Jan. 30, 2009 - In September, Gatehouse Capital Corp. CEO Marty Collins bluntly assessed his firm's attempts to develop the $158 million Palomar Hotel and condos in downtown Milwaukee.

Dallas-based Gatehouse would bolt without city funding of at least $10 million, Collins said.

"It is not a viable project as evidenced by zero (condo) sales," Collins wrote in a Sept. 9 e-mail to Gatehouse's local partner, Ruvin Development Inc.

That's among the juicy tidbits revealed in a recent lawsuit filed by Ruvin against Gatehouse. It claims Gatehouse required Ruvin to raise money -- totaling $1.57 million -- that provided "exorbitant" development fees to the Texas firm.

The lawsuit, filed in Milwaukee County Circuit Court, also claims Gatehouse kept Ruvin in the dark about project delays. Those delays caused Ruvin to fall behind on paying back cash it raised from local investors to help fund the failed project, which called for a 175-room Kimpton Palomar luxury hotel and 66 high-end condos in the Park East area. Those investors have sued Ruvin.

Collins, in a statement, said he was disappointed and surprised that Ruvin has sued Gatehouse, which he called "senseless."

"We suppose this simply reinforces the commonly held notion that anyone can sue anyone for anything, if they so desire," Collins said. "It is an unfortunate turn of events, the logic of which simply escapes us."

Gatehouse announced Jan. 13 it was killing the 22-story Palomar, proposed for a county-owned lot bordered by W. Juneau and W. McKinley avenues and N. Old World 3rd and N. 4th streets. Collins blamed tight credit markets and weak demand for downtown condos, and also said Gatehouse unsuccessfully sought financial assistance from city officials.

City documents later showed that Gatehouse, on Nov. 11, requested $18 million in city funds, including $8 million for demolition, site work and public improvements, and $10 million in construction financing. City Development Commissioner Rocky Marcoux rejected the request, saying it would have put the city in the position of "substituting for the market."

As early as July 25, Collins was signaling problems with the Palomar. That day, he sent an e-mail to Ruvin Development, saying the project's marketing should be minimized, which Collins called a "mothball strategy." That came just 10 weeks after Gatehouse opened, with much fanfare, a condo sales center on McKinley Blvd.

According to the lawsuit, Collins in an Aug. 2 e-mail told Ruvin Development, "We run out of dough end of August." He had a tart retort when David Florsheim, a Ruvin Development partner, objected to the "mothball strategy."

If the strategy "offends your sensibilities," Collins wrote on Aug. 5, "we can dismantle the sales center, sell for scrap or warehouse in Dallas and move on."

Relationship began in '06

Gatehouse and Ruvin Development formed their partnership in May 2006 and that fall obtained County Board approval to pursue the Palomar project. It was Ruvin's job to raise up to $2 million to help fund pre-construction costs.

Ruvin's investors included the Mark and Barbara Glazer Trust of Mequon and other Glazer family members, who provided $600,000 in March 2007.

Those funds were to be repaid, with a 20% return, by November 2007, when construction on the Palomar was to start, according to court documents. The plan was for Gatehouse to have Dallas billionaire Thomas Hicks -- owner of the Texas Rangers baseball club -- signed on as an equity investor, and for Gatehouse to have secured a construction loan, the lawsuit says.

But the project ran into delays, and Ruvin asked the Glazers to extend the due dates on the loans, and provide more money. The suit claims Gatehouse executives knew about delays and budget problems early in the project history but dragged their feet on telling Ruvin Development.

By 2008, Gatehouse told Ruvin Development it was having trouble landing Hicks as an investor. Collins told the firm's partners, Robert Ruvin and Florsheim, that the only way to draw Hicks into the project was for Ruvin and Florsheim to reduce their ownership share of the Palomar project from 49.9% to 10%.

Ruvin and Florsheim agreed, and in May the $1.5 million condo sales center opened. Gatehouse executives said they hoped to begin construction in November. But the condos -- with prices starting at $575,000 -- proved too rich, and sales were slow. The fall construction start was delayed.

In November, the Glazers sued Robert Ruvin and Florsheim, saying they owed $700,000 in unpaid loans, plus interest. The Glazers claim Robert Ruvin and Florsheim personally guaranteed the loans, which Robert Ruvin and Florsheim denied in their court response.

Meanwhile, the relationship between Ruvin Development and Gatehouse had fallen apart. That same month, Ruvin Development demanded that Gatehouse return funds that Ruvin had raised to pay pre-construction costs. Gatehouse responded by locking Robert Ruvin and Florsheim out of the sales center, the lawsuit said.

Gatehouse's announcement that the Palomar was being dropped came without any advance notice to Ruvin Development, the lawsuit says.

Read Tom Daykin's new commercial real estate blog, "Land and Space," at www.jsonline.com/blogs/landandspace.

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