Sept. 03, 2011--Plans to convert a historic downtown Milwaukee building into a 128-room Hilton Garden Inn are facing an obstacle after a foreclosure lawsuit was filed against the investment group that controls the property.

First Hospitality Group Inc., based in Rosemont, Ill., had planned to begin work by September on an $18 million conversion of the Loyalty Building, 611 N. Broadway.

But First MKD LLC, an investment group led by First Hospitality Chairman Stephen Schwartz, is being sued by its lender, Phoenix-based Sir Mortgage & Finance of Arizona Inc.

Sir Mortgage loaned First MKD $1.5 million on March 1, according to the suit filed in Milwaukee County Circuit Court.

Another First Hospitality affiliate in March bought the Loyalty Building and the nearby historic Mackie Building, 225 E. Michigan St., for $1.7 million, according to assessment records.

The loan agreement included a provision that First MKD's failure to obtain a $10 million construction loan commitment for the project within 60 days would result in a default, the suit said.

First MKD has failed to secure that construction loan, and Sir Mortgage has demanded full payment of its loan, the suit said. As of Aug. 1, First MKD owed $1.5 million in principal, and $359,800 in interest, the suit claimed.

Sir Mortgage is seeking a foreclosure sale of the Loyalty Building, which is mostly empty. Schwartz didn't return telephone calls and an email seeking comment.

Schwartz said in June the project's $18 million to $20 million cost would be financed with a bank loan and federal historic preservation tax credits, as well as equity from the developer. The tax credits help pay for a portion of a project's exterior renovation costs as long as the historic restoration meets federal standards.

First Hospitality also would use the nearby Grain Exchange Room, at the Mackie Building, as the Hilton Garden Inn's banquet and catering facility. The Loyalty Building would include smaller meeting rooms, along with guest rooms and an atrium lobby.

News of the foreclosure suit comes as plans proceed for a nearby 200-room Marriott hotel.

Jackson Street Management LLC this week bought buildings at the planned Marriott site, near the southwest corner of E. Wisconsin Ave. and N. Milwaukee St. The firm plans to begin work later this year to develop a nine-story hotel.

The $54 million Marriott will be a combination of new construction, and the renovated portions of some of the historic buildings.

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