Who's to blame? Coast or CCI?

Or both? Any way, it's the investors who are left in housing debacle's lurch.

Published February 4, 2007

The Florida housing boom was creating instant millionaires when St. Petersburg builder Jesse Battle III hit on a promising formula to feed the public's hunger for no-pain, all-gain real estate deals.

Within 18 months, Battle's company, Construction Compliance Inc., had lined up customers for more than 500 investment homes he would build, mostly for no money down in southwest Florida.

By early 2006, the former home renovator with one bankruptcy under his belt was a player, selling more homes in certain Florida markets than major national builders.

He outgrew his downtown offices and traded up to a bayfront suite for his 60 employees in May. The company splurged on season tickets for the Tampa Bay Buccaneers and a business trip to Spain.

Around the CCI office, Battle, in his late 50s, buoyantly addressed co-workers as "dawg" before hopping in his new Hummer.

In the past three months, that go-go environment collapsed in a tangle of unpaid debts, unfinished homes, burned customers and furloughed employees.

And Battle's housing business might not be the biggest casualty.

His partner in the deal, Coast Bank of Bradenton, financed at least 482 of the CCI loans and is on the hook for upwards of $77-million customers may never repay. Stockholder wrath sent bank shares spiraling to record lows. Last month, the bank hired an advisory firm in the hopes of salvaging its future.

"Coast Bank has become the poster child for many banks having problems in Florida," said Miami banking expert Ken Thomas. "This is a national story. Everyone around the world is talking about the housing crisis in America. There hasn't been a bank failure since June of '04. The question is: Is this going to be the first casualty?"

How did a modest home renovation firm capsize a fast-rising bank?

Neither Battle nor Coast executives are talking extensively, but interviews with dozens of the players in the debacle point to an unhappy combination of a slumping housing market, corporate hubris and poor management.

An irresistible pitch

Back in 2004, most Florida housing prognosticators were predicting the bloom was about to fall off the housing rose.

Jesse Battle didn't think so - and he was right. Builders could reap huge rewards as investors and speculators kept the boom rolling into 2005.

He found partners in Phil Coon, head of residential lending at Coast Bank, and John R. Miller, a Tampa mortgage broker who ran American Mortgage Link.

Their pitch would prove irresistible to many. If you had strong credit and $20,000 to $40,000 in the bank, CCI would build you a house with no money down and no closing costs on scattered lots in Sarasota County's North Port community.

Battle would cover interest expenses on the construction loan and sell you the house at 10 percent below appraised value. Coast's "construction-to-perm" loan, a construction loan and permanent mortgage folded into one, streamlined the process. Even if property values flattened, you'd turn a profit.

Michael Wood, a Zephyrhills medical equipment salesman, not only contracted for two houses, but tipped off 25 of his family members and friends.

"I paid zero out of pocket. There was $30,000 to $50,000 potential to make on it," said Wood, who, like many investors, considers the CCI/Coast package legitimate but marred by poor execution.

Wood was one of hundreds. A Tampa businessman snatched up six. A Long Island investment club grabbed dozens more, as did scattered investors in Ohio, Texas and California. American Mortgage Link and Tampa's Dollar Realty Inc. took commissions on most Florida sales.

By 2006, they were feeling flush in the Bradenton headquarters of Coast Bank, founded in 2000. In the nine months ending Sept. 30, Coast's assets, mostly outstanding loans, grew a heady 23 percent from $550-million to $676-million.

When Coast CEO Brian Peters left the company in July after two years on the job, the company showed its gratitude with a $743,000 severance payout.

But if the gravy was to keep flowing, Coast had to rely on a largely untested builder in Battle, who was juggling more homes than ever before and hatching grand plans beyond little North Port.

Battle sent his top salesman, Jason Ingram, to pitch CCI deals to a real estate conference in Spain. In late 2005, Battle drew up plans to develop Hollywood Trailer Park at Fourth Street and 73rd Avenue in St. Petersburg. A down payment of $500,000 came out of company accounts. He talked about branching out to Hilton Head, S.C.

By the spring of last year, just as Battle shifted his growing staff into an $8,000-a-month bayfront office on St. Petersburg's Beach Drive, the company was showing signs of sickness from a real estate market in free fall.

Battle contends he completed 70 homes last year, but buyers were reluctant to close since many might have lost money as sales slumped in North Port.

When CCI begged Coast to move buyers from construction loans, which Battle was obliged to cover, to permanent mortgages, which the buyer had to pay, the bank declined.

By the fall, CCI was buckling under the financial strain: Sales were slowing, interest payments on construction loans multiplied and subcontractors were getting stiffed.

Buyers get the bills

St. Petersburg investor Marilyn Schwegman, who ordered a $237,000 house from CCI, got the letter around Christmas.

The concrete company that laid her slab and the concrete block dealer who has built her walls wanted her to pay nearly $30,000.

"CCI is supposed to be covering construction costs and I'm getting this certified notice from the concrete company," Schwegman said.

Hers was just one blighted deal of hundreds. CCI has ceased paying subcontractors and abandoned work in North Port. The freeze affected 482 homes in Coast's loan portfolio. Frustrated contractors retaliated by filing liens against the property owners, bypassing Battle.

The liens weren't the worst of it. Scores of customers were saddled with debts to Coast of $80,000 and up. They had nothing to show for it but empty lots.

The lot represented part of the debt, as did the closing costs, fees and unpaid interest Battle was supposed to cover. But much of the rest fed CCI overhead that had reached $300,000 a month in rent, payroll and other expenses.

On Jan. 19, Coast revealed the extent of the troubled loans - up to $110-million - in a report to the Securities and Exchange Commission. The bank tried to steady shareholder nerves by pledging to line up builders to finish houses far enough along and stretch out repayment for customers stuck with lots.

There have been few takers. Most customers want their debt cleared or restructured downward.

"Will I repay Coast Bank? If they're telling me I owe $90,000 on a vacant piece of land with all these dirty hands involved, then no way, I'm going to walk," said Wood, the Zephyrhills investor.

At least four law firms are gathering clients from the discontented. Their opinions converge: Coast failed in its fiduciary responsibility to ensure CCI properly spent the bank's money.

"There's definitely a bunker mentality at the bank," said Sarasota attorney Alan Tannenbaum, who plans to take the case for CCI customers. "The bank is taking a no-compromise position: 'It's not their problem. It's CCI that defaulted.' "

The tide has turned heavily against Coast the past two weeks. After its stock took a shellacking, it said it had hired a New York investment firm to shop purchase offers for the bank.

On Friday, Jim Toomey, Coast's chairman and largest individual stockholder, was hospitalized with chest pains and placed on leave.

For banking types, Coast is a perfect illustration of the danger of lending too heavily to one customer. Smitten with easy money from residential real estate, it piled a fifth of its loan portfolio into the CCI deal. Coon, who was in charge of Coast's residential lending, has been on extended vacation and won't return calls.

Coast has little choice but to submit to a buyout, a move encouraged by federal regulators that will likely happen by summer, predicted Thomas, the Miami banking analyst.

"It's going to be like visiting the clearance rack in the back of the store. They're not going to pay top price for Coast," Thomas said. "This time next year, Coast will be a footnote in history."

Battle is struggling to avoid becoming a footnote, too. He's broken his lease on his new office and returned to his old downtown storefront, more or less a one-man shop after laying off most employees.

In a twist last week, Battle revealed he's courting private investors from New York to buy out Coast's loans linked to him. A New York consultant Battle hired to urge the deal along turned out to be under federal indictment on charges of defrauding a Long Island bank.

Port Charlotte attorney Glenn Siegel represents mostly unpaid subcontractors. He's unimpressed by Battle's attempts to make amends.

"If my clients have to sue," he said, "I believe there are grounds to pierce the corporate veil and hold Jesse Battle personally responsible."

James Thorner can be reached at thorner@sptimes.com or 813 226-3313.


Timeline of a housing deal gone bad:

EARLY 2004: Jesse Battle III of Construction Compliance Inc., John R. Miller of American Mortgage Link and senior lender Phil Coon of Coast Bank establish a no-money-down investment program to sell houses, mostly in North Port, a city in Sarasota County.

APRIL 2004: Coast Bank CEO Gerald Anthony resigns.

MAY 2005: Customer interest is high, so Battle hires Jason Ingram as top salesman for the program. Sales top 500 houses, and Ingram becomes a top money earner at the company.

LATE 2005: Grumbling begins among subcontractors that Battle is behind on payments.

APRIL 2006: After outgrowing one St. Petersburg office, Battle moves his company into a converted garment factory at 1499 Beach Drive SE.

MAY 2006: As housing market slows, Battle warns Coast Bank the investment program could be in trouble. Battle says Coast declined to take action.

JULY 2006: Coast Bank CEO Brian Peters is fired, replaced by Brian Grimes.

OCTOBER 2006: Cash-short CCI stops paying many of its subcontractors. Construction stops on most houses. Subcontractors start placing liens on incomplete CCI houses. The owners, not CCI, get the bills.

NOVEMBER 2006: CCI's Battle brings in New York consultant James Licata to help find private capital. Unknown to some, Licata is under federal indictment, accused of bilking a Long Island bank in a $19-million loan deal.

DECEMBER 2006: CCI president John Wylie is fired.

EARLY TO MID JANUARY 2007: Battle lays off most CCI employees.

JAN. 19: News of CCI's troubles leaks in a Coast Bank report to the Securities and Exchange Commission. Bank says it's on the hook for 482 risky loans with one builder.

JAN. 22: Coast says it has hired New York investment adviser Sandler O'Neill & Partners LP to explore selling the bank.

JAN. 24: CCI issues a statement confirming "severe financial distress" and asks for patience until it can sort through options.

JAN. 25: Stock of Coast parent, Coast Financial Holdings Inc., falls to all-time low, less than half its value of a week earlier.

JAN. 26: Coast releases audit results showing that 216 of the 482 homes customers contracted from CCI were never built, with remainder between 10 and 99 percent finished. Coast demands CCI customers pay their debts.

FEB. 1: CCI says it is trying to line up private investors to buy Coast's troubled loan portfolio on the cheap.