Developers, businesses lose property to lenders in turbulent market

As Columbia’s building boom fades into memory, some speculative developers who entered the market too late – and the bankers who loaned them money – have had to accept that demand for their property is unlikely to rise in the near future.

The market stagnation has forced the developers to give back large tracts of land they borrowed against because they could no longer meet the payments.

New building permits are nowhere near what they were before 2006 as the market continues to absorb the excess inventory. And for the first time in years, land values are not expected to rise, further hurting speculative builders.

On top of that, banks feeling the effects of the global financial crisis are dealing with their second year of record foreclosure numbers in Boone County.

The 10 largest foreclosures and deeds in lieu of foreclosure include two businesses reeling from decreased consumer demand, along with historic mansion and a country estate. But most are tracts of undeveloped land.

A look at the largest land transfers to lenders in the last 15 months shows that while some property is being acquired by banks through the normal foreclosure process, other property, mostly undeveloped, is being deeded directly back to lenders.

Premier Bank, in particular, has acquired a number of undeveloped properties through its real estate holding company, PDIL, LLC, after lending to developers who only managed to develop portions of the land and have relinquished the rest. Of the 10 properties with the largest borrowing limits deeded back to lenders that the CBT could ascertain, Premier and its holding company now own six.

Premier Bank formed PDIL in March 2008 and has put 46 parcels of land in the subsidiary over the last eight months. Four of the largest transactions, all undeveloped land, have been warranty deeds directly from the developer to PDIL in lieu of foreclosure. Premier Bank’s Sept. 30 bank performance report filed with the FFIEC recorded more than $65 million in real estate owned. That’s up from $1.4 million at that time in 2007.

However, not all the property in the original deed of trust is being deeded back to Premier. The owners generally are keeping the developed portions while the undeveloped portions are being deeded to PDIL.

Steve Smith, Premier Bank’s Columbia market president, said he could not discuss specific transactions due to confidentiality agreements. But one of the reasons for using the subsidiary was that it makes the property easier to market, he said.

“The entity will probably be there a long time,” Smith said. “Whether there will be property in it, whether it will be active or not, probably depends on the economy as much as anything else.”

Missouri Banking Commissioner Eric McClure also said that putting real estate into a subsidiary can help with marketing the land by not having a bank’s name on the title. Jim Powell, an attorney who represents banks, said it’s uncommon in Boone County for community banks to put acquired real estate into holding companies.

“Oftentimes it boils down to how cooperative the borrowers are, and can we reach a resolution without having to resort to foreclosure?” Smith said. “If it’s obvious that the borrower can’t continue, then it’s a matter of, ‘Do we have to foreclose to take control of the property or are we able to work out other arrangements?’ Sometimes, particularly in a larger transaction, the customer is able to retain a portion of the property, and deeds a portion back to the lender.”

Smith said the real estate market is as slow as he’s seen it in over 20 years. He said Premier continues to be well capitalized, and that it will look at ways of maintaining adequate capital, including possibly applying for federal bailout money once rules are in place for privately owned banks. But he’s hopeful things will pick up in the spring, because “even a pessimist is more optimistic in the spring.”

Boone County National Bank has foreclosed on a couple of large properties, as well. They bought Procycle USA at auction this summer, two years after the owners, Jo and Allen Shernaman, reached a settlement with the Missouri Attorney General’s office in 2006 for alleged deceptive advertising. The Shernamen’s also had a lot they owned in the Eastport development foreclosed on in April by Central Bank of Missouri.

BCNB also acquired an undeveloped property on West Old Plank Road from Duffield Construction. The bank took the undeveloped land back directly. The bank’s director of marketing, Mary Wilkerson, said she only knows of two instances where BCNB has put land they acquired as part of a foreclosure settlement in a real estate company. When it did occur, it was usually with half-developed property that required more work in order to be marketable, she said.

FNB President Sabrina McDonnell said the bank does not currently have an active real estate holding company. As far as she can remember, the bank hasn’t used one since the 1980s, she said.