A brush with foreclosure for Shops at Village Creek
Brooklyn Park EDA agreed to modify mortgages
A four-year-old high-profile shopping center at Zane Avenue and Brooklyn Boulevard is struggling to pay its mortgage.
But with a change in ownership and management, plus a little help from the city, the Shops at Village Creek can avoid foreclosure and have another chance to be profitable.
The Shops at Village Creek is considered the centerpiece of Brooklyn Park’s redevelopment of the Village Creek area near the site of the former Village North Shopping Center and the new Village Creek Community Police Station.
Built in 2009, the Shops at Village Creek has experienced a high vacancy rate, even though its “anchor tenant,” a Hennepin County Medical Center clinic, occupies more than half the building. Since two key tenants closed in 2011, the development’s expenses have been higher than the rent it collects, according to a city report.
The cash-flow difficulties caused MidCountry Bank, the development’s primary lender, to threaten foreclosure when the mortgage expires at the end of March.
MidCountry’s threats left the developer, Brooklyn Park Holdings A, only one option to avoid foreclosure: refinance with a different lender.
The property’s challenges made finding another lender difficult. The developer only found one taker, a private equity group in Chicago.
But the new lender would sign off on the loan, unless there were modifications to secondary mortgages held by the Brooklyn Park Economic Development Authority (EDA), which consists of the same members as the city council.
The EDA holds two mortgages for the property. It issued them so the developer could meet the bank’s requirements and get financing to build the project.
One mortgage was a five-year, $1.3 million loan with a 10 percent interest rate. The city issued the loan with Tax Increment Financing dollars. The developer now owes the city $1.6 million because of accrued interest.
The second mortgage was for the “deferred purchase price” of the land. In other words, the city transferred ownership of the land but said the developer didn’t have to pay the $477,500 price until the end of five years.
At its Feb. 11 meeting, the EDA was asked to slash the interest rate on the loan from 10 percent to 3.5 percent and to double the length of the repayment period for both mortgages from five to 10 years. The EDA was also asked to clear up a technicality in the mortgage contract and to approve a transfer of ownership of the property.
Four partners developed the project, but of those four, only Tom Gump would retain a stake in the Shops at Village Creek.
Brooklyn Park Community Development Director Jason Aarsvold recommended that the EDA approve the requested changes.
“The last thing we want to see is this thing end up in foreclosure or have to go dark or anything like that,” Aarsvold said. “This puts the project on a path to sustainability, and we think that’s a good thing.”
If the development went into foreclosure, the property wouldn’t go dark, but it would be sold. It’s current market value of approximately $3.8 million would not be enough to repay the $4 million owed to the bank, let alone pay back the city.
“For us a foreclosure would’ve meant losing our investment,” Aarsvold said.
Why is the property valued at such a low price? According to Aarsvold, the building’s value is based on the stream of rent revenue it can produce, so it is worth less when there are fewer rent-paying tenants.
“If you fill that building up and start collecting all the rent, that valuation goes way up,” he said.
That would be good not only for the developer, but also for the EDA.
“The good news here is that this project does have the ability to make money and be self-sufficient,” Aarsvold said.
That means the EDA still has a chance to turn a profit on the investment.
Aarsvold also pointed out that even if the development went into foreclosure, the EDA has been collecting Tax Increment Financing dollars generated by the property. That is money the city wouldn’t have received if the building were never constructed. So in a sense the extra revenue is slowly repaying the loans, regardless of what happens.
The EDA commissioners didn’t seem pleased by the requested modifications but agreed to the terms.
“The best chance we have of getting our money back and keeping the corner occupied is doing this – is that accurate?” Commissioner Mike Trepanier asked.
Aarsvold said staff believes that’s correct.
Commissioner John Jordan asked developer Tom Gump what he plans to do differently to make the project succeed.
Gump said the building will be under new management and a have fresh leasing team, the Davis Group, that specializes in medical office leasing. The building will still have retail tenants, Gump said, but instead of focusing on general retail, he plans to target tenants who want to locate near the clinic.
Gump said the new lender believes in the plan.
“And now I’m here tonight asking you to believe in us,” he said.
EDA President Jeffrey Lunde seemed frustrated by the project, which has not lived up to the grand vision originally cast.
“I think three or four times I’ve sat up here and said, ‘Well, I’ve got to vote for this because I have no other choice,’” he said. “… And that’s where I am tonight. I guess I’m really troubled by that.”
Aarsvold said he believed the original plan was always an “aspirational” plan that helped the city get the best possible development for the area. He said even though the site hasn’t met original expectations, in his opinion there have been enough positive effects to call it a success.
“People forget that we’ve put in millions of dollars of public improvements that are used every day,” he said. “… We’ve done apartment rehab in that area. We’ve built hundreds of new homes in that area that were all sold and occupied.”
He said property values have doubled and tripled in the area, creating tax revenue for the next 30 years in an area that had essentially been “subsidized” by the rest of the city when distributing the property tax bill.
Nevertheless, Lunde had reservations.
“In my mind, I’m always going to think about this redevelopment” when it comes time for future redevelopment, Lunde said. And he said he’ll ask how the city can know future projects won’t end up in a similar situation.
In the end, the EDA unanimously approved the modifications to the mortgage, allowing the refinancing to proceed.
Contact Jonathan Young at firstname.lastname@example.org