Orem city officials are threatening to hold a foreclosure auction of the stalled Midtown Village unless its developers pony up $430,000 by Nov. 14 to fund work done on underground public parking.
"We've filed a notice of default with the county recorder's office on Aug. 14, and within 90 days of that period, if someone makes the assessments, then the foreclosure auction will be stopped," said Steve Earl, assistant city attorney for Orem. "We have liens against 152 residential units in the north and south towers, except for four units that were sold, and about 139,000 square feet of commercial space."
The assessments, which came due on June 1, total $2.31 million for all the condo units, while the assessments against 139,000 square feet of commercial space total $3.34 million. Of the 152 units, 32 have temporary certificates of occupancy, six are close to getting those, and 114 are in various stages of completion.
But Midtown's developers, which haven't sold enough condos or commercial space to date and are therefore responsible for paying the annual assessments for about 20 years, failed to meet the June payment deadline.
"If the project does indeed go to a foreclosure sale, the city won't bid more than $5.65 million for it," Earl said. "Our starting bid and the maximum we will bid will be equal to the amount of assessments owed on the 152 units, which comes up to $15,173 per unit, and the starting bid for the commercial space is around $24 per square foot."
But Earl believes the foreclosure sale is unlikely because "too many people have too much of a stake in the project to let it be auctioned off for this amount. The project has had about $100 million invested in it already. Even if the project went to auction, the city won't end up the owners because someone will very likely outbid the city."
He said he believes the $430,000 assessment will be made in the next few months.
The city planned to use those funds to make payment on a $3.5 million interim warrant it issued several years ago to pay for its share of three proposed parking structures at Midtown. The warrant, which was issued as part of the Special Improvement District created by Orem in 2004 to fund public parking construction, is secured by assessments against Midtown's completed condos.
The city is due to make its first payment on the warrant on Dec. 1.
Earl believes the foreclosure auction may prompt more serious efforts to resolve an ongoing lawsuit filed by Big-D Construction Corp. and several subcontractors against Midtown's developer and its financial backers to recover about $20 million in alleged unpaid work.
"A foreclosure sale will cut off all the liens to the property and the banks and contractors don't want to see that happen," he said.
Both the contractors and the project's lenders, which have liens against the property, are fighting over who has priority to get paid first after the city.
"There's probably not enough money to pay off everyone in full so it's important to see who has the highest priority after the city," Earl said.
The lenders include Marshall Investments Corp., which provided $42 million in construction financing in June 2005 to Midtown after the project was suspended in January 2005 because of financial difficulties. Other lenders include South Dakota-based BankFirst; and First United Funding LLC, which provided around $20.7 million in additional financing.
Robert Babcock, the lead counsel for the contractors, said excavation of the underground parking structures and the towers began in 2004, nearly two years prior to any lender recording a deed of trust to secure funding for the project's construction.
But the lenders, in court documents, argue that the contractors' liens don't relate back to the date that excavation of the south tower began because the original developer, Tower Development, abandoned the project when its inability to get financing resulted in work stoppage for nearly a year (from December 2004 through October 2005) and the eventual transfer of the project to another entity that entered into a new contract with a new contractor.
But Babcock disagreed.
"BankFirst was marketing loans to the other banks from October 2004 through 2005. Is Bankfirst saying it was defrauding the other banks by getting them to buy into an abandoned project? Just because the developer didn't have a loan in place doesn't mean he gave up and abandoned the project," he said.
Meanwhile, Bankfirst and several other banks are separately in litigation with Jerry Moyes, guarantor of the Marshall loan. Moyes is co-founder, chairman and chief executive of Swift Transportation Co. and also has an interest in SME Steel Contractors Inc.
"There've been a number of settlement discussions between the banks, the developer and Moyes for a year now. If that case gets resolved, it may be a precursor for the contractors' case getting resolved potentially, depending on how everything is settled," Babcock said.
Bankfirst was taken over by the FDIC in July. Banks all over the country are in trouble because of rising defaults on residential loans as well as commercial real estate loans for construction and development projects. A number of companies have gone under because of the recession, abandoning commercial projects financed by the bank loans.