Dayton's Project owners get temporary reprieve, chance to resolve lender spat

A new chapter has begun in the wrestling match over the newly renovated Dayton's Project on Nicollet Mall.

Hennepin County District Judge Susan Burke granted the owners of the historic downtown Minneapolis building a temporary restraining order against a New York-based hedge fund lender late Monday, providing time for the developers to usher in a new lender and halt takeover actions.

The ruling prohibits Monarch Alternative Capital from auctioning off its collateral ownership interests in the historic Dayton's building on Aug. 23. It allows the lender to auction the sale of the ownership interests of the 12-story former department store building on or after Sept. 8 if the developer doesn't take action before then.

The current developer and building owner — New York-based 601 Minnesota, 601W, Mark Karasick and Michael Silberberg — has said it needs the extra time to finalize $250 million in new financing with Winthrop Strategic Real Estate and the Fortress Investment Group.

The new funds would be used to pay off Monarch and the primary mortgage holder, J.P. Morgan. It also could help put to rest the battle for control over the beloved downtown landmark.

In her restraining order, Burke ruled that 601 also must put up a $10 million bond to cover the delinquent penalty fees and building expenses that Monarch says it is owed.

"We are delighted by the decision of the court," Karasick and Silberberg said in a joint statement. "We have the financing all lined up and just needed a bit more time to execute the documents, which the judge granted ... Based on the Judge's ruling, 601 Minnesota will move as quickly as possible to complete the financing and remove Monarch Alternative Capital LLC from the project."

601 Minnesota's lead attorney Christopher Sullivan also called it a "wonderful result."

Monarch bought 601's $78 million mezzanine loan on the newly renovated Dayton's building at a discount in February from another investor.

By June, Monarch declared the loan was in default because 601 had failed to lease 20% of the building to office tenants as promised in the original loan documents and failed to pay the $6.6 million in related penalties by June 9.

Monarch has since said 601 separately did not pay $2 million in monthly building expenses and neglected to pay its monthly mortgage interest to J.P. Morgan.

Because of this, Monarch accelerated the rest of 601's loan and advertised the planned Aug. 23 auction, according to court documents. The pledged collateral on the mezzanine loan was 601W's ownership stake in the building.

601 officials sued Monarch in June, and a month later requested that the judge issue a temporary restraining order, to put off Monarch's auction.

601 said Monarch's goal was a "loan-to-own" scheme and that it ignored the pandemic's role in freezing the commercial office leasing market in the Twin Cities. It also said riots and civil unrest following George Floyd's murder left the Dayton's building on Nicollet boarded up for weeks and unable to attract tenants.

601 officials argued that Monarch should honor "force majeure" clauses in lending agreements that usually allow some leeway for forces beyond the control of the borrower.

Monarch said 601 had already renegotiated loan terms in October 2020 to factor in the leasing obstacles and countersued in a New York court claiming the loans were in default and it had to protect its interests.

Monarch's attorney said in a hearing last week it still planned to proceed with the auction of the pledged collateral, unless the court intervened.

In her ruling Monday night, Burke said she was granting the temporary restraining order because irreparable harm could come to 601 and to the city of Minneapolis unless a brief period of time was given to the current owners of the project.

She noted that "public policy considerations strongly weigh in favor of granting a temporary injunction in this case."

Burke referred to a legal brief the city of Minneapolis filed in support of 601 and noted how city officials "lauded" the group for restoring the building to historic standards. Historic preservation was incredibly important to the federal government, state and to the city, which provided tax credits so that the $350 million Dayton's renovation project could occur, Burke wrote.

At this stage, "plaintiffs loss of the project to a buyer who does not share the same commitment to historic preservation and downtown revitalization would harm the public," Burke wrote.

The 30-day restraining order, she said, was all the relief she would grant 601 and noted that the group was less likely to prevail in several of its other legal arguments, such as its "force majeure" claim.

She said 601's case for the restraining order was strengthened by the fact that 601 worked four years to restore and convert the former Dayton's store into an office complex while Monarch recently purchased the loan, right before a critical leasing deadline.

Monarch then refused to extend 601's deadline, declared a default and issued a notice for a foreclosure sale. As a result, "a temporary restraining order is necessary to preserve the status quo," she wrote.

Monarch spokesman Jon Austin said in a statement Tuesday that the restraining order basically grants 601 just two extra weeks beyond Monarch's originally planned Aug. 23 auction date.

"We remain skeptical that 601W has the means to achieve its proposed refinancing, but the court's requirement that 601W posts a bond to receive the extension gives us some reassurance that 601W will ultimately bear responsibility for the critical operational and security costs at the building that Monarch has recently been forced to cover," Austin said.

"If 601W is unable to complete its refinancing by early September as required by the Court, we are ready – and able – to invest the additional money needed to finish construction and lease this property," he said. "We know the Dayton's building is a place of historical pride and a critical element in Minneapolis' bright future."