Nashville Business Journal
Friday, June 26, 2009
Taking control: Nashville lawyer works to turn troubled condo projects into cash
When condo development dreams are shattered, Nashville’s courts have turned to one man to pick up and sell off the pieces.
So far this year, John Cheadle Jr. has been appointed receiver of three major luxury condominium projects: 5th & Main in East Nashville, The Braxton in Ashland City and, most recently, Rolling Mill Hill in downtown Nashville.
Combined, those projects have more than 300 units and are valued at more than $135 million. Turning that value into actual cash is what Cheadle’s job is all about.
It’s important to get the right person in charge of a project gone bad, says attorney James Kelley of Neal and Harwell PLC.
"They need to be trustworthy, because they’re obviously looking after a rather substantial asset," says Kelley, who is representing Bank of America, the lender for the Braxton and Rolling Mill Hill projects, in the receivership claims.
Beyond that, a receiver has to have the flexibility and amicable personality to deal with all parties involved in a project, including tenants, creditors and contractors, Kelley says. Cheadle's track record of success stretching back more than two decades is what often makes him the receiver of choice for bankers, he says.
"He’s a person that everybody has confidence will do the right thing," he says.
Nashville — like many U.S. markets — saw a boom of new condo developments in the mid-2000s, with thousands of high-end units hitting the market, particularly in the downtown and Midtown areas. Earlier projects sold out, but those that have come on line in the past year have had trouble closing sales — even those that were under contract because buyers got cold feet and banks restricted mortgage lending for condos.
"There’s clearly a lot of that business out there," says Cheadle, a lawyer who represents creditors in his "day job."
Cheadle now is in control of more Nashville condos than anyone except 12th Avenue Ventures, the partnership between Franklin-based Bristol Development Group and Jay Turner’s MarketStreet Enterprises, which developed the Icon and Velocity condos in the Gulch neighborhood. The developers still have about 280 Icon units for sale, and Velocity has delayed opening its 265 units.
The 55-year-old Cheadle is modest about his role in charge of the prominent and troubled developments.
"My job is as an administrator," he says. "We hire people to do the heavy lifting."
A receiver is a court-appointed manager of an asset, who generally steps in after a borrower has defaulted on a loan secured by the asset.
For instance, the Rolling Mill Hill developers had more than $20 million in outstanding development loans, and when they failed to pay the property’s mortgage note (or even its water bill) for several months this year, the lenders sued to install Cheadle as receiver.
In the case of real estate assets, the goals are usually "get through it as quickly as possible and look for a way to liquidate the asset as successfully as possible," Cheadle says.
Cheadle graduated from the Vanderbilt University Law School in 1978, going to work for his family’s law firm. John Cheadle Sr. was a Nashville attorney, along with the younger Cheadle’s brother and sister, who all practice together at Cheadle | Law. The elder Cheadle had been a receiver as well and occasionally took his son to work with him.
A receiver has to anticipate future problems in an often unfamiliar field, says John McLemore, a Nashville lawyer often named as receiver by the courts.
"Even if you don’t know what’s going on in the business, you’ve got to learn it, and you’ve got to get capable people, and you’ve got to have the authority to hire those people," McLemore says.
Unlike bankruptcies, receiverships aren’t well defined by law, so individual filings lay out what receivers can and can’t do, McLemore says.
A receiver has to make sure the court gives him enough power to take care of everything needed in the first order, to avoid conflicts and more litigation later, McLemore says. That ranges from the power to use rent money to pay the electric bill to the authority to sell off parts of an asset and hire or fire employees.
A receiver takes center stage in an existing situation that generally has a long and troubled history, Cheadle says.
"You’re stepping in as a receiver to an enterprise that has usually been the subject of a whole lot of investment — emotional capital, time, not to mention monetary capital — by your predecessors, the prior owners," he says.
It’s vital to delegate — whether that’s finding somebody new to oversee leasing or tapping an existing employee to keep answering the phone at a business, Cheadle says. One of the most difficult parts is determining which staff should stay and which should go, he says.
"I’ve had receiverships where we’ve kept on the entire management staff at the same salary as before," he says. "I’ve also had the more common situation, where we have to go in and fire everyone and start from scratch."
With a wry sense of humor, Cheadle has an eye for numbers as he works through the details of making an asset produce. Administering the projects gives him the opportunity to step into the shoes of an entrepreneur, he says.
"It’s a vicarious thrill," he says. "Most business lawyers are risk-adverse, relatively dull, not adventurous like the venture business people."
The condo projects that he’s taken over all have high-end living units, but the owners couldn’t make the numbers work with the slow pace of sales in today’s credit-crunched economy, Cheadle says.
"All of these have been dropped on the market at probably one of the worst economic times that I’ve seen," he says.
That said, Cheadle sees a lot of value in the buildings, which were all complete before he was appointed receiver though few if any units have sold.
At 5th & Main, the plan is to sell the units individually and lease those that can't be sold immediately. At Rolling Mill Hill and the Braxton, it’s possible Cheadle will find a single buyer to take over the projects.
"They’re pretty impressive results that are sitting there on the landscape that before were pieces of dirt," he says.
As the rocky real estate market has landed three prominent condo projects in court, receiver John Cheadle Jr. has control of more than 300 units valued at more than $135 million.
5th & Main
Location: East Nashville
Condo units: 129
Estimated cost of development: $50 million
Completed: September 2008
Receiver appointed: January 2009
Location: Ashland City
Condo Units: 136
Estimated cost of development: $60 million
Completed: Late 2008
Receiver appointed: May 2009
Rolling Mill Hill
Location: Downtown Nashville
Condo Units: 72
Estimated cost of development: $24 million to $55 million
Completed: April 2009
Receiver appointed: June 2009
Nashville Business Journal
Friday, June 26, 2009
Receiver offers 5th & Main condos at deep discounts
East Nashville’s 5th & Main condos, the first to fall into receivership since the downtown building boom, is ready to unload its 125 remaining units by slashing prices.
"I really do feel like it's a Phoenix rising from the ashes," says John Cheadle Jr., the court-appointed receiver overseeing administration of the project.
The 5th & Main condos went into receivership in January when lender Wachovia Bank seized control from the developer, Nashville nonprofit Affordable Housing Resources. Since that time, two other condominium projects have met the same fate, the Braxton in Ashland City and Rolling Mill Hill just south of downtown.
Cheadle says the 5th & Main units will be priced at 25 percent less than the original asking prices for the first buyers. The bank hopes to increase the prices as the building fills up, but Cheadle says he’s not sure by how much given the
weak market for condos.
"Even at 25 percent discount for the rest of the project, that would be a relatively reasonable return to the lender,"
The $47 million mixed-use project was touted as a gateway into East Nashville, intended to spur investment in the Main Street corridor. But only four of 129 units had sold before the project went into receivership.
Its developers had a $36 million outstanding construction loan when it went into default, says Eddie Latimer, CEO of Affordable Housing Resources.
Cheadle says selling the units as condos is the path that will get the most money back for Wachovia. Still, units also are being offered for lease.
The mostly vacant property is coming back to life. A new property management company, Freeman Webb Co., has cut the grass, washed the windows and rehired Soloman Builders to complete the interiors of some units that were never finished.
Mark Deutschmann, owner of Village Real Estate, will be marketing the units for the bank, opening an on-site sales center in the coming week. He says the first 25 buyers will get "strong incentives."
The project had about 100 pre-construction contracts with potential buyers before the receivership, but most of the units are now available for sale.
"Banks are positioned to offer a better deal," Deutschmann says. "They have incentive to get the project sold."
The units range from $149,900 — units set aside for lower-income buyers — to the $542,000 penthouse. The 5th & Main units are larger than other downtown condos, ranging from 785 square feet to a 2,600 square feet.
The condos and townhomes are situated around a central courtyard with a 250-space underground parking garage. The posh units have dark wood modern kitchen cabinets, tile showers, floor-to-ceiling windows and concrete floors.
Deutschmann says the size, price and green features of the building will help them sell. The building was built to the U.S. Green Building Council’s LEED standards.
Real estate agent Grant Hammond has been polling potential condo buyers, asking if they’d consider a purchase at 5th & Main despite its troubles. Many said they wouldn’t, calling the project a failure, he says.
But Hammond points to other developments like the swanky Governor’s Club in Brentwood that have faced foreclosure and a change in developer in their past yet still succeeded.
Hammond says he has a handful of interested buyers — both investors and those who plan to live in the building — given the steep discounts.
"The stigma is very short lasting in that it will have absolutely no long-term effects on the value of the building," Hammond says. "It didn’t go into receivership because of construction flaws. The only issue was the developer got caught by the economy."
Affordable Housing Resources, which has been developing affordable housing communities in Middle Tennessee for 20 years, launched 5th & Main after community leaders pushed for revitalization in East Nashville, Latimer says. Construction began in 2007.
Land adjacent to 5th & Main was planned for more development. Latimer says he believes those phases will be completed when the economy recovers.
"We’re very pleased to see the bank is going to allow the project to move forward," he says. "It's been a long eight to nine month delay."
Two restaurants, Otter's Chicken Tenders and Allium, occupy part of 5th & Main’s 30,000 square feet of retail and office space. Otter's opened in September and Allium opened a few months later.
The bank chose Freeman Webb to handle the commercial leasing for the property. Dan Ford, property management director for Freeman, says the project has about 20,000 square feet available for lease including 10,000 square feet of second and third floor office space.
Since his firm took over the leasing June 1, Ford says he’s getting interest in the location.
Wall Street Journal
Receivers' Catch: Foreclosures Banks Pass Wind-Down Work to Court-Appointed Pros
Some banks are starting to bypass foreclosure on large, troubled real-estate developments and instead are throwing the properties into receivership, a move intended to reduce some of the headaches associated with taking over problem assets.
When banks foreclose on delinquent borrowers, they often plan to sell the property to new owners. But while holding the properties, banks are required to maintain them and pay all fees and taxes associated with the real estate. In some towns, banks that hold foreclosed residential property may be fined as much as $1,000 a day for code violations or even be subject to arrest.
As banks look to avoid the hassles of the foreclosures process, receivers are gaining a more-prominent role. Here, a development in Peyton, Colo., that has languished unfinished since WL Homes filed for bankruptcy.
To avoid those hassles, some banks are asking courts to appoint receivers for large projects, especially residential developments in California, Arizona, Colorado and other Western states. The aim is to have the receiver, not the bank, eventually sell the property. By keeping the bank's name off the title of the property, the bank hopes to stay out of trouble with the law.
"The fact is we are seeing a number of banks that don't want to get in the chain of title," says Douglas Wilson, a receiver in San Diego. He and other receivers report that business is booming. A trade association, the California Receivers Forum, has seen its membership increase to 550 today from 300 in 2007.
Banks have long used receivers to work with properties owned by borrowers in default, but their role was typically making sure utilities stayed on and thieves and squatters stayed out. Now, some banks are expanding the role of receivers by hiring them to also ready properties for sale and to handle dispositions.
"They're putting in receivers with much more proactive roles -- not just collecting money" from tenants, Mr. Wilson says. And since receivers are officers of the court, they can get some things done more quickly, such as getting permits or hiring contractors.
The cost of hiring a receiver can be a drawback. Receivers are paid with creditor funds -- sometimes at great cost. In addition to hourly rates starting around $250, receivers employ staffs of their own and may choose to hire on-site property managers or contractors to complete developments. Dozens may be needed for larger projects.
Hiring a receiver to sell a property also means that banks relinquish some control over the sale prices, although courts often work with banks to set minimum amounts. In addition, banks have more control over proceeds from a sale in a foreclosure than they do when a receiver sells them. Spokesmen for Citigroup Inc. and GMAC LLC said they don't use receiverships often because of the expense.
But Wells Fargo & Co. and Bank of America Corp. are giving lots of new work to receivers, according to industry participants. Wells Fargo declined to make anyone available for comment, but a Bank of America spokeswoman said the bank uses receivership because it is efficient and avoids disputes among multiple creditors.
The bankruptcy of WL Homes LLC exemplifies the trend. The company, parent of John Laing Homes, was one of the West Coast's biggest home builders during the real-estate boom. But after its Dubai-based owner, Emaar Properties PJSC, cut off funding, it filed for Chapter 11 bankruptcy-court protection in February, then Chapter 7 liquidation in June.
After the bankruptcy, Bank of America found itself with collateral comprising 31 separate assets in 19 locations across California, Arizona and Colorado from one $130 million loan. The properties ranged from raw land to partially completed developments to half-filled condominium buildings, meaning the bank would have to deal with everything from hiring contractors to wrangling with upset and cash-strapped homeowners' associations if it foreclosed.
And by taking the title on the building, Bank of America could be liable for any construction defects for a decade in California or for any injuries on unsecured construction sites.
Rather than deal with the litany of issues, Bank of America turned to Taylor B. Grant, a veteran real-estate receiver based in Newport Beach, Calif.
"It is extremely complicated," Mr. Grant says. But he adds: "Anything that we've seen, we've seen before."
Since his June 10 appointment, Mr. Grant has visited the properties and hired asset managers, and is deciding how to dispose of the holdings.
Some tasks are mundane, like making sure fire alarms and security systems have power connected. Otherwise, he says, "on Friday they strip the copper, and Monday it's a meth lab."
He also will begin deciding whether he can get a better value from hiring contractors to finish partially completed homes or from tearing them down and selling vacant lots. After that, he will be able to sell the properties and distribute proceeds proportionally among creditors.
Nashville Business Journal
Friday, August 21, 2009
Rolling Mill Hill may go rental
Out-of-state developers are eyeing the three empty condominium buildings at Rolling Mill Hill, looking at the units as possible apartments instead.
The 72 condos south of downtown have been in receivership since early June when property owner RMH Development 1 LLC, a Wisconsin-based holding company for the project's investors, defaulted on a $21.4 million construction loan. The units are finished, but none have been sold.
Receiver John Cheadle says some heavy hitters are looking at the property: The Lionstone Group, a real estate investment firm in Houston, The Tuckerman Group headquartered in New York and a New Orleans firm he wouldn't name. Local developers also have been shown around the property.
Cheadle says the investors are interested in buying the entire condo project and have been hinting at renting the units until the condo market rebounds.
That's probably the right strategy, says developer Ray Hensler, who built the Adelicia condos in West End.
"It's a great location, and I think theyâ??ll lease up pretty quick," he says. "... But from the standpoint of valuation, the eventual pricing from that trade may turn some heads. Right now, everyoneâ??s still guessing about what a new condo project here might be worth as an apartment."
Yet, the city also is planning apartments next door.
The Metropolitan Development and Housing Agency is planning to break ground in October on Nance Place, a 109-unit apartment building at Rolling Mill Hill that will be gold certified under the U.S. Green Building Council, says Joe Cain, development director for MDHA.
The 34-acre Rolling Mill Hill is being redeveloped through a public-private partnership between the city and select developers. MDHA has invested $10 million into the project over the past six years. Plans call for a mixed-use community, but a timetable for complete buildout remains uncertain.
Direct Development out of Green Bay, Wisc., was acting as developer for RMH but is no longer involved with the project. Direct had planned a $55 million project with four condo buildings on the site of the old Nashville General Hospital but canceled plans for a 10-story building called The District last year, citing the sluggish economy.
MDHA just approved a contract to move forward with contamination removal at the trolley barn site, which the city agency hopes to transform into offices and shops. That property was used for vehicle maintenance, and the city is working with the Environmental Protection Agency to clean it up. The agency also is seeking bids for a third phase to add sidewalks, a greenway and improvements along Hermitage Avenue.
MDHA wants to see people moving into Rolling Mill Hill, as renters or buyers. If the condos become apartments, Cain says, it won't affect the construction of Nance Place because that building is aimed at workforce housing for people with household incomes less than $50,000 a year. The upscale condos likely would have higher rents.
"Those units are ready for occupancy, ready for folks to move in, and the greenway will be under construction for residents to enjoy the overlook," Cain says.
The condos remain vacant, sitting quietly with panoramic views of the Cumberland River inside the brick Victorian architecture of the old hospital. All units have stainless steel appliances, granite countertops and modern cabinets.
RMH built three of the five residential buildings planned for Rolling Mill Hill. Two are renovated buildings, the Victorian with 12 units and the Art Deco building with 24 units. The Metro building is new construction and is the largest at 36 units. The nine-unit Powerhouse and 92-unit District were never built, but could be added by a new developer.
Condos had been priced between $230,000 and $680,000, with some affordable units priced at $139,000 for buyers meeting income qualifications.
The $10 million Nance Place, funded through the state's Housing Development Agency, will take 12 to 14 months to build. In the meantime, MDHA is working to get federal grants to pay for the $8 million greenway, and the agency hopes to get historic tax credits to complete the $10 million to $15 million renovation of the 1930s-era trolley barns. The Matthews Co. in Nashville will be the developer on the barns, but no timeline has been set. MDHA is working to get the barns on the National Register of Historic Places.
A 2003 feasibility study by Economic Research Associates found enough demand for 100 to 200 units per year at Rolling Mill Hill. A master plan based on the study calls for 34 acres of mostly residential use but also office and retail space. Cain says the master plan may include too much residential space and will be re-evaluated based on the rough economic conditions.
In its master plan and guidelines set out for MDHA in 2003, RTKL Associates Inc. says a high-quality urban neighborhood could be created at the site, but phase one of the project must be an overwhelming success.
"Rolling Mill Hill must be quickly established as a premier urban neighborhood location in Nashville, with prices and rents at or near the top of the market," the study reads.
RMH and Direct aren't the first developers to bail on the project.
Baltimore-based Struever Bros. Eccles & Rouse had eyed the site of the former Thermal Transfer Corp. plant and Rolling Mill Hill on the west bank for a major mixed-use project. Plans called for 214 condos, a 224,000-square-foot office building and up to 50,000 square feet of retail. But Struever pulled out of Nashville and has not announced any future plans.