Wachovia's mounting troubles caused by bad loans and the housing market's collapse have reached Nashville's condominium development community.

Several developers in court with Wachovia Bank

Wachovia's mounting troubles caused by bad loans and the housing market's collapse have reached Nashville's condominium development community.

There's been a buzz in development circles that the group building the East Nashville development 5th & Main has tangled with Wachovia for the past few months over the sale of almost a third of the project’s 118 units and 11 townhomes.

Wachovia apparently won't let the developer, an affiliate of Affordable Housing Resources, close on the units, fearing that the bank will end up owning unsold units and essentially becoming partners with the condo owners. Banks don't like that because they will then have carrying costs and will need to deal with a homeowners’ association.

The result: Wachovia has put 5th & Main in default of its $24 million construction loan. A separate loan for the construction of 19,000 square feet of retail space that involves using "New Market" tax credits is unaffected.

Wachovia and the developer have been negotiating an extension and a resolution apparently is close at hand.

Still, it seems that Wachovia, which is being bought by Wells Fargo, has decided to tighten the reins to stem losses or stave off what it sees as future liabilities. That's a bit ironic since the bank got into its current mess by issuing gobs of residential mortgages that are now going bad.

The squabble over 5th & Main isn't the only local issue Wachovia’s lenders are having to handle. Developer Tony Giarratana recently reached a deal with Wachovia to extend the land loan for his proposed Signature Tower downtown. But there's no telling what he had to pledge to make that happen.

And while the proposed West End Summit is heavier on office space and hotel rooms than condos, Wachovia at some point will be standing at developer Alex Palmer's door — if it isn’t already. Talk is that Palmer — who has been sued by a subcontractor accusing nonpayment and is believed to owe his general contractor money — has been trying to find investors to bail him out of the hole in the ground on West End.

The deed of trust on the property shows Palmer owes Wachovia $21.5 million. He may have more than that invested in the site but the property's value is less than that. Someone coming in and repositioning the property would have to spend a hefty sum to fill in the hole to make banking the land an option.

The plight of 5th & Main is emblematic of the troubles Wachovia is having across the country. In Virginia Beach, Va., the bank last month sued a developer to recover $5 million for a 20-unit condo development. Of the planned units, 15 were built and 10 sold, according to The Virginian-Pilot. Wachovia put the project in default in August.

The bank got into a legal battle with a Tampa developer in March over a $52.4 million construction loan. The developer countersued in July with a lender-liability lawsuit to stave off foreclosure. The developer claims the bank acted in bad faith by cutting off loan draws, effectively preventing the project from being completed. Industry experts expect these types of lawsuits to increase.

A legal battle hasn't erupted with 5th & Main. Wachovia initially wanted Affordable Housing Resources to lease its units, seeing that as a better way to get paid. The bank has been doing this in other states, primarily Florida. But AHR pushed for selling them because leasing would be difficult given the custom features of many of the units.

Wachovia representatives, who are based in Jacksonville, Fla., had never come to Nashville to see the project. Apparently, it was a challenge to get them here — or to even get their attention — since the bank is dealing with billions in loans across the country. Once they did get here and saw the project, the Wachovians agreed leasing wasn't the best option.

In a certain respect, this situation and others are reminding some of the Resolution Trust Corp. and the late 1980s, when properties sold for pennies on the dollar. Some developers don't think the local condo market is near collapse as it was then or as it is in Florida or Las Vegas. The market has pulled back for sure, but developers say units can still sell. Other market players say Nashville's urban market is overblown and see serious trouble on the horizon.

Next year, we all should know who is right and who is wrong — and just how many people will be living in 5th & Main.

Original story - NashvilleCityPaper.com