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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.]

Hotel growth anticipated for downtown Phoenix, report says

Sheraton, downtown Phoenix

[Source: Kasia Kowalczyk, Hoteliers Market Intelligence Report] — The onset of [significant downtown Phoenix] development activity has spurred the addition of several proposed hotels.  Downtown Phoenix has long awaited the addition of a new convention hotel, and the call will be answered with the opening of the 1,000-room Sheraton on October 1, 2008.  This city-funded project, which includes 80,000 square feet of meeting space, was budgeted along with the expansion of the Phoenix Convention Center, and the combined projects will be able to accommodate events that would have otherwise passed Phoenix by.  The hotel is one of Sheraton’s grandest undertakings and will be the largest hotel in the state of Arizona.  The Hotel Monroe, Hotel Palomar by Kimpton (as part of the CityScape project), and TWELVE Hotel and Residences are among the other high-end hospitality projects planned for downtown…

Generally, historical occupancy levels have shown steady increases since the market’s low point in 2001.  This growth is a result of record convention activity, increased air travel to the area, and the business of major institutions within downtown Phoenix.  Occupancy growth, which peaked in 2005, has been attributed to the city’s unprecedented expansion efforts over the last five years, as well as a relative undersupply of nationally branded hotel chains within the Central Business District.  Hoteliers look forward to the stronger occupancies associated with increased convention attendance.  Average rate growth in recent years has been significant as well.  This growth is due to strong demand in downtown Phoenix generated by the area’s development, especially from high-rated clientele associated with the biomedical research industry and commercial development activity.  Significant average rate increases noted in 2005, 2006, and 2007 were due to the influx in demand from many of the city’s law firms, banks, and development teams, as well as the positive national economic trends of the last few years.

Economic trends experienced on a national level in the latter half of 2007 and so far into 2008 have resulted in decreased business travel due to rising fuel prices, job losses, and corporate budget cuts. Although Phoenix is not necessarily sheltered from the impacts of these discouraging trends, the capital city benefits from a strong and stable government presence, new mixed-use development efforts that have already secured financing, and the imminent opening of the expanded convention center.  Thus, operating statistics for Phoenix hotels are expected to experience continued growth, but at a slower pace than in former years.  [Note: To read the full report, click here.]

Mortgages Ltd. plans legal action against borrowers; downtown Phoenix Hotel Monroe targeted

Nick Oza, Arizona Republic[Source: Andrew Johnson, Arizona Republic] — Bankrupt real-estate lender Mortgages Ltd. plans to begin foreclosing on properties being developed by two of its largest borrowers.  John Clemency, an attorney representing Mortgages Ltd., said in U.S. Bankruptcy Court on Monday that the company plans to take action against Grace Communities and Rightpath Ltd. Development Group LLC.  Mortgages Ltd. claims the borrowers are in default on loan payments.

Grace has five loans from Mortgages Ltd., including ones for the construction of Hotel Monroe in downtown Phoenix and X Wine Lofts near downtown Scottsdale.  Rightpath has three loans from Mortgages Ltd. for the development of Main Street Glendale, a mixed-use sports and entertainment project on 500 acres near University of Phoenix Stadium.  Both companies deny being in default and are suing Mortgages Ltd. in Maricopa County Superior Court.  They allege in separate lawsuits that the lender did not fully fund their loans.  [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.]

Lender’s downfall puts downtown Phoenix plans in limbo

Exterior of Hotel Monroe renovation project.  Photo by Nick Oza, Arizona Republic.[Source: Jahna Berry and Andrew Johnson, Arizona Republic, June 25, 2008] — The financial storm brewing around Mortgages Ltd. has touched two key downtown Phoenix projects, a blow to ongoing efforts to reinvigorate the city’s heart.  There is no more loan money to fund construction and renovation work for Hotel Monroe, a high-profile luxury project, the developer said Tuesday.  And a proposed Jackson Street entertainment district is looking for new lenders for a land deal.  And it was unclear if other downtown projects could be next.

It’s unknown what developments are among the estimated 70 loans in the embattled Phoenix company’s $925 million loan portfolio.  The downtown projects are significant because Phoenix and state officials have invested years of planning and millions of taxpayer dollars to resuscitate what had once been a sleepy business district.

On Tuesday, city officials downplayed the impact, noting that Phoenix has many successful downtown projects under way.  That includes the expanding Arizona State University downtown Phoenix campus, the $600 million convention-center expansion, and the nearly complete 1,000-room Sheraton hotel project, said Phoenix’s downtown-development director John Chan.  “One segment of the market is slowing down, but there are a lot of positive things going on in downtown Phoenix,” said Chan, adding that the Mortgages Ltd. meltdown is a symptom of the national credit crisis.  [Note: To read the full article, click here.]

Downtown Phoenix developer petitions court to force lender into bankruptcy

[Source: Andrew Johnson, Arizona Republic, June 20, 2008] — A developer behind several high-profile real estate projects and a construction contractor filed a petition late Friday to force lender Mortgages Ltd. into bankruptcy.  Grace Communities, which is developing the 44 Monroe condominium tower and Hotel Monroe in downtown Phoenix, filed motions in U.S. Bankruptcy Court for the District of Arizona asking a judge to put Mortgages Ltd. into Chapter 7. 

Separately, the firm also filed a lawsuit against Mortgages Ltd. seeking the $48 million in financing it claims it is owed for the Hotel Monroe project and to get a $100,000 bond from the lender’s regulator, the state Department of Financial Institutions.  If a judge accepts the bankruptcy petition, the Phoenix-based financier would be required to sell its assets.  Grace Communities also filed an emergency motion to appoint an independent trustee to take over Mortgages Ltd.’s operations.  [Note: To read the full article, click here.]

Other notable Mortgages Ltd. projects funded in and around downtown Phoenix: