A Valley Farms model apartment.

It may be that 2010 is remembered as the “Year of Foreclosure,” the year so many bad deals reached the bitter end of the legal process across the United State after the housing bubble bursting.

In Louisville, 2010 is going out with a bang.

Another in a series of giant apartment complexes is scheduled to go to the foreclosure auction, at least the fourth to go on the Jefferson Circuit Court foreclosure docket in 2010, though it won’t be auctioned till February.

Valley Farms, 160 apartment units in 10 buildings off Valley Station Drive and Dixie Highway, is scheduled to be auctioned February 1. The amount to be recovered by the lender is $14.82 million, according to Jefferson Circuit Court records.

The lender is Wrightwood Capital Lender, a large, Chicago-based private equity firm.

Now, here’s the really scary bit: Valley Farms is one of dozens of major foreclosures in Louisville during 2010 that ranged from subdivisions to hotels to strip shopping centers to entire rental home portfolios held by fairly well capitalized, fairly sophisticated local investors.

Oh, and don’t forget all the homes developers lost, homes they’d put up as collateral.

My guestimate on the value of these deals in aggregate is way north of $300 million, and that’s a lot of money in city as small as Louisville.

In a way, Valley Farms is emblematic of the whole year, and the commercial foreclosure phenomenon.

The apartment complex was developed in 2006. Large real estate deals go through a series of financing steps from development funding – most of which gets rolled into a construction loan – on the way to permanent financing.

But many multimillion dollar projects that needed to jump to final financing – or saw loans called – in the middle of the financial crisis, ended up being foreclosed because they couldn’t get new financing after inflated market values started plunging.

Longtime developer Donald Cook, who owns Louisville-based Renaissance Development Consultants with his wife Linda Cook, said that in 2009, Wrightwood refused to renegotiate the non-recourse loan he had on Valley Farms unless he agreed to “onerous terms.”

A non-recourse loan means the Cooks’ only collateral in the deal was Valley Farms itself, and that the lender couldn’t go after their personal wealth to make up the difference if the value of the property decreased.

The original note was for $13.43 million, according to court documents.

Those new terms included a 1-year extension, with Wrightwood Capital offering to lend $2 million less than in the original deal at a much higher interest rate.

“All the attorneys looked at it, and no one recommended that we do it,” Cook said. He added that he didn’t have sufficient time to find new financing. All the banks had stopped lending to real estate developers.

“So, I said, ‘To hell with it,’ and I gave them the property.”

Wrightwood Capital executives did not return calls for comment.

Cook asserts that Renaissance was current on the loan at the time Wrightwood Capital called it, and that Valley Farms was more than 90-percent rented. Court documents tend to bear him out.

In a foreclosure suit, typically a running record of mortgage payments made or missed payments is introduced as evidence, but not in the Valley Farms case.

And the latest 30-day executive summary to the court, dated August 2010, court-appointed property manager PMR Companies LLC, based in Louisville, reported that that Valley Farms occupancy was about 98 percent. The complex generated a net operating income of $82,000 for the year so far, according to the summary.

Yet no one has bought the complex in a short sale – a negotiated sale in advance of the foreclosure auction.

Valley Farms is the second property Cook lost this year.

Renaissance at St. Andrews Apartments was auctioned July 6, with the lender, Wachovia Bank, now part of Wells Fargo, taking back the property.

The amount to be recovered for the 216-unit complex at 3311 Renwood Blvd., was about $16 million, including fees added in the loan default, according to court records.

At the time, I interviewed Cook for Business First, and the story was very similar

Cook developed Renaissance at St. Andrews in 2000 and 2001.

In 2007, RSA LLC, a partnership Cook put together with some of the biggest names in Louisville real estate, signed a promissory note as interim financing as they paid off a construction loan on the way to permanent financing.

At the time, interest rates were comparably high, so the investors decided to bide their time for a couple of years with an 80-percent loan-to-value loan in order to get more favorable interest rates on permanent financing.

RSA borrowed $15.25 million from Wachovia on a promissory note in September 2007, a note that was amended on May 22, 2008. Even though again, the group never missed a payment, Wachovia declined to extend credit on a promissory note that was due on Oct. 1, 2009, according to court documents.

Wachovia executives sought a default judgment on Oct. 14 for $13.13 million plus fees and fines.

Prior to the loan maturing, RSA partners discussed extending the loan with bank officials, Cook told me earlier this year.

Instead, Wachovia demanded repayment in full — a turn of events Cook and his partners had not expected.

RSA filed a response in Circuit Court stating that “Wachovia has pulled the rug out from under RSA by declaring a performing loan in default.”

So, with Valley Farms and Renaissance at St. Andrews, that’s more than $30 million in two deals.

Don’t get me wrong – it wasn’t always the lenders. A lot of deals went bad because banks, developers, retailers and home buyers got greedy. But a fair amount went bad just because of pure timing, and that’s a shame.

As we know, an element of capitalism – and we at Insider Louisville are unapologetic capitalists – is creative destruction.

The question as we get into 2011 is, will it get any better? How will all this turn out?

And what, if anything, will we learn?

Terry Boyd
Terry Boyd has seven years experience as a business/finance journalist, and eight years a military reporter with European Stars and Stripes. As a banking and finance reporter at Business First, Boyd dealt directly with the most influential executives and financiers in Louisville.

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