In an early sign that investors are starting to pounce on the billions of dollars of troubled land and construction loans that banks are looking to unload, a venture headed by LandCap Partners is buying $40 million of such assets from Wachovia Corp.

LandCap, a residential-land company headed by real-estate veteran Jeffrey Gault, has created a joint venture that will buy the loans which have a book value of $75 million to $80 million, according to people familiar with the deal.

The loans are to home developers and collateralized by 2,900 house lots -- which are in varying stages of development -- in such states as California, Arizona, Florida and Illinois. Many of the loans are in some form of distress because of delinquent payments or plunging values of the collateral. Charlotte, N.C.-based Wachovia, which declined comment, will be a minority partner in the venture.

The deal allows Wachovia, one of the nation's largest construction lenders, to move the troubled loans off its books and raise capital. LandCap will service the loans and foreclose on the troubled debt if deals can't be worked out with distressed borrowers. The venture plans to sell foreclosed property to other home builders.

"We get it off their balance sheet, and we take on the management duties," says Mr. Gault. "It's the best of both worlds.

The LandCap venture bought the loans out of a pool of about $350 million in such loans that the bank put up for sale earlier this year. But that pool is just a fraction of Wachovia's overall portfolio of construction loans. According to Foresight Analytics LLC, about 9.4% of Wachovia's $24 billion in construction and land loans were delinquent in the second quarter. That is up from a 7.7% delinquency rate in the first quarter.

Other banks are facing similar problems as more residential projects fail. Foresight Analytics estimates that land- and construction-loan delinquencies reached 8% in the second quarter for commercial banks, up from 7.1% in the first quarter and 2.3% in the year-earlier period. Over the next five years, U.S. banks could write off as bad debt between $65 billion and $165 billion loans tied to residential construction and land assets, according to research firm Zelman & Associates.

Mr. Gault, whose firm has raised about $400 million from private equity to buy land, says the venture intends to buy more loans from Wachovia in the future.

--Lingling Wei contributed to this article.

Write to Michael Corkery at michael.corkery@wsj.com

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