Minnesota Developer Battles for Future of Historic Building

MINNEAPOLIS, June 15, 2021 /PRNewswire/ -- The future of the historic Dayton building, which is part of the cultural and retail fabric of downtown Minneapolis is at stake and its developer, 601 Minnesota Mezzanine LLC, is fighting to preserve the architectural masterpiece. An economic lynchpin in the area, the building is owned by 601 Minnesota, which painstakingly restored it, preserving stunning architectural details and making it ready for a new generation of occupants. However, lender Monarch Alternative Capital LP, which acquired the mezzanine debt position just four months ago, wants to take over the 1902 gem, in a "predatory 'loan-to-own' scheme," according to a complaint just filed in Minnesota state court.

The plaintiff is the owner-developer of the beloved property on the corner of Nicollet and 7th Avenue. For the past four years, 601 Minnesota executed a $350 million dollar redevelopment of the historic property. The 1.2 million square foot building, that has been transformed by 601 Minnesota Mezz, offers 9 floors of offices plus nearly 300,000 sf of retail space on the lowest 3 floors, including restaurants on the first and second floor. It offers first-of-their-kind features such as a library on the rooftop--alongside a gym and park. The Dayton Project has provided over 1,500 construction jobs; there likely will be thousands more jobs generated by occupants of the extensive office and retail space.

"This will be the first space of its kind in Minnesota," said Mark Karasick, one of two managing partners of 601 Minnesota Mezz. "We will be supporting the local business community with a designated area for small retail shops and kiosks, specializing in products made here in Minnesota, including those made by local artisans and minority-owned businesses." 

The project has been largely complete since February 2020, the beginning of the COVID pandemic. Prior to the pandemic and the local civil unrest over the tragic death of George Floyd, 601 Minnesota had firm lease commitments from two significant tenants and was in advanced negotiations with various others. According to the complaint, in the past 16 months "the Minneapolis leasing market has been virtually frozen as a result of COVID-related lockdowns and widespread civil unrest, resulting in and the shutdown of retail and office operations citywide."

Defendant Monarch Alternative Capital LP describes itself on its website as a New York "opportunistic credit and distressed situation" investment fund. According to the complaint, Monarch is claiming that even though 601 Minnesota is completely current in its debt service obligations, it is in technical default, and therefore subject to massive additional potential penalties under the mezzanine loan documents, for not leasing up the project by various "leasing hurdle" dates.  The complaint explains that those leasing hurdles were set before anyone understood how severe and long lasting the dual crises impacting Minneapolis would be. The mezzanine loan involved is not in monetary default, nor is the mortgage loan on the property.

The complaint alleges that Monarch is looking to profit from the crisis confronting Minneapolis and its business community by seeking to compel 601 Minnesota to adhere to lease-up projections established at a time when no one could reasonably have predicted the unprecedented extent to which the pandemic and civil unrest would paralyze office and retail leasing downtown. The filing goes on to state, "By refusing to cooperate with 601 Minnesota in addressing the Leasing Hurdles, and instead trying to capitalize on the current crisis to foreclose the mezzanine loan and steal the Property, Monarch has ensured that no other lender will refinance the Dayton's project."

601 Minnesota Mezz seeks declaratory and injunctive relief and $270 million in damages from Monarch.  As the complaint states, "a predatory lender...is seeking to drive the owner-developer of a local Minneapolis real estate project out of business and take over the project for itself."

SOURCE 601 Minnesota Mezzanine