|By Susan Feyder, Star Tribune,
MinneapolisMcClatchy-Tribune Regional News
December 9, 2009 --The lender for the upscale Ivy Hotel + Residence in downtown Minneapolis is seeking to foreclose on the property, a high-profile project built less than two years ago that has fallen victim to the depressed condominium and hotel market.
In suits filed Nov. 17 in Hennepin County District Court, Dougherty Funding LLC said the developers owe more than $56 million on $69 million in loans for the project at 11th Street and 2nd Avenue S. The amount doesn't include interest or late fees, the suits said.
Dougherty said it wants to foreclose so it can recoup some of what it is owed by selling the property. The foreclosure would include the 136-room hotel and 49 unsold condo units. Court documents said that, as of mid-November, only 21 units had been sold.
Local industry experts said it is very unlikely Dougherty would seek to close the hotel; typically, lenders go out of their way to keep hotels operating during a foreclosure. Earlier this year, Dougherty got court approval to have a receiver appointed to manage both the hotel and condo complex.
Dougherty's suits also said its claims against the developers, Jeff Laux and Gary Benson, should rank ahead of those from a long list of companies that say they have not been paid for work on the project. Those mechanics liens total almost $9 million, led by general contractor Bor-Son Construction with liens of about $5.5 million.
A foreclosure would be a spectacular come-down for the $88 million project, which included constructing the new hotel and condominium buildings, plus renovating the historic Ivy Tower near the Minneapolis Convention Center.
The hotel is part of Starwood Hotel and Resort's Luxury Collection, one of 18 in North America. Four of the suites in the old tower take up an entire floor each, and one is a two-level suite furnished with a baby grand piano that goes for about $3,000 a night.
The condominiums, most of them initially priced at more than $1 million, include full use of the hotel's amenities, like the food, valet and maid service and the 17,000-square-foot spa.
But the project struggled from the start. Completed behind schedule, the hotel opened early last year as the economic downturn began to hit the travel industry. In an interview earlier this year, Laux said occupancy had been "terrible" from January through April. Representatives of Regency Hotel Management of Sioux Falls, S.D., the receiver, could not be reached for comment on the hotel's recent occupancy.
Figures from Tennessee-based Smith Travel Research show that for the 12 months ended Oct. 31, hotel occupancy in the Twin Cities area is down almost 11 percent from the same period a year earlier. Many hotels have cut rates to draw traffic, but the result has meant a dramatic drop in revenue-per-available-room, a key performance benchmark.
Likewise, the Ivy's condos came onto the market well after condo sales went into a tailspin. Neither Laux nor Benson could be reached for comment Tuesday. But industry experts said the lack of condo sales likely hurt their ability to pay off construction loans and other bills. It's not known whether they tried to refinance, but that might have been difficult because of the credit crunch that has caused a sharp increase in commercial property defaults and foreclosures here and elsewhere.
List of creditors
Bor-Son President Gary Heppelmann said Tuesday the Ivy has a lot of things going for it -- the buildings themselves, the amenities, the location -- but has suffered because of the economic downturn. Bor-Son, which had worked with Laux and Benson on other projects, has been in mediation with the developers to settle its contract dispute in connection with work on the Ivy. The $5.5 million in liens are part of about $60 million Bor-Son billed on the project, Heppelmann said.
The list of contractors and subcontractors that haven't been paid also includes smaller companies such as Tekna-Kleen of Burnsville, which has claims for about $13,000 for construction cleaning services. Owner Majid Mashad said he filed the lien after not receiving an $8,500 payment he had negotiated with Laux. Mashad said the unpaid bill has been a large burden for his small company.
Eric Magdal, whose Straughan Hardware claims it is owed about $31,000, also said he filed a mechanic's lien after contacting Laux several times. His business was paid most of the $1 million it billed the developers for doors, door frames and other hardware. But Magdal said the unpaid amount has a significant impact on his business, whose annual sales are $3 million to $4 million.
Dougherty's suit said the city of Minneapolis may also have unspecified claims against the Ivy. The city had a development agreement with Laux and Benson and provided tax-increment financing for the development, which would allow future property taxes to repay some construction costs.
Susan Feyder --612-673-1723
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