Dayton's Project secures $208M in financing to ease legal woes over ownership

Developers of the Dayton's Project in downtown Minneapolis said Friday they have secured $208 million in financing, averting more legal wrangling with one of the project's former key lenders.

Dayton's Project developer and current owner 601W Cos., along with new financial partners Winthrop Strategic Real Estate and the Fortress Investment Group, refinanced the building, effectively paying off the previous lenders.

601W Cos. will kick in an additional $18 million to cover remaining expenses for the development, which after millions spent and years under construction is set to open fully to the public around Nov. 18.

"This has not been an easy project, but landmark projects and projects this large never are," said Brian Whiting, president of the Chicago-based Telos Group, which partnered with 601W to lead the development's execution.

Ownership of the iconic Nicollet Mall property has been mired in a contentious legal battle between 601 Minnesota, an affiliate of New York-based 601W Cos., and hedge fund lender Monarch Alternative Capital.

Monarch Alternative purchased the original $78 million mezzanine loan from another investor in February. During the summer, Monarch claimed the loan was in default because 601 had failed to lease 20% of the building to office tenants, as had been outlined in the original loan documents.

Monarch said 601 also owed $6.6 million in penalties along with $2 million in monthly building expenses plus monthly mortgage interest. Monarch began to advertise an Aug. 23 auction with the pledged collateral on the mezzanine loan being 601W's ownership stake.

The owners, meanwhile, sued Monarch in June and accused the lender of a "loan-to-own" scheme. 601 Minnesota cited the pandemic as the reason for the leasing slowdown as many downtown office workers continue to work from home. Additionally, 601 said that riots following the police killing of George Floyd had led owners to keep the property boarded up for weeks, which dampened the ability to attract tenants.

The 601 group requested that a Hennepin County district judge issue a temporary restraining order to hold off the auction, which was granted last week. Representatives for 601 said Friday the lawsuit will be dropped as the uncertainty with the disgruntled lender has cleared.

Funds from the refinancing will pay off Monarch and the primary mortgage holder, J.P. Morgan.

Tenant interest in the Dayton's Project has been strong despite concerns over increasing cases involving the delta variant of the coronavirus, which has prompted some businesses to consider long-term work-from-home policies, Whiting said. He said he was confident the project would get additional leases signed in the next several months.

"[Employers] want reasons for people to come into the office," Whiting said during a news conference inside the building.

According to the latest samplings from downtown's largest office buildings, downtown building occupancy is at about 35%, the Minneapolis Downtown Council recently reported.

"We've had our challenges, but we are on the way back," said Steve Cramer, president and chief executive of the Minneapolis Downtown Council. "Reanimation is occurring and will continue to occur in the coming months. The Dayton's Project is at the center of that reanimation."

City Council member Lisa Goodman, a vocal supporter of the project and development team, said it would have been a tragedy for the city if the project had been parceled off and not completed the way it was originally envisioned.

"We are here today to celebrate the fact that we are back on track with this development team, moving towards leasing and clearing up the uncertainty surrounding whether or not this project was actually going to open or not," she said.

The Dayton's Project, named after the beloved Dayton's department store that formerly occupied the historic building, has faced an uphill battle.

The $350 million redevelopment was close to being finished early last year, but most of the 1.2 million-square-foot property is still not accessible to the public minus the skyway access for pedestrians. Leasing came to a standstill when the coronavirus pandemic emptied downtown office buildings last year.

Earlier this year, developers announced that its first office tenant, accounting firm Ernst & Young, would move 800 employees to the building this fall when the property will be fully opened to the public.

On Friday, much of the sleek, multiple-story atrium buttressed by white columns looked complete. Plans call for a marketplace with local businesses and an array of food vendors.