Sandler brothers take a deep hit from housing bust

SHALLOTTE, N.C.

L.M. Sandler & Sons Inc. arrived in this low-key hamlet between Myrtle Beach, S.C., and Wilmington, N.C., more than three years ago with ambitious plans.

The Virginia Beach firm, owned by brothers Steve and Art Sandler, wanted to double the size of Shallotte with a 2,400-home, lush, Caribbean-style development.

They built a grand sign to announce the San Rio community. They imported palm trees for the entrance way and laid out sidewalks and gutters along the picturesque banks of the Shallotte River.

Then, in the summer of 2008, everything stopped.

The construction crews left, and so did the sales staff.

Weeds cropped up. A builder started on the moss-green shell of the first house, a bungalow with a wide back porch, but stopped before constructing any rooms. Uninvited visitors crept into the orange observation tower and left behind food wrappers.

The Sandlers’ San Rio project got swept away when the real estate market collapsed.

Scores of nascent housing developments have been abandoned across the country, and many developers and homeowners are underwater on their bank loans. The Sandlers are prominent examples in the region of the effects of the housing meltdown and economic crisis.

A homeowner with an upside-down mortgage might owe banks $300,000 on a home that’s now worth much less. L.M. Sandler & Sons and its many subsidiaries had bank loans totaling at least $1 billion in 2008, according to a search of court documents. A source close to the negotiations between the Sandlers and the banks said the debt is significantly more.

“These guys are dealing with humongous numbers,” said Richard Doummar, a local attorney who represents several contractors who worked on the Sandlers’ Ashville Park project in Virginia Beach and haven’t been paid.

The company’s exact financial situation is difficult to ascertain. Bank representatives declined to comment, as did several of L.M. Sandler & Sons’ partners who still have investments with the brothers.

Numerous calls to L.M. Sandler & Sons officials and messages left through their attorneys were not returned. Steve and Art Sandler , who were reserved during the boom times, have become even more private in the past year.

T he company has shed several of its key employees. More than a dozen of its more upscale projects in North Carolina, Maryland, Florida, N orthern Virginia and even in Virginia Beach have stalled.

Court documents indicate that banks have slowly been foreclosing on some of the firm’s properties or have sought to appoint receivers to manage other developments.

In some cases, the Sandlers are still trying to find new investors for the projects.

“They need money, that’s the bottom line,” Doummar said.

The nearly 60 people – retirees, real estate agents and businessmen – who invested in San Rio never expected the Sandlers or their companies to be short of cash.

Back in 2007, the purchase carried minimal risk, said Dick Werner, a Raleigh, N.C., resident who paid $360,000 for his quarter-acre lot.

It was, after all, a trademark Sandler development: big, well-planned, with amenities such as cabanas.

The brothers threw lavish sales events with helicopter rides, cocktail parties and even a performance by country music star Travis Tritt to lure potential buyers. Steve Sandler personally pitched the development.

At first, the property owners received updates about the progress of the development. But reaching a Sandler representative has been impossible this year, Werner and other investors said.

Many were angered by the lack of communication and frustrated that they are left with overpriced lots because the extras they paid for – tennis courts, a lazy river, waterfalls – might never happen.

“We’re hosed,” Werner said. “This was going to be the place, if you wanted to get away. This was perfect.”

Werner and other property owners filed a lawsuit in mid-October against the L.M. Sandler & Sons subsidiary that developed San Rio for breach of contract and fraudulent and negligent misrepresentation.

The unraveling of the Sandler company has shocked many in the development business, locally and nationally.

For years, the Sandlers were the go-to investors for developers.

The brothers, whose family made its fortune in the food-distribution business, had the cash to sink into big projects and the ability and reputation to get banks to lend them the rest. They were so wealthy that one developer classified them as institutional-grade investors and, before the current crisis, considered them “bulletproof.”

It’s unclear what shape L.M. Sandler & Sons will take after the recession .

The irony is that the company thrived during the last economic crisis in the early 1990s, picking up large tracts at low prices from struggling banks.

Joel Rubin, a public relations expert who worked with the Sandlers on many of their local projects, said the brothers shouldn’t be underestimated.

“I wouldn’t sell them short,” Rubin said. “They’ve got to be where they were by doing some things that are very smart.”

Still, it will take time, and the company will have to regain the trust of investors, partners and buyers, Rubin said.

William Rudnick, a managing partner with Waterbrook Development in southern Florida, was introduced to Steve Sandler by a mutual friend because of the brothers’ “experience and their ability to put the equity financing together.”

The Sandlers invested in Rudnick’s plan to build a 27-story luxury condominium called Da Vinci on the Ocean. The starting price for a condo, which offered modern European cabinets and stainless steel appliances, was $1.3 million. But before any physical work could be done on the condominium, the real estate market turned, the Sandlers opted out in the summer of 2008 , and the property was sold at a loss, Rudnick said.

“I was surprised,” he said. He expected that the Sandlers would have been able to weather the downturn.

“It would have been spectacular,” Rudnick said.

The Florida real estate market is in particularly bad shape.

In other parts of the country, some developers have stayed afloat in this economy, said John Griffin Jr., a partner with the law firm of Edwards, Angell, Palmer & Dodge in Boston.

The companies in trouble are those that borrowed too much money and didn’t have other capital or resources.

“Many overpaid for the land, and then the demand dropped,” Griffin said.

In some cases – such as Shallotte, N.C.; the Florida Keys; Virginia Beach; and Prince William County in Northern Virginia – the Sandlers had spent significant money to build the initial infrastructure for a neighborhood. When people stopped buying houses and builders backed out of lot purchases, the Sandlers couldn’t pay back the banks or the contractors.

The Sandlers showcased the Beach’s pricey Ashville Park subdivision in the 2008 Homearama. Out near Pungo, the development springs up suddenly next to stretches of open fields. Almost immediately, the Homearama builders struggled to sell the seven homes featured at the event.

In recent months, the Sandlers have allowed the vacant lots to go unmowed. Some of the companies responsible for the groundskeeping have liens against the Sandlers.

The first public reports of weaknesses in the Sandlers’ armor surfaced in July 2008, but according to court documents, the company was struggling even earlier.

In April 2008 – five months after Virginia Beach officials toasted the Sandlers for their $5 million donation to the Sandler Center for the Performing Arts – banks were sending the brothers warning letters.

Wachovia notified the Sandlers that the loan for the Port Potomac project in Northern Virginia had matured in March 2008 and the brothers owed the bank $26 million.

In a letter to a Sandler company official in May 2008, Larry Goldstein, a partner in a Delaware project, hinted at the extent of the financial troubles.

“I know that you, Steve and Arthur (and most of your staff) are preoccupied with your problems with Wachovia and various other lenders on all of your projects across the country,” Goldstein wrote . “Recently, Steve sent me an e-mail in which he very briefly advised me that he needs to work out a global resolution with all the lenders.”

The resolution has varied with each bank and on each development.

In Connecticut, Webster Bank foreclosed on a Sandler-owned property to collect on a $10.1 million loan.

BB&T Bank did the same in Waxhaw, N.C . At the time, the $50 million foreclosure was the largest in the Charlotte area and the legal notice took up four pages in the local newspaper.

While the Sandlers have technically defaulted on some of their loans, banks such as Wachovia, Wells Fargo and Bank of America are still working with the brothers.

In the case of a shopping center that is part of a mixed-use development in Union County, N.C. , Wells Fargo started garnisheeing rents from the project to pay off a $12.5 million loan.

“Some banks are willing to work with borrowers,” said Ken Cusick, with Cusick Financial, a Maryland firm. “Other lenders have made the decision to move out of land and real estate. It’s not a cut-and-dry situation.”

In general, the banks and the developers are trying to avoid a foreclosure, said Shawn Krantz, a principal with Brownstone Capital, a company based in Bethesda, Md., that helps troubled borrowers restructure their loans.

“The banks don’t want to own the land,” Krantz said.

Some of these financial institutions lack the expertise to manage the property and protect its value until the market improves or another buyer comes forward, Krantz said.

Under a foreclosure, banks also would have to write off the loan as a loss, which forces them to increase their reserves, Krantz said.

If a bank has to put more money into its loan-loss reserves, it cuts into its earnings and, in the worst cases, capital, Krantz said.

Some banks have adopted a strategy of extending the loans, with some concessions from the developers, in the hopes that the market will rebound and that they’ll eventually get their money back, Krantz said.

“A lot of lenders are delaying and praying,” he said.

Other banks have been slower to foreclose on properties simply because they didn’t have the staff to deal with the complexity of the loans, said Griffin, with the Boston law firm .

“We haven’t seen the full effect,” Griffin said of the housing crash.

Wachovia only recently started taking legal action against the Sandlers. The bank asked the court to appoint a receiver to manage several Sandler properties, including San Rio, late this summer.

In documents filed in August, Wachovia claimed that the Sandlers failed to pay back $136.4 million in loans for Port Potomac and Harbor Station in Prince William County.

According to the nearly 560 pages of loan documents, Steve and Art Sandler each personally guaranteed the loan, allowing the bank to go after their personal wealth if necessary.

Still, the brothers have managed to keep their multimillion dollar homes in Virginia Beach and elsewhere, and they are paying off their $5 million pledge to the Sandler Center on time.

Some banks didn’t get personal guarantees from the brothers.

Most of the Sandlers’ developments are operated as limited liability companies . These LLCs are established to protect the parent company and its assets. If one LLC defaults on a loan, it doesn’t drag the entire company down.

The LLC structure poses a challenge for the property owners in San Rio, the Shallotte, N.C., development . Their contracts were with Sandler at Shallotte LLC, and if that limited liability company defaults on its bank loan, it’s unclear whether the lot owners will be able to get any refunds.

“That’s the purpose of the LLC, to protect the owners from liability,” said Bradley Coxe, an attorney representing some of the lot owners.

But the people who invested in the properties felt that they were assured the project would be completed because the Sandlers were behind it, Coxe said.

“They were representing, 'Don’t worry, we’ll build them because we’re part of L.M. Sandler and Sons and it’s a billion-dollar company and we’ll build it,’ ” Coxe said.

The town of Shallotte took action as soon as it could.

Town officials decided this summer to pull the surety bond on San Rio, despite assurances from officials tied to the Sandlers’ North Carolina development arm that the company was looking for new investors for the project.

The bond, similar to insurance on the project, enables the town to complete the most basic infrastructure for the first phase of San Rio, said Paul Sabiston, then the Shallotte town administrator .

The $2.7 million bond will pay to extend the water and sewer lines to the project, Sabiston said.

Shallotte will survive because the town can wait for the market to turn around, Sabiston said.

Even the Sandlers expected it to take years before San Rio was completed as planned, he said.

“Having a nice, high-end development by the river could be a bonus for a town,” Sabiston acknowledged.

He knows that the people who bought lots in San Rio want more, but that’s not Shallotte’s responsibility.

The town’s goal is simply to make the land livable, he said.

“We can’t solve all those problems,” Sabiston said. “Maybe it will have a chance to be what it was meant to be.”

Deirdre Fernandes, (757) 222-5121 or deirdre.fernandes@pilotonline.com