In southern Delaware, evidence abounds of real estate, banking collapse

SUSSEX COUNTY, Del. - The sign for the Heritage Commercial Center in Bridgeville is blank except for a number to call about leasing one of six empty parcels.

The proposed center was meant to draw residents of the 800-acre Heritage Shores housing development nearby.

But at Heritage Shores, launched in 2005 toward the end of the national real estate boom, only 284 of the planned 1,816 units have been sold as of June 30, putting a big dent in the demand for new stores. The number of houses built and sold is nearly 1,000 fewer than projected in early 2008.

That scene of plans gone awry along Route 13 in southern Delaware is emblematic of Sussex County's real estate collapse, which played a significant role in the sale this month of Wilmington Trust Corp. to M&T Bank Corp. at a 50 percent discount of its stock price.

There is no sign that Wilmington Trust, founded in 1903 by members of the du Pont family, was involved in Heritage Shores, but bank executives have spoken repeatedly about problems in southern Delaware, where subdivisions in poultry country - a full 45-minute drive from the beach - are sold as shore communities.

"The problem that we've been contending with for the last several quarters is . . . that we have a tremendous concentration of our loan portfolio, particularly the construction portfolio, down in southern Delaware," Donald E. Foley, Wilmington Trust's chairman and chief executive officer, said in a Nov. 1 conference.

From 2000 through 2008, Wilmington Trust lenders poured money into real estate, mostly single-family developments, even after the number of building permits started falling in 2005.

In the fall of 2006, an analyst in an earnings conference call asked a bank executive if he had data on the number of houses for sale in Delaware, wondering if it was increasing as it was in Florida.

"Honestly, I don't have the inventory levels. I'm sorry to tell you that, no," said Robert Harra, the bank's chief operating officer.

Harra and other Wilmington Trust executives expected retirees moving into southern Delaware for the lower living costs to keep the housing market healthy. They also thought they were protected by the financial strength of local and regional builders.

"Maybe they have a different set of builders," former Wilmington Trust chief executive Ted T. Cecala Jr. said in early 2008, when an analyst questioned him about Wilmington Trust's lack of loan difficulties compared with competitors with a similar focus.

When loan troubles arose, the bank held off on taking significant losses, counting on an economic turnaround to rescue the loans.

This year, the bank finally buckled and started taking substantial losses. But the future remains grim. M&T estimated that Wilmington Trust faces $534 million in losses on its $1.68 billion in construction loans as of Sept. 30.

Wilmington Trust declined to comment for this article. Cecala, who was CEO from 1996 through June, when he abruptly retired, did not respond to interview requests.

Tommy Cooper, owner of Cooper Realty Associates in Sussex County, said he "can't fault Wilmington Trust's logic" in thinking the market would improve. "Who would ever have guessed this was going to drag on so long?" asked Cooper, who is trying to line up tenants for the Heritage Commercial Center.

Cooper said the Heritage Shores 55-plus housing development, with well-kept grounds and a golf course surrounding a well-appointed clubhouse, is a relative bright spot in the county. "It's diminished from what we started out selling, but we continue to do four, five, six deals a month," said Cooper, who has worked in real estate since 1972.

Otherwise, Sussex has a painful number of developments where weedy lots outnumber houses.

One of them is the 730-acre Plantation Lakes in Millsboro, where only 72 of the planned 2,817 units had been sold as of Sept. 30, according to documents related to a $17.8 million bond offering used to fund infrastructure.

"That's pathetic," Cooper said of the conditions at Plantation Lakes, under way since 2005. "If you were to go off the main roads, I could show you 30 more [developments] that look just like that," he said.

At least Plantation Lakes, started in 2005, is still active. About 10 prospective buyers attended a sales presentation there Nov. 10 - in a double-wide trailer along a paved, but unfinished road devoid of houses. Manhole covers protrude from the road surface, which is awaiting a final layer of asphalt.

About 20 miles away, near Milford, roads were built at West Shores at New Milford, but no houses went up, partly because of a dispute with a neighboring development over a municipal sewer line.

Not far to the east, 32 of 64 lots have been sold in Knollac Acres, according to the website of developer Bestfield Homes, a Wilmington home builder in the business since 1954. Bestfield sold a property there this month, but the last sale before that was "a few months ago," sales manager Guy Waites said.

Slow sales have crushed appraised values of land, said Waites, who has been in the industry for 19 years. Building lots that sold for $90,000 each are now being appraised at $45,000, he said.

Waites, who said Bestfield has long been a Wilmington Trust customer but is "stepping away from them," declined to give a specific example of such appraisals. "That's exactly what the decrease has been. I can promise you that one," he said.

Banks have been taking substantial write-downs because of weak appraisals, but they do not forgive the debt, leaving the borrower in a tight spot. Sometimes the banks try to sell the loans, settling for a portion of what is owed.

That is what Wilmington Trust is trying to do with a pool of loans to developer Preston Schell, who said his loans are not in default. But appraisals are down, he said.

"Appraisers are shooting in the dark right now. They have no idea what things are worth," Schell said, and "are erring on the low side when possible" to avoid liability. He acknowledged that he would have the same problem if he were an appraiser.

Schell declined to name any developments financed by loans Wilmington Trust is trying to sell: "I've got residents in some of these developments. I don't want to scare them for no reason."