Developers sue banks as agreed upon funding vanishes

Lender liability lawsuits are beginning as builders see banks pulling back from their contractual agreements. In some cases it is due to lack of funds, while in other cases lines of credit are reduced as new appraisals come in millions of dollar lower than previous appraisals. Developer John Thomas says he had nearly finished building a 222-unit condominium and hotel project in Stockton, Calif., when his lender, First Banks Inc.’s Missouri-based First Bank, wouldn’t release the final $6 million from his $40 million construction loan. There are other similar cases.

An IndyMac appraisal in December 2007 valued one project, the approximately 900-acre Joshua Ranch Development, at $17 million, down from an appraised value of $82 million in May of that year, says Andrew Eliopulos, the company’s president and chief executive. The bank estimated it would take about 18 years to sell 539 houses on the property, Mr. Eliopulos said. “That’s insane,” he said. “I told them your appraisal is flawed. This bank is in trouble, and it just wants out.”