The Morning Report
Get the news and information you need to take on the day.
Tuesday, Sept. 23, 2008 | In coastal Leucadia in Encinitas, eight brand new, $2 million luxury homes built with Cape Cod and other colonial touches comprise the first phase of Nantucket, a recent Barratt American housing development.
Next door, what was supposed to be phase two now consists of three half-finished, papered-up houses, weeds and some empty foundation slabs, surrounded by a chain-link fence.
In coastal North San Diego County west of Interstate 5, the housing market doesn’t usually resemble the sprawling desert subdivisions of the Inland Empire or the Central Valley. There, the crashed market has forced homebuilders out of the scene in droves, leaving some streets half-built, foundation slabs poured without houses on top, and owners who imagined vibrant cul-de-sacs instead living on roads that abruptly stop.
But in Nantucket, that scene has been set in an unlikely place.
“It’s like a ghost yard,” said John Kline, a real estate agent with Coldwell Banker in Del Mar, who is trying to sell one of the houses from the first phase.
The development appears frozen in time, a snapshot of market trouble that is now reaching upper-crust enclaves, having already devastated many of the region’s lower-end neighborhoods. It stands as a symbol of the damage sustained by Carlsbad-based Barratt American after its bank cut off construction funding last year in the wake of the crashing housing market.
The Carlsbad-based homebuilder is a quarter-century fixture in the housing industry in San Diego and Riverside counties and beyond. The company had several projects under construction when its development funding, a $125 million credit line from Bank of America, was suddenly frozen last year. Assured the funding issue would soon be sorted out, Barratt American kept making interest payments for several months, said Mick Pattinson, the company’s president. But finally, Barratt gave up on the bank and stopped making interest payments on the frozen credit line earlier this year.
Bank of America filed a notice of default, a legal record testifying the company was behind on its payments. Barratt laid off more than 100 of its 130 employees, Pattinson said, and leave subcontractors in the lurch, dozens of whom have sued. The company was forced to stop construction on several projects on which it planned to use the credit line to fund. And now several of the company’s properties, including some raw land, half-finished projects and some houses and townhouses in subdivisions from Carlsbad to Escondido to Riverside County, have fallen into a receivership. A court-appointed firm is working to liquidate those projects to make up for the lapsed payments.
Nantucket is one of these projects.
And now, the trouble is growing. One of the eight 4,000-plus-square-foot houses built is now up for sale at a loss, and will soon enter the foreclosure process, said Kline, the house’s listing agent.
The house is a short sale, listed for $1.2 million even though his clients had a $1.5 million mortgage. A group of investors, including a Barratt employee who has since been laid off, paid about $1.9 million in December 2006 for the house, which has an outdoor built-in barbeque and an in-ground hot tub. The investors leased the house back to Barratt American to use as the company’s model home, and the developer converted the garage to use as an office and a showroom.
When Barratt fell into financial trouble, the investors stopped getting paid. In the spring, the investors listed the house for sale at $1.95 million, eventually lowering their price to $1.649 million and letting the listing expire. Then they hired Kline to sell the house, which he listed at $1.55 million. Last Tuesday, they discounted the price to $1.2 million. A notice of default will be filed on the property within the next few weeks, Kline said, because the investors have stopped making their mortgage payments.
That a foreclosure could occur in a showpiece development like this illustrates how far the trouble has reached for Barratt, and for the neighbors who paid close to $2 million each for their houses.
Aaron Brent and his parents work in real estate, and Brent was working from his mom’s house in Nantucket on Friday. His mom paid $2.1 million for her house, Brent said, a semicustom home near the beach. Now the house next door is for sale for more than $800,000 less than she paid.
“In these places, you wouldn’t figure it would happen quite as much,” he said Friday morning, gesturing over the fence to the half-finished houses. “Most of the time when this has happened, it’s out in the middle of nowhere where they have way too much land.”
Pattinson blames Bank of America for his hardship. He and more than 80 homebuilders statewide have banded together as the Homebuilders Coalition for Responsible Bank Behavior, a group gaining attention locally and at the state and national level. The group aims to publicize their perspective and lobby lawmakers for greater bank regulation.
Pattinson said Bank of America’s recent actions to help purchase beleaguered companies and the bank’s other moves to shore up the nation’s mortgage mess demonstrate that the bank has the money; it just didn’t want to keep it flowing to companies like his.
“They just chose to get out of a particular industry (residential building in California) at a time when they decided they didn’t like the look of it,” he said. “No matter the fact that you would have to lay off employees, that you’d leave subcontractors hanging. In other words, everybody could just go to hell except the bank.”
Shirley Norton, spokeswoman for Bank of America, took issue with Pattinson’s perspective. The bank is continuing to make loans on some developments in the state, she said.
“He tells only his side of the story,” she said. “As most of the builders know this is an economic issue, not a bank issue.”
Pattinson lamented the situation that’s left the Nantucket project, conceptualized in good times, half-finished.
“At 16 lots, this wasn’t going to break the bank, but of course the bank broke us,” he said. “It doesn’t get much better than west of I-5. This should’ve been as close to a home run as you can get.”
But he acknowledged that even Nantucket, with its lucrative location, wasn’t a for-sure profitable proposition in the slumping market. That might have triggered the bank’s skittishness, he said. The houses were built and sold between spring 2006 and the beginning of this year.
“Yes, we would’ve probably taken a loss in building out Nantucket, and maybe the bank would’ve shared in that,” he said. “But they weren’t even willing to contemplate it. The rug was pulled.”
The Nantucket development has not been without controversy since it was presented in early 2006. Residents have fought the city, Barratt American and the subcontracting developer, David Meyer, over a slough of issues related to the project. In exchange for concessions on development permits, like how far the houses could be from the curb, how many houses could be built there, and how much parking they’d have to provide, the developer promised to build two affordable homes for low-income residents. Those units have yet to be built.
Ron Ranson lives a few doors down from the project on Andrew Avenue. A theatre design teacher for 24 years at the University of California, San Diego, Ranson takes issue with the way the development sticks out in the community.
“They’re not compatible with the neighborhood,” he said. “There’s nothing unifying.”
Neither Glenn Sabine, Encinitas city attorney, nor a representative of the city planning department returned calls for comment.
Please contact Kelly Bennett directly at email@example.com with your thoughts, ideas, personal stories or tips. Or set the tone of the debate with a letter to the editor.