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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.

1931 bank building in downtown Phoenix headed for foreclosure

[Source: Jahna Berry, Arizona Republic] — A downtown Phoenix 1931 bank building that was entangled in Mortgages Ltd.’s collapse appears headed for foreclosure.  The 12-story Professional Building at 15 E. Monroe Street is scheduled to be auctioned on April 20, according to a notice of trustee sale filed at the Maricopa County Recorder’s Office.  The notice is the first step in the foreclosure process.  Thirteen investors are owed $76.5 million, according to the notice.  The largest share is owed to a court-appointed entity that is managing the remainder of lender Mortgages Ltd.’s assets.

Phoenix-based Mortgages Ltd., helmed by the late Scott Coles, was once considered Arizona’s largest private commercial lender.  The firm ran into trouble when the real estate market crashed, the firm couldn’t raise new capital from investors and couldn’t meet some of its loan obligations.  When Mortgages Ltd. went bankrupt, developer Grace Communities was transforming the former home of Valley National Bank into an upscale 150-room boutique hotel called Hotel Monroe.  Construction stopped and the partially-renovated building sits empty near Central Avenue and Monroe Street.

Fraud case ends for Arizona’s Mortgages Ltd.

Unfinished Hotel Monroe project, downtown Phoenix

[Source: Andrew Johnson, Arizona Republic] — The U.S. Securities and Exchange Commission has resolved fraud accusations it brought against an investment arm of failed commercial real-estate financier Mortgages Ltd.  The federal agency on Monday announced that Mortgages Ltd. Securities LLC agreed to an order revoking the company’s registration as a securities broker-dealer.

The SEC also sought $7.3 million in penalties and prejudgment interest but waived the amount because the investment firm demonstrated a lack of funds to pay.   The action stems from the downfall of Phoenix-based Mortgages Ltd., once considered Arizona’s largest private commercial lender.

Mortgages Ltd. distributed more than $900 million in loans for real-estate acquisitions, development, and construction projects… Mortgages Ltd.’s failure led to the collapse of several high-profile real-estate projects, including Hotel Monroe in downtown Phoenix and the Centerpoint condo towers in Tempe.  It also left the company’s thousands of investors, many of them retired, in the lurch.  [Note: Read the full article at Fraud case ends for Phoenix’s Mortgages Ltd.]

Mortgages Ltd. altered deal to benefit downtown Phoenix project

[jackson.jpg][Source: Andrew Johnson, Arizona Republic] — Investors’ rights have been a long-standing issue in the bankruptcy of Phoenix-based Mortgages Ltd. Former Managing Director Robert Furst testified in U.S. Bankruptcy Court that Chairman and Chief Executive Officer Scott Coles made the decision to alter an investors agreement to give Mortgages Ltd. more flexibility to bring in new investors as first lien holders ahead of existing investors.

Furst said he worked for Mortgages Ltd. from October 2005 to March 2008, when he quit.  He testified unexpectedly on a proposed loan extension Mortgages Ltd. was offering local real-estate developer Dale Jensen.  Jensen’s firm, SOJAC I LLC, has an approximately $24 million loan with Mortgages Ltd. for the development of a proposed entertainment district on Jackson Street in downtown Phoenix.  Furst said he wanted more information about Jensen’s finances before a judge approved the extension.

Jensen was current on interest payments but the loan principal came due in late September.  Because of turmoil in the credit markets, he likely wouldn’t be able to secure financing to pay off the balance, said his attorney, Don Gaffney.  SOJAC wanted to have the loan-maturity date extended a year.  Judge Randolph Haines ultimately approved the extension, calling it a reasonable deal.  [Note: To read the full article, click here.]

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’s private real estate financiers now in the spotlight

[Source: Andrew Johnson, Arizona Republic] — For years, “hard-money” real-estate lenders have operated in relative obscurity, raising billions of dollars from investors to fund thousands of developments across Arizona.  The inner workings of such financiers, who charge high fees and interest on building projects that banks deem too risky, traditionally have been familiar only to developers and the lenders themselves.  The integral role they play in the Valley’s real-estate market has garnered increased attention as banks have reined in lending activity.

The high-profile case of Mortgages Ltd. also has brought more attention to the industry.  It was thrust into the spotlight with the June 2 suicide of its chairman and chief executive officer, Scott Coles.  Coles’ death occurred amid lawsuits brought by borrowers and just three weeks before a developer forced the company into bankruptcy.  Phoenix-based Mortgages Ltd. was considered Arizona’s largest, oldest and best-known private lender.  But the company is only one of dozens of hard-money lenders in Arizona that specialize in short-term, high-interest loans for real-estate projects.  The firms’ operators say they have seized a bigger piece of the construction-lending market because traditional banks and institutional players are on the sidelines.  Many are still actively soliciting funds from investors, who are vital to their ability to make loans.

But Mortgages Ltd.’s problems have caused some industry experts to question whether hard-money lenders are next in line to be hamstrung by the bad real-estate market.  Their lending and fundraising practices — largely unregulated — also have come under scrutiny in lawsuits by investors and developers.  “Our industry for many years was the Wild West,” said Jayne Hartley, managing director of Phoenix-based private lender Coppercrest Funding LLC.  [Note: To read the full article, 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.]

Lender for major downtown Phoenix projects files for bankruptcy

[Source: Andrew Johnson, Arizona Republic, June 23, 2008]Mortgages Ltd. filed for Chapter 11 bankruptcy Monday night, under pressure from a borrower that earlier had filed a petition seeking to liquidate the lender’s assets.  John Clemency, an attorney for Mortgages Ltd., said that the move seeking a reorganization of its debts could help bring stability to the embattled company, which has an estimated $925 million in loans outstanding and has faced questions since the June 2 death of its chairman and CEO, Scott M. Coles.

Mortgages Ltd. also is lining up outside financing from real-estate lender Southwest Value Partners to continue at least servicing existing borrowers, Clemency said.  The move by the Phoenix-based commercial real-estate lender comes three days after Scottsdale-based developer Grace Communities, one of its borrowers, filed a petition to force Mortgages Ltd. into Chapter 7 bankruptcy.  [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: