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(This story, in slightly different form, originally appeared in Incisive Media’s Daily Business Review.)

WEST PALM BEACH, FL-Embattled BankAtlantic has sold a $40-million mortgage backed by a retirement community development in Delray Beach. It is unclear how much of a loss the bank may have taken on the note sale.

Some builders and investors are taking advantage of the distressed real estate market to gain control of properties by buying the financing at a deep discount. Red Bank, NJ-based K Hovnanian Homes last week purchased the BankAtlantic loan secured by 128 lots and 33 homes in Tivoli Isles, a development catering to residents ages 55 or older.

Tom Godart and Gary Coates, of Boca Raton-based PMA Sales Group, represented BankAtlantic and K Hovnanian in the deal. In general, notes secured by residential developments have been selling at substantial discounts, in some cases more than 50% below the remaining principal.

Godart, a development specialist at PMA, says end-users such as K Hovnanian typically pay more for distressed notes than buyers such as vulture funds because they have the ability to complete the project. Mark Hodges, K Hovnanian’s president, could not be reached for comment.

Tivoli Isles, which is planned to have 315 homes, is on US 441 north of Atlantic Avenue and was developed by Delray Beach-based Home Devco. The company borrowed about $67 million from BankAtlantic to purchase the 130-acre site in 2004 for $54 million. Home Devco sold a little more than 150 homes at prices ranging from $300,000 to $600,000 and paid down some of the debt, leaving a balance of about $40.7 million, according to Palm Beach County records.

Home Devco defaulted on the remaining balance of the loan and BankAtlantic foreclosed on the unsold lots and homes in late December. Home Devco principals Richard Swartz and Andrew Steinberg did not return a phone call seeking comment. BankAtlantic and its attorney, William Davell, also did not return calls seeking comment.

Godart and Coates said they have been working to put the deal together for about four months. Coates, PMA’s president, says the note was never officially put up for sale, but he knew it was on BankAtlantic’s books. They pitched it to K Hovnanian, which wanted to enter the active adult market in South Florida.

K Hovnanian bought the note and intends to continue with the foreclosure and eventually complete the project, Godart says. “The whole idea is to end up with the deed,” he says. “They are not in the business of buying notes. They are in the business of developing homes.”

Coates says the developer is going to focus on the sale of the 25 completed houses and seven unfinished homes before resuming development of the remaining lots.

Palm Beach County’s active-adult market is weathering the real estate downturn better than other sectors of the industry. But even those types of projects haven’t been immune, especially if the developer purchased the site at the height of the market and had to sell houses at record high prices.

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