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Dayton’s Project in downtown Minneapolis
601 Minnesota Mezzanine, the owner and developer of the Dayton’s Project in downtown Minneapolis, is suing its debt holder, New York City-based Monarch Alternative Capital LP, over claims that Monarch acquired the debt in a “predatory loan-to-own scheme.” (Submitted image: CoStar)

Dayton’s developer sues debt holder

With leasing stymied, complaint calls investment firm ‘predatory lender’

The owner and developer of the Dayton’s Project in downtown Minneapolis is suing its debt holder over claims the debt was purchased in a “predatory loan-to-own scheme.”

601 Minnesota Mezzanine and its managing members, Mark Karasick and Michael Silberberg of The 601W Cos., are seeking injunctive relief and $270 million in damages from global investment firm Monarch Alternative Capital LP, saying continued civil unrest in the metro area and the global pandemic caused prospective tenants to back out of lease commitments. The Dayton’s Project is the $350 million redevelopment of a 1902 building in downtown Minneapolis, at 700 Nicollet Mall, according to the civil complaint Finance & Commerce received.

Although 601 Minnesota is current in its debt obligations, the complaint said the developer is in default for not leasing up the project by leasing hurdle dates. These are scheduled dates where a property must have a certain percentage of the space leased.

601 Minnesota says the leasing dates were set before dual crises enveloped Minneapolis: the COVID-19 pandemic and the civil unrest following the murder of George Floyd. Monarch is allegedly not engaging in lease deadline renegotiations, and instead is allegedly working to foreclose on the loan and “steal” the property, according to a news release about the case from the developer.

“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,” according to the civil complaint 601 Minnesota recently filed but has yet to be made public.

New York City-based Monarch didn’t send a comment by time of publication.

601 Minnesota is partnering with The Telos Group LLC and United Properties on the project. Work has been ongoing for four years, during which crews renovated the 1.2 million-square-foot building to house retail and restaurant space on the lowest three floors and office space on eight floors, along with a library, gym and park, according to the release.

“This will be the first space of its kind in Minnesota,” Karasick said in the release. “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.”

Crews completed most of the work on the 12-story building by February and March of last year — one month before pandemic restrictions began. Prior to the pandemic and murder of Floyd, the developer had lease commitments from two “significant” tenants — including a national accounting firm — and was in advanced negations with one other for a 150,000-square-foot space, the complaint said.

However, “the Minneapolis leasing market has been virtually frozen as a result of COVID-related lockdowns and widespread civil unrest, resulting in the shutdown of retail and office operations citywide,” according to the complaint.

This included the Dayton’s project, which indefinitely suspended its leasing program, the complaint said.

As of January this year, two prospective tenants have backed out of lease commitments, citing continued civil unrest in the downtown area. The prospective anchor tenant, a national accounting firm, deferred and “drastically” reduced the scope of its original commitment to lease four office floors, the complaint said.

601 Minnesota was — and still is — allegedly unable to meet lease-up dates, which were created 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 release said.

The Dayton’s Project is currently 98% vacant, according to the complaint.

The complaint states the project was financed with mortgage financing from JP Morgan Chase Bank, N.A.; mezzanine financing from Angelo Gordon Management LLC; and tax incentives from the federal government and the city of Minneapolis.

Monarch acquired the $78 million mezzanine loan from Angelo Gordon four months ago. Neither the mezzanine loan nor mortgage is in default. But 601 Minnesota is in default as it failed meet leasing benchmarks, the complaint said.

Monarch is allegedly refusing to address the leasing hurdle dates and is instead looking to foreclose on the mezzanine loan and take the property. The release added that Monarch has ensured that other lenders can’t refinance the Dayton project.

Additionally, Monarch allegedly agreed to a “good faith agreement” that parties would work together to restructure the leasing deadlines, according to the complaint.

“It is clear that Monarch intentionally acquired this mezzanine loan in order to capitalize on the unprecedented crisis confronting the Minneapolis business community and to steal the Property from 601 Minnesota,” the complaint said.


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