Credit crisis snarls Waverly Place

Developer can't find a lender to bankroll his plan to make the Cary shopping center a modern mix of condos, stores and offices

The $180 million redevelopment of Cary's Waverly Place shopping center is joining the list of projects delayed by the credit crunch.

Developer Todd Zapolski says the plan -- much of which was expected to be complete next year -- is on hold until a lender is willing to bankroll the rest. A deal may be in the works to allow Zapolski to sell his stake in the project but remain involved.

It's another example of how an about-face by lenders is snarling developments across the country.

Less than two years ago, lenders routinely financed mixed-use projects such as Waverly. Companies were expanding, and consumers were traveling, buying homes and spending in stores, which led to demand for all types of residential and commercial real estate.

As the economy has slowed, so has demand for real estate.

Lenders are taking fewer risks on construction, often requiring more equity from developers and more presales or preleasing.

"We had the perfect positive storm a year and a half ago: condos, hotels, office, retail, everything looking good," Zapolski says. "And now we have the reverse situation, where everybody is running for the hills."

The Waverly deal tracks the market's ups and downs. "It's the poster child," Zapolski says.

In January 2005, when lenders were gladly financing acquisitions and developments, he paid $14.25 million for the 82,386-square-foot shopping center at Tryon and Kildaire Farm roads.

Two years later, near the height of the lending boom, he hatched plans to tear down most of Waverly Place and add offices, hotel rooms, condominiums and shops, including a much anticipated new Whole Foods grocery. In December, Crescent State Bank agreed to move its headquarters to the new Waverly.

A hitch in the plans

But in recent months, the project has hit bumps.

Pre-construction phases, such as demolition at the 20-year-old shopping center and site work for the new Whole Foods, have slowed. Prospective tenants have bailed. Others, such as Crescent and Whole Foods, don't know when they will have their spaces.

And the architect of the redesigned Waverly doesn't know when it will be paid. Little Diversified Architectural Consulting of Charlotte this week filed a lien in Wake County, saying it is owed $109,321 for design work at Waverly.

Allen L. West, a Charlotte lawyer who filed the document for Little, said the company wouldn't comment on the dispute.

Zapolski says the fee is the remainder of about $950,000 in work Little did for the redesign.

Zapolski and his partners in the project paid most of it out of pocket, he said, and they planned to pay the balance once construction financing was in place. Now he's not certain if that will happen.

In addition to having already spent millions on pre-construction, Zapolski and his Waverly partners still must pay a $13.5 million debt to Bank of America, county records show.

"We just need to adjust to the current market and not be unrealistic," he said. "What we want and wish -- that was yesterday. We've got to deal with today. And today is still very strong for this location. We just need to retool it and deal with it in the current context."

That means the project may not proceed as envisioned or under Zapolski's ownership.

Zapolski has been courted by private equity firms and public real estate investment trusts that want to make a play at Waverly. A deal may be in the works to sell the project, refinance it or form a joint venture with one of them. Zapolski wouldn't name names.

Meanwhile, he's considering ways to build the project in phases instead of all at once, which may be more acceptable to lenders.

"A project like this is like doing a major catered meal," he says. "You've got to have all the different dishes come out at the same time and keep warm, and make sure that some that take longer are baked earlier.

"Trying to do the project all at one time with all the different types of food groups is really impossible in this market."

The Waverly troubles are the latest in a busy summer for Zapolski. In June, he split with his longtime partner, Leslie Rudd of Napa, Calif. Zapolski has been focusing on projects in the Carolinas under the Zapolski Real Estate name, while Rudd formed Rudd Properties to concentrate on the pair's West Coast dealings. Both have said the split was amicable.