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Wisconsin firm buys troubled midtown Phoenix project

[Source: Milwaukee Business Journal] — Main Street Ingredients, a La Crosse company that manufactures and distributes food-processing ingredients, has been selected to buy the “opulent” Chateaux on Central brownstone project in Phoenix for $7 million.  The unfinished residential development at the northwest corner of Central Avenue and Palm Lane has been financially troubled since construction started in 2005.  All forward movement stopped when the lender, Mortgages Ltd., took it back in 2008 shortly before that company was forced into Chapter 11 bankruptcy protection.

Mark Winkleman, chief operating officer of ML Manager LLC, said MSI West Investments LLC submitted the winning bid for the Chateaux.  Closing on the property is scheduled for Friday.  ML Manager is the court-approved entity administering the Mortgages Ltd. loan portfolio in the wake of the lender’s bankruptcy.  The Chateaux is one of the first Mortgages Ltd. properties to be sold off.

Dave Clark, CEO of Main Street Ingredients of La Crosse, confirmed that his company is behind the winning bid.  Main Street recently created MSI West, a limited-liability company registered with the Arizona Corporation Commission.  The company has purchased real estate in other states and started looking around the Phoenix area last year.  “We like what we see in downtown Phoenix,” Clark said.  “We feel this will be a good investment, but we’re not here to turn a dollar.”

The project was designed as 21 five-story residences with private elevators and rooftop terraces.  The announced prices ranged from $2.8 million to $4.5 million per unit, but none were sold.  Desert Hills Bank provided the first construction loan, but the relationship soured when the bank filed a lien on the property.  The late Scott Coles, then CEO of Mortgages Ltd., stepped in to salvage the project, but Coles committed suicide on June 2, 2008, thrusting the entire Mortgages Ltd. loan and property portfolio into limbo.  Within a month of Coles’ death, several borrowers forced Mortgages Ltd. into Chapter 11 bankruptcy.

Phoenix Interrupted: Downtown’s full of gleaming progress surrounded by vacant lots – now what?

Chateaux on Central

Failing midtown Phoenix project (Photo: Sharon, Phoenix Daily Photo)

[Source: Sarah Fenske, Phoenix New Times] — There’s a development on the edge of downtown Phoenix that captivated me even before I moved into the neighborhood: the Chateaux on Central.  My interest wasn’t a matter of good design — everyone from Will Bruder on down is on the record mocking the place, and rightly so.  (With its fanciful turrets, shiny copper roofs, and that ghastly faux-French “eaux,” the project’s overall effect is Disney Does Brownstones in the Desert.) No, the Chateaux on Central were somehow personally evocative.  They made me homesick. [Note: Read the full article at Phoenix Interrupted: Downtown’s full of gleaming progress surrounded by vacant lots – now what?]

Mortgages Ltd. real estate investors seek new court representation

Hotel Monroe, downtown Phoenix

[Source: Andrew Johnson, Arizona Republic] — A group of about 50 investors who pumped nearly $8 million into a fund that bankrupt construction lender Mortgages Ltd. managed could have a new committee representing it in court.  Judge Randolph Haines granted a motion at a hearing Wednesday at the U.S. Bankruptcy Court in Phoenix clarifying that an existing investor committee does not represent Mortgages Ltd.’s Value-to-Loan fund investors.

That leaves the door open for the U.S. Trustee’s Office to appoint a separate committee to represent those investors.  Jonathan Hess, an attorney for the U.S. Trustee in Phoenix, said the office plans to decide on such a request shortly.  Valley bankruptcy attorney Dale Schian said he has been asked by a handful of investors in the Value-to-Loan fund to get a committee formed to represent those investors.  [Note: To read the full article, click here.]

Known Downtown/Midtown Phoenix Projects associated with Mortgages Ltd.

Number of metro Phoenix mechanic’s liens triple since 2005

Rendering of Hotel Monroe, Phoenix, AZ

[Source: Jan Buchholz, Phoenix Business Journal] — Hundreds of mechanic’s liens are being filed each month in the Valley by contractors and subcontractors that haven’t been paid for their work.  Industry experts say the liens, some in the millions of dollars, are a strong indicator of stress in the real estate community.  “Liens are a great way of seeing what’s coming ahead.  A glut of liens is a bad sign,” said Zach Bowers, a researcher for Ion Data Express, a Valley real estate data firm.

In fact, the numbers are startling compared with previous years.  In 2005, 1,752 mechanic’s liens were filed with the Maricopa County Recorder’s office.  Through Aug. 6 of this year, 5,303 liens were filed.  If that rate continues, the number of mechanic’s liens filed will more than double the 4,152 liens filed in 2007.   “We have filed a ton of liens,” said Janet Summers, owner of Van Rylin Associates Inc. in Tucson, which researches and files mechanic’s liens on behalf of clients all over Arizona.

Summers believes the mortgage and banking industries are to blame.  In many cases, she said, developers did not receive the full amount of money promised them.  In other cases, banks and other lenders suddenly have called loans or refused to extend credit lines to worthy parties because of market fears, she said.  [Note: To read the full article, click here.]

Top 10 Mechanic’s Liens Filed in 2008 (Downtown/Midtown Phoenix Only)

#1. Summit Builders Construction Co. ($5.68 million)
Lien filed against: Hotel Monroe, Central & Monroe LLC, Grace Communities
Type of project: Luxury boutique hotel, historic preservation

#4. The Weitz Co. ($3.21 million)
Lien filed against: The Summit at Copper Square LLC
Type of project: High rise condominiums

#5. Gold Creek Inc. ($3.05 million)
Lien filed against: Mortgages Ltd. in connection with Chateaux on Central
Type of project: Luxury condominiums

Mortgages Ltd. empire is built, then crumbles

[Source: Catherine Reagor and Andrew Johnson, Arizona Republic] — Mortgages Ltd. has gone in less than two years from being Arizona’s largest private commercial real-estate lender to a company plunged into bankruptcy following the suicide of its CEO, Scott Coles.  Along with questions raised by the suicide, Mortgages Ltd.’s dramatic fall raises the business question of why a firm holding $900 million in high-interest commercial loans suddenly had to borrow money to stay afloat.  Some borrowers and investors have wondered whether illegal investment practices, a Ponzi scheme, or bad record keeping could have played a role.

The Arizona Republic has tracked the arc of Mortgages Ltd.’s financial plummet through months of interviews, court testimony, and thousands of documents.  The company’s undoing was the result of heavy investment in a falling market, investors pulling out, and a shortfall of cash.  The collapse has cut off payments to thousands of panicked investors and stalled several of the Valley’s biggest commercial projects.  

The Metro LoftsThe problems started quietly.  In early 2006, as metropolitan Phoenix’s housing market showed early signs of slowing, Coles continued to pour hundreds of millions of dollars into residential developments, which included Chandler’s first high-rise and a tower on Phoenix’s Central Avenue that would have rivaled the state’s tallest skyscraper (rendering at right).  A year later, the Valley’s housing market was clearly in a downturn: A glut of new homes with no buyers.  Falling home prices.  Struggling home builders.

Coles did not slow down.  He put almost $50 million into Chateaux on Central’s brownstone mansions in central Phoenix and committed to more than $150 million for the high-end high-rises at Centerpoint in Tempe’s Mill Avenue district.   “I can’t figure out how Mortgages Ltd. decided to fund the condo projects it did when it did,” said Eric Brown, founder of the Artisan Lofts in Phoenix and an analyst with national real-estate consultants Robert Charles Lesser & Co.  “The timing was bad for most new housing developments.” [Note: To read the full article, click here.]

Phoenix developers challenge bankruptcy by Mortgages Ltd.

Rendering of Hotel Monroe project, downtown Phoenix, AZ[Source: Andrew Johnson, Arizona Republic] — Developers worried about Mortgages Ltd.’s dwindling assets asked the U.S. Bankruptcy Court on Monday to convert the real-estate lender’s Chapter 11 bankruptcy case to a Chapter 7.  The change would significantly affect the Phoenix-based company, other borrowers and the company’s nearly 3,000 investors.  Specifically, Chapter 7 proceedings would halt the Phoenix-based firm’s efforts to obtain interim financing for stalled projects while in bankruptcy.

Mortgages Ltd. has been meeting with other lenders, seeking money to pay for business expenses and continue funding unfinished developments such as Hotel Monroe in downtown Phoenix, [Chateaux on Central in midtown Phoenix,] and the Centerpoint condo towers in downtown Tempe.

The motion filed Monday came from Rightpath Limited Development Group LLC, one of several borrowers that claim Mortgages Ltd. did not fully fund its loans.  Scottsdale-based Rightpath is developing a spring-training and entertainment facility in Glendale.  Its motion asksthe court to convert the Mortgages Ltd. bankruptcy case from Chapter 11 to Chapter 7.  [Note: To read the full article, click here.]

Phoenix developers came to rely on Mortgages Ltd.

[Source: Andrew Johnson, Arizona Republic] — Many Arizona developers relied on Mortgages Ltd. In a business where even minor delays can add millions of dollars to projects, real-estate developers turned to the Phoenix-based commercial-mortgage lender for hard cash fast.  In most cases, the company and its investors financed short-term loans intended to bridge gaps between the equity a developer was investing in a project and what it intended to obtain later from other lenders.

Mortgages Ltd. often financed real-estate projects deemed too risky by more-conventional lenders.  With the company now in Chapter 11 bankruptcy, many local industry analysts feel that the risky loans may have contributed to the company’s financial problems.  In return for fast approval at higher risk, developers paid significant upfront fees and higher interest rates than traditional bank lenders typically charge.  Developers accepted the higher costs because they might not qualify for loans elsewhere.

Phoenix-based APEX Development Group obtained three loans in recent years from Mortgages Ltd. for residential projects in south and central Phoenix.  APEX principal Gary Leavitt said quick loan approval was a primary reason his company turned to the lender.  Mortgages Ltd. isn’t the only hard-money lender in town, but it’s the largest with $925 million in outstanding loans.  The firm’s loan portfolio includes such high-profile developments as the Centerpoint condo high-rise in downtown Tempe, Hotel Monroe in downtown Phoenix, and Main Street Glendale, a 500-acre sports and entertainment project near University of Phoenix Stadium[Note: To read the full article, click here.  To read a related article about individual investors caught up in the situation, click here; to read about Southwest Value Partners’ decision to withdraw an offer to provide financing to Mortgages Ltd., click here.]

Wall Street Journal covers Phoenix developer’s woes

[Source: Jonathan Karp, “Real-Estate Financier’s Death Hints At Trouble for Lenders,” Wall Street Journal] — Flamboyant real-estate financier Scott Coles penned a farewell letter, put on a tuxedo, and climbed into bed, where he was later found dead in what police believe was a suicide.  The tragedy last month is drawing attention to the condition of the nation’s commercial real-estate market, which is beginning to show mounting signs of distress. 

Mr. Coles, who was 48 years old, had built his company, Mortgages Ltd., into one of Arizona’s biggest private lenders during the real-estate boom.  It specialized in short-term, high-interest-rate loans to commercial developers — builders of malls, office parks, condominiums and other projects — who either had bad credit or a need for quick cash with no red tape.  But he overreached, and the debacle that has devastated the U.S. housing market the past year is now squeezing Mortgages Ltd.

To keep growing and outrun the problems, Mr. Coles leaned increasingly on loans — totaling roughly $200 million — from an obscure company, Radical Bunny LLC, run by his accountant.  He also sought to raise new money on terms that undermined his existing investors.  These moves triggered the departure of several senior managers at the firm in recent months.

So far, the commercial-property market has been spared the devastating losses felt in the housing market because there wasn’t flagrant overbuilding.  But declining property values and a weakening U.S. economy are starting to bite: Mortgages Ltd. and other lenders are reporting a significant jump in loan defaults.  That’s placing enormous new pressure on the lenders, which have bet billions of dollars on new construction of commercial properties.  [Note: To read the full article, click here.]

Bankrupt lender asks for $125M in aid for metro Phoenix projects

[Source: Andrew Johnson, Arizona Republic, June 29, 2008] — Financing from Phoenix Suns majority owner Robert Sarver’s real-estate company could help bankrupt Mortgages Ltd. continue to fund some big-ticket developments and keep running its business.  Phoenix-based Mortgages Ltd. filed an emergency motion Friday to obtain $125 million from Southwest Value Partners.  Without the money, Mortgages Ltd. says it will not have enough cash to operate.  The company immediately sought $500,000 from the lender for “payroll and other short-term obligations.”  Grace Communities, a developer that borrowed money from Mortgages Ltd., said Friday that it opposes the agreement.

Rendering of Hotel Monroe project in downtown Phoenix.Southwest Value Partners is a real-estate investment company of which Sarver is a co-founder and executive director.  Its loan to Mortgages Ltd., which finances commercial real-estate projects, would be broken into two parts, including $5 million to pay down debt and pay for business expenses and $120 million to fund six development projects.  They include the Centerpoint condo high-rise in Tempe and Hotel Monroe in downtown Phoenix.

Problems at Mortgages Ltd. have intensified since its Chairman and Chief Executive Officer Scott Coles died June 2 in an apparent suicide.  The lender filed for Chapter 11 bankruptcy Monday after Scottsdale developer Grace Communities tried to force it to liquidate under Chapter 7.  Grace is developing Hotel Monroe, a boutique hotel project that has shut down due to a lack of money to pay contractors.  The developer claims Mortgages Ltd. is behind on funding a $75.6 million construction loan it borrowed for the project.  In its emergency motion, Mortgages Ltd. listed proposed amounts it might give to developers.  They are:

Phoenix

  • $35 million for Hotel Monroe.
  • $5 million for Chateaux on Central, a Victorian-style development that Mortgages Ltd. took ownership of in May under a lawsuit settlement with the project’s developer, Central PHX Partners.
  • $3 million to Zacher Homes, which Clemency said is for infill developments in Phoenix.

Outside Phoenix

  • $75 million for Centerpoint in Tempe, which includes two towers, the first of which is close to completion.
  • $5 million for an entity identified as National Retail.  John Clemency, an attorney for Mortgages Ltd., said that loan was for Tutor Time child-care center.
  • $1.1 million for Grace’s Ten Wine Lofts condo development at Scottsdale and Osborn roads in Scottsdale.

The deal was not finalized as of Friday afternoon and is still subject to the approval of the bankruptcy court.  A court hearing is set for 2:30 p.m. Tuesday.  [Note: To read the full article, click here.]