Dayton's Project lender throws new wrinkle: Selling the debt

The financing of the biggest remodel in downtown Minneapolis may now be up for grabs.

In the latest chapter in the battle brewing over the repurposed Dayton's Project on Nicollet Mall, a key lender of the project wants to auction off the loan to a new owner on Aug. 23, a move the project's developer along with the city of Minneapolis and downtown boosters plan to fight in court.

New York-based Monarch Alternative Capital purchased the original $78 million mezzanine loan on the iconic, but mostly vacant, former Minneapolis department store from investor Angelo Gordon in February.

In recent weeks, however, Monarch informed the developer and owner of the Dayton's Project, 601 Minnesota Mezz, that it considers the collateralized loan in default because it missed key leasing targets and deadlines.

601 Minnesota claimed it was current on its loan payments, even if it had not been able to rent office space to new tenants as was stipulated by the original loan documents. 601 Minnesota officials cited the pandemic as the reason for the leasing delay.

Monarch made the move to go to auction after 601 Minnesota Mezz sued Monarch on June 9 in Hennepin County District Court to try to prevent any kind of future sale and to halt mounting penalties.

News of a sudden debt sale caught many in Minneapolis by surprise. The historic former Dayton's department store site reopened in September as a gleaming 12-story office complex after three years of renovations that cost $350 million.

601 Minnesota Mezz officials insist they are up to date on loan payments and that Monarch's actions are nothing more than a power grab based on a technicality, one that ignores the caustic impact of the pandemic on Minneapolis' commercial real estate market.

Monarch officials did not respond to several calls seeking comment. Its website describes the company as focusing "primarily on opportunistic credit and distressed situations across corporate, real estate, structured credit, special situations, and other market segments."

Monarch's plans to quickly sell 601 Minnesota Mezz's debt in the project is unsettling, said Minneapolis City Council member Lisa Goodman.

The city is not an investor in the project but intends to assist in the battle now making its way through the court.

"We are looking at ways that we can get involved in helping the court understand how important this project is to the future and recovery of our downtown," Goodman said Friday. The city is in discussions with several "downtown stakeholders," and Goodman said it plans to file a brief with the court soon.

"I for one stand by the 601 Cos. and commend them for the incredible [renovation] job they have done with this building," she said. "They really have captured the hearts and minds of so many people who have known this building throughout their whole lives and have made many happy memories here."

The Minneapolis Downtown Council is also throwing its weight behind the building owners.

"The Downtown Council in partnership with the Minneapolis Regional Chamber [of Commerce] have retained counsel to offer whatever legal help we can. [The Dayton's Project] is that important for downtown and the city," Downtown Council CEO Steve Cramer said. "Our organization is 100% in the corner of 601 Minnesota in this matter. They have made an incredible commitment of resources to the Dayton's Project and absolutely are the right party with their partners to complete the development,"

601 Minnesota and its owners Mark Karasick and Michael Silberberg first sued Monarch Alternative Capital on June 9 in Hennepin County District Court.

601 Minnesota amended its complaint June 30 citing Monarch's foreclosure and sale plans. It is seeking immediate injunctive relief.

But it is unclear how the court might intervene. Currently the case is scheduled for trial in May 2022, long after Monarch plans to auction off the collateral loan.

In its lawsuit, 601 Minnesota said Monarch's attempt to sell off the mezzanine loan amounts to an "opportunistic" and "predatory loan-to-own scheme" since the building's "mezzanine" loan is — and has always been — current.

The lawsuit also alleges that Monarch is taking advantage of a technicality in the original loan agreements that was put in place well before the COVID pandemic existed and well before riots and protesters took to the streets of Minneapolis after the killing of George Floyd last May.

The lawsuit said Monarch considers 601 Minnesota in "technical default" because it was unable to find tenants for at least 250,000 square feet of space within the building due to the pandemic and civil unrest that made some prospective tenants uneasy about relocating downtown, the complaint said.

601 Minnesota officials told the court that two key tenants were lined up for leases but pulled out when the pandemic took hold, forcing many businesses to close as most downtown office workers went home to work remotely.

The building didn't land its first tenant until March of this year, when Ernst & Young accounting firm signed a lease for 30,536 square feet of space in the massive 1.2 million-square-foot structure. The building remains mostly vacant.

601 Minnesota officials said in a statement: "Monarch continues to pursue its loan-to-own strategy without regard to the pending lawsuit or the concerns of the Minneapolis downtown and business communities.We intend to make sure that Monarch has to explain its conduct to the Hennepin County District judge assigned to the case."