Downtown Phoenix High-Profile Projects in Limbo

Downtown Phoenix High-Profile Projects in Limbo
Collapsed lender imperils downtown developments

A celebrity chef was planning the menus, brides were negotiating room rates and 250 staffers were on the payroll.

But four months before Hotel Monroe was scheduled to open, its lender went bankrupt.

Now it could be at least a year before the 150-room luxury hotel is complete, says developer Grace Communities.

It's unclear what the future holds for the hotel and an entertainment district, two high-profile downtown Phoenix projects tangled in Mortgages Ltd.'s web of legal and financial woes. The credit crunch could mean a difficult road for both projects, an expert says.

But backers of both projects are optimistic.

Downtown boosters are watching both ventures closely because they would add much-needed elements to the city: an infusion of hotel rooms and a corridor of shops, nightspots, and restaurants near Phoenix's sports arenas.

The troubles at Mortgages Ltd. won't put the brakes on downtown Phoenix's resurgence, but impact on those two projects may be painful, observers say.

"This one hurt, bad," said Jonathan Vento, a principal at Grace Communities. The developer was renovating a 12-story 1931office building at 15 E. Monroe Street to house Hotel Monroe Construction work essentially stopped last week.

On Thursday, Grace officials were courting a prospective lender, but it's hard to say what will happen next, Vento said. It would take about $50 million to finish the hotel project, he added.

"A boutique hotel is not a construction project by itself. It is an operating business," Vento said. "It lives and breathes."

Grace is also wrapping up construction on 44 Monroe, a 34-story condo tower a block away from the Hotel Monroe. The tower, however doesn't have a Mortgages Ltd. loan, said Joyce Wright, an attorney for Grace Communities.

No easy choices

There may be few easy options for the two downtown developments or for the estimated 70 loans in Mortgages Ltd.'s $925 million loan portfolio.

The economic slump has all but shut off the credit tap for many commercial projects, said Anthony Sanders a professor at Arizona State University's W.P . Carey School of Business.

"A lot of lenders are taking a timeout right now," said Sanders, who teaches real-estate finance.

Nationally, loan defaults are up, sales of finished projects are down, senior loan officers at banks have ratcheted up their lending requirements, and land - which is collateral for the construction loans - is worth less, Sanders said.

"I would love to see downtown Phoenix blossom," the professor said. "Right now, it's not a sure thing that downtown Phoenix will be like downtown Manhattan. These are really, really dicey loans at the moment."

In response, the institutions making loans may have doubled or tripled the interest that they charge compared to rates at the beginning of this year, Sanders said.

Jackson Street

The Jackson Street entertainment district would line a stretch of that street near Chase Field with nightspots, restaurants and residences, developer say.

Mortgages Ltd. provided a "seven-figures plus" loan that helped the project's backers to buy two city blocks of property south of the Summit at Copper Square condo tower, said developer Dale Jensen. He declined to give the exact figure.

Now Jensen is looking for a new lender to take over the debt.

Of the two projects, the proposed Jackson Street entertainment district may have a relatively easier road, said Larry Lazarus, a veteran Valley development attorney working on the Jackson Street project.

Developments that have "end users" are easier to finance than housing, which involves more speculation, the lawyer said.

Lazarus is also an example of how the Mortgages Ltd. debacle has permeated the region's development circle. He invested in the firm, as did his parents, friends and some former clients, the lawyer says.

"It's hard to be in the industry here and not know every side of this deal," Lazarus said.

Loan crisis

Mortgages Ltd. was a key player in Arizona's building world.

It bankrolled land acquisition, development and construction for commercial real estate.

Mortgages Ltd. came under scrutiny shortly after CEO Scott Coles' son found him lying unconscious in bed on June 2. Police suspect it was suicide.

Two borrowers, including Grace Communities, have sued Mortgages Ltd., claiming that the lender defaulted on loan obligations.

Some of Mortgages Ltd.'s investors, who helped fund the loans, have filed suit to gain access to the lender's books.

Grace Communities' attorney says Mortgages Ltd. provided only a third of the $75.6 million loan. Mortgages Ltd. has argued that Grace and other borrowers have filed lawsuits because they are in default and they need to buy time.

Vento insists Grace hasn't defaulted on any loan payments.

The bankruptcy case heads back the U.S. Bankruptcy Court for the District of Arizona on Tuesday.
Source: The Arizona Republic

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