Developer Terminella, Metropolitan Bank Face Off

Metropolitan National Bank and Tom Terminella are headed for a showdown in court and the stakes couldn’t be higher.

The slowdown in the Northwest Arkansas real estate market has produced a slew of bankruptcies, foreclosures, lawsuits and liens in recent months, but no conflict is more explosive than the one brewing between MNB and Terminella.

Little Rock-based MNB, which started building its retail banking presence in Washington and Benton counties two years ago, filed two foreclosures on May 30 demanding more than $11.8 million from Terminella and his partners Myron Morter, Milton Morter and Mark Foster.

Terminella, one of Northwest Arkansas’ most prominent developers, fired back July 2 with a counterclaim alleging breach of contract, breach of good faith and fair dealing, constructive fraud and negligence.

Terminella is seeking at least $50 million in damages, a number his lawyers Jim Penick and Robert Ginnaven call “a moving target” that will likely become much larger before the case ever sees the inside of a courtroom.

On July 19, Terminella sold his 440-acre Mountain Ranch property in west Fayetteville, which included 118 developed lots, to a Little Rock investor for $17.14 million.

That may sound like welcome news for the embattled developer, but he estimates he will lose millions by liquidating now rather than seeing the 10-year project through to completion. He blames the MNB foreclosure for losing the financing to continue development of the property.

Terminella has other deals pending that could bring him $30 million or more, but Penick said selling land at a discount and site-ready lots in bulk is not how the developer became successful.

“In November 2006, his business was not in this mode at all,” Penick said. “It is in this mode now having to come off and sell as a direct consequence of what the bank did.”

Terminella and his lawyers also argue MNB’s foreclosure induced the Bank of England (Ark.) to file a foreclosure on June 6 against Terminella and John Montgomery of Montgomery Homes for $990,000 related to a $1.1 million mortgage on lots in the Creekwood subdivision in Lowell.

MNB president and CEO Lunsford Bridges, through spokesman Robert Stebbins, elected not to comment for this story.

MNB’s lawyer, Charles Trantham of Fayetteville, did not return calls.

Terminella, however, is taking his beef public and expanded on the pointed allegations of his counterclaim in an exclusive interview.

“It’s cost me tens of millions so far,” he said. “I estimate it to be off the Richter scale. When you go from a legal and financial status you’ve worked your whole adult life to achieve and then you have someone do this to you, it absolutely affects every banking relationship we have.”

His financial future and the reputation of a bank with nearly $1.8 billion in assets are on the line and at the heart of the case will be how and why a sweetheart deal went so sour.

Boom Times

Flash back to summer of 2005 and MNB was making retail inroads into Northwest Arkansas’ booming market with announced plans to build 12 branches in the two counties at a total cost of $30 million.

Terminella, meanwhile, had just been featured in the Northwest Arkansas Business Journal’s neighborhood profile in March for his successful Candlewood subdivision in east Fayetteville that had even attracted then-Arkansas basketball coach Stan Heath.

A $975,000 investment in 1999 by Terminella turned into a 59-lot neighborhood worth between $25 million and $30 million in 2005. With several other development projects in the works, he was a prime prospect for any bank and especially for one trying to grab market share like MNB.

Terminella, who does business with 16 area banks, said MNB’s Larry Olson, president of the bank’s Washington County division, actively solicited his business.

“I’d seen them at numerous gatherings,” Terminella said of the networking events where bankers, clients and prospects mingled. “They were courting me, looking for loans, looking for deals.”

Terminella, who’d formed numerous close banking relationships throughout 20 years in real estate development, would need incentives to move business from one of those banks to MNB.

Olson, relationship manager Susan Slinkard and MNB obliged, he said.

Sweetheart Deal

According to Terminella’s counterclaim, Olson convinced him to move a $6 million loan from Signature Bank of Arkansas for the land acquisition for the Grand Valley Ridge subdivision in Springdale and to refinance a commercial property known as Cornerstone in Bentonville.

The terms of the three-year, $9.63 million Grand Valley loan closed on Sept. 13, 2005 were particularly favorable.

According to the loan agreement, the initial interest rate was 6.5 percent and would adjust based on the Wall Street Journal’s published prime rate.

The principal was to be paid down with 100 percent of the proceeds from the first year of lot sales and 70 percent in the following years.

The true sweetener was the terms of interest payments.

MNB allowed part of the loan proceeds to be used to fund the interim interest payments, which amounted to around $50,000 per month.

In effect, MNB was paying itself out of the loan proceeds it released to Terminella. According to the counterclaim, MNB and Slinkard managed the loan account and administered the debiting of the monthly payments.

The Cornerstone property was leveraged for $4.9 million – 60 percent of its $8.1 million value – on Dec. 16, 2005 with semi-annual interest-only payments and the principal due in two years.

Everything was moving along through 2006, according to Terminella. He made his semi-annual payment for Cornerstone on June 16 and went through the civil engineering and road cuts at Grand Valley while acquiring approvals from the planning commission and city council.

Then, in late November 2006 with contractors mobilized and an order for millions of dollars worth of drainage pipes and sewer lines pending, Terminella says MNB told him he had exhausted the monies available for interest payments and it would no longer fund the project.

Unanswered Questions

Terminella, who told the Business Journal in November 2006 that he was in good standing with all his loans and hadn’t missed a payment in spite of rumors to the contrary, was baffled.

According to the agreed-upon construction budget, $600,000 of the original loan proceeds was a line item to fund interim interest. There was also a line item labeled “contingency” for $270,000, which the counterclaim said was understood to be available to fund the interest payments.

Additionally, Terminella had given MNB a $500,000 certificate of deposit to be used to fund the interest payments should the loan proceeds be exhausted.

Terminella and his lawyers said MNB provided no supporting documentation as to how the loan proceeds to fund interest had been depleted.

“To date, we can only assume things and we don’t know,” Penick said. “Our legal position is at the time that they said there wasn’t any money left, they knew that there really was. The law requires them to deal in good faith because they have the power to shut somebody down.”

They maintain that the loan was in good standing, which gave MNB no cause to put the loan in default status.

“We believe they were in breach of contract at that very moment,” Terminella said.

MNB, which had released $6.9 million of the $9.6 million budget, refused to fund the Grand Valley project any further. In response, Terminella did not make his semi-annual payment on the Cornerstone property on Dec. 16.

“I certainly wasn’t going to fund the other credit when they put me in default in Springdale,” Terminella said. “That’s when the pissing match started.”

Regulators Watching

In January 2006, the consortium of regulators who govern American banks began looking more closely at the very kind of loan MNB gave Terminella for Grand Valley.

Known as acquisition, development and construction loans, these 100 percent financing arrangements that allow interest funding through loan proceeds are widely blamed for the collapse of the savings and loan industry in the 1980s.

The regulators proposed assigning a greater than 100 percent risk weight to such loans that didn’t meet Interagency Real Estate Lending Standards or weren’t backed by at least 15 percent of the loan value in borrower equity.

The Grand Valley loan was only backed by the $500,000 CD Terminella put up to fund interest payments.

Examiners who looked at the Grand Valley loan could have found other issues. The standard loan-to-value ratio for an ADC loan is for 75 percent of the appraised value, but MNB was relying on an appraisal of the property prepared for Signature’s benefit that placed the value of Grand Valley at $12.5 million.

Terminella’s counterclaim alleges that MNB violated Regulation Y by not preparing its own appraisal, which could have raised a red flag with regulators if they believed the property was overvalued and skewed the loan-to-value ratio.

With MNB keeping mum and Terminella left to speculate to the bank’s motives – which he alleges were to take possession of his property – it will likely take MNB’s response to Terminella’s discovery request in mid-August before any light is shed on why it took the actions it did in late 2006.

Terminella’s lawyers have requested all MNB files and correspondence related to the Grand Valley loan, the personnel files of Olson and Slinkard along with a list of other loans they’ve been involved in for MNB and copies of any write-ups generated by any regulatory agency or any examiner comments about the loan.

“We’re not aware of any,” Penick said, “and that goes to our point the loan was in good standing.”

Loan Losses

In the first quarter of 2007, MNB reported nonperforming loans of $17.34 million, up more than 400 percent from $4.1 million in the first quarter of 2006. Terminella’s loans represented 68 percent of that total.

Terminella believes MNB’s struggles are of its own making and he is feeling the fallout. He and his lawyers have also seized upon comments by Olson in the July 22 Benton County Daily Record in which he stated:

“When times are good, you don’t have to look at things quite as (diligently),” Olson told the Daily Record. “But when times get tougher – and they certainly are now – it’s prudent business to look at everything a little closer.”

Terminella said Olson’s comments are proof MNB wasn’t practicing good banking in Northwest Arkansas.

“I think, personally, they’ve made some very poor business decisions with their own organization with their over-aggressive nature coming into this market being from another community,” he said.

Terminella called a meeting of his creditors on March 28 and enlisted the help of fellow Fayetteville developer Jim Lindsey to speak on his behalf. Lindsey warned of the dangers of moving forward with foreclosure filings, not only to Terminella, but also to the banks themselves and the market as a whole.

Terminella said his company holdings represent 5 percent to 10 percent of the residential communities in the two-county area. He currently has 525 home lots on the market ranging in price point from $40,000 to $100,000 with a total value of more than $26.7 million.

After the meeting, Terminella said Olson declined a $50,000 check to keep the loan out of nonperforming status and told him to take it to Bridges in Little Rock.

The counterclaim alleges that shortly after the March meeting, MNB wrongfully liquidated Terminella’s $500,000 CD. When Terminella went to Little Rock, Bridges refused to meet with him.

“Mr. Terminella wasn’t important enough anymore,” Penick said. “[Bridges had] gotten enough out of him that he was ready to jump on the opportunity to get control of his land.”

If MNB erred by calling in the Grand Valley loan, underestimating Terminella’s counterpunch may turn out to be the bigger miscalculation.

“I didn’t ask for this fight,” Terminella said. “They’re the ones that served it up. They reneged on the damn loan agreement. They’re the ones that knee-jerked and I don’t know why.

“But I’m looking for our day in court with our 12 peers.”