BB&T land signs an agreement that allows for the development and sale of the three buildings.
This month, he asked the FDIC for an extension on his 30-day contingency period. The FDIC turned him down, and the agreement expired.
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