This morning’s Tennessean is reporting that Terrazzo, an uber-high-end-condo development in the Gulch is going to auction off some of their units.  Of the 117 units in this LEED certified building, only 13 units have sold since March.  Reading the article, and then scanning through the comments, I am reminded of how litigious a society we have become.  The general theme in the comments is that the developer should be pursued!  Off with their heads!

This is just plain silly.  The developer is the one who took all the risk up front.  Now we can argue whether it was excessive risk – they were late to the game, their construction was slow, there were a lot of units already coming into downtown and the Gulch etc. etc.  But, it was the developer who took the risk of putting these units on the ground and they had enough contracts in pre-sales to secure construction financing…here we can get into another round of “coulda shoulda woulda” on whether the bank should have made the loan, but it doesn’t matter.

Now, sillier is the young woman sited in the article for having “three mortgages.”  On what planet do you live?  And thanks, Mom, for outing your daughter’s insane appetite for risk…now get back on the plane and return to the Baccarat table in Vegas.  Yet, Nashville, like so many other markets was infiltrated with stupid money at the height of the “it will never end” craze in 2007.  Remember when a certain Gulch development sold out in 48 hours!! Oh, right, few of those people closed on their units because they had so little down…but that’s another story.

Folks, auctioning is a very legitimate and fair way to get the building’s pricing adjusted to the market. It has been used all over the country, and I expect we will see more of it.  The developer was apparently unwilling to experiment with lowering their prices on their own to find where the market would start to move for their product.  It isn’t rocket science – take a couple of units and push the prices down till you have a buyer.  At that point, you will know whether it is worth lowering all the other units or not.  Well, I was not at the conference table where this decision was made, but again, this is one way to work your way out of the debt.

The losers are the current owners that paid full freight, especially if they had thoughts about trying to sell anytime soon.  These auctioned prices will establish the “new normal” for pricing in the building and it may be well below their current basis.  Nevertheless, getting the building occupied and getting their Homeowner’s Association up and running will be a net positive in the long run.  You need to get the lights on in the building – dark buildings at night scare people and the development will get a negative reputation.

We are looking at this situation across the board with distressed assets.  The banks have been kicking the can down the road with loan extensions at an interest only rate, but they are now feeling the heat.  The developers’ interest reserves have been burned through and their balance sheets are getting wobbly.  Lord knows I hate being pessimistic, but I suspect we are going to be seeing this type of maneuver more and more until we get the supply and demand back into equilibrium.

What will be interesting to see is how many people really do show up at the auction prepared to buy.  If the auction is ill-attended, that would signal a far more ominous sign – Americans are so concerned about the economy that they are not willing to even turn out for a good deal.  Let us pray that does not happen.