Troubles mount for office park owner

  • Article by: SUSAN FEYDER , Star Tribune
  • Updated: February 7, 2010 - 10:30 PM

Investor M.G. Kaminski and Pentagon Park are caught in the real estate downturn.

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Pentagon Park in Edina was supposed to make way for a hotel but the complex is close to foreclosure.

Photo: Glen Stubbe, Star Tribune

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The pending foreclosure of a large chunk of Edina's Pentagon Park -- the first office park built in the Twin Cities -- is just the tip of the iceberg for its owner, Maciek (M.G.) Kaminski.

The possible loss of eight buildings at the office park, which could begin with a sheriff's sale set for Monday, threatens to derail Kaminski's plans to redevelop the entire 15-building complex. Dubbed the "Gateway" because of its location at the main southern entrance to the city, the project would replace Pentagon Park's aging office buildings with a hotel, housing and new office space. A condominium project he recently built near Pentagon Park is not part of the foreclosure but sits empty.

Kaminski also is delinquent on a loan on the Boatworks Building, a multitenant building in Wayzata where his property management business is headquartered. As of Dec. 31, the Pentagon Park and Boatworks' delinquencies totaled $42.5 million -- among the largest in the Twin Cities tied to commercial mortgage-backed securities (CMBS), according to Trepp, a New York-based real estate research firm.

A $50.3 million loan on another one of his holdings, the Parkdales office complex in St. Louis Park, has been flagged by Trepp. It was not delinquent at year-end, but Trepp placed it on a watchlist to be monitored for potential problems.

Kaminski also is behind on taxes on other properties near Pentagon Park and the Boatworks Building, owing almost $275,000, according to Hennepin County property records.

And several area contractors that have done work at his buildings -- including one owed almost $250,000 -- have had to file lawsuits in the last year to get paid.

In an interview, Kaminski disputed Trepp's classification of the Boatworks loan as delinquent, even though it is based on objective measures like being more than 30 days past due.

Kaminski has a long track record as an investor. A former broker at Paine Webber and Piper Jaffray, he gained notice in the late 1990s when he established the Kaminski Poland Fund, the first Poland-focused investment fund in the United States. In addition to his property management business, Kaminski heads Wayzata Capital Management, an investment firm focused on Eastern Europe.

Kaminski said he doesn't regret his real estate investments, made through various business entities he controls. He said he's one of many suffering in a dismal market. To be sure, Trepp has reported sharply higher CMBS delinquency rates here and nationwide. CMBS, commercial loans packaged together and then resold in pieces to investors, were widely used to finance deals in the hot real estate market in the mid-2000s.

But investors like Kaminski made themselves more vulnerable to the downturn by buying at the peak of the market and heavily financing deals with debt. In 2005, Kaminski paid $42.7 million for Pentagon Park and $49.2 million for the Parkdales, according to figures from Bloomington-based NorthMarq. By 2007 the market for commercial properties already had begun to soften. At the end of 2009 the unpaid balances on both Pentagon Park and Parkdales loans were higher than their principal amounts.

"Obviously the redevelopment market has changed," Kaminski said of the uncertain future at Pentagon Park. He's not sure if he'll be able to keep the eight buildings to be auctioned at the sheriff's sale. Owners typically have six months after an auction to redeem properties.

But he said he hopes eventually to build senior housing on other parts of Pentagon Park. "I could tell you when if I had a crystal ball so I would know when the market will recover," he said.

His immediate prospects for generating significant revenue at Pentagon Park appear dim. It has a prime location near Hwy. 100 and Interstate 494, but the properties date back to the 1960s and can command only low rents, especially in the glutted market. A market research report by NorthMarq, the court-appointed receiver for the buildings in default, said some have not been well-maintained and lack features like sprinkler systems.

Kaminski's plans at Pentagon Park also called for demolishing some buildings to make way for a 149-room Aloft hotel. The site currently is occupied by five of the eight buildings headed for foreclosure.

The site also is across the street from Burgundy Place, a 36-unit condominium building Kaminski recently completed. One side of the building overlooks the Fred Richards Golf Course, but others face Hwy. 100 and the stalled hotel development site. Two buyers recently have made offers, Kaminski said, but no condos have been sold, and the building's ground-level commercial space is empty.

Edina Planning Director Cary Teague said not having the hotel or another new development across the street could make the condos less appealing to buyers. He also thinks it could be difficult to market condos in a building where there are no other occupants. "It's going to be tough to be that first person [to buy and move in]," Teague said. Kaminski said some prospective buyers reserved condos before construction began but later backed out.

Kaminski also faces trouble generating revenue at the Boatworks Building. NorthMarq's research showed the building was 29 percent vacant in the second half of 2009, compared with an average vacancy rate of about 13 percent for comparable properties in the west metro area.

Kaminski acquired the building in 2001 when he purchased the business entity that had owned it. The price he paid for the property isn't known, but area real estate experts believe it was $20 million to $25 million. The previous owner, failed technology mogul Rick Born, had paid $3.3 million in 1996, converting the building from a boat showroom into an office property.

Kaminski's strongest major holding may be the Parkdales, which he said has an overall vacancy rate of just 10 percent. That's better than the 15 percent average vacancy rate for comparable office west metro area properties, according to NorthMarq. Its research shows overall vacancy figures for the Parkdales at about 14 percent.

The Parkdales has been the focus of most of Kaminski's legal disputes with contractors claiming they had not been paid. Most, like a suit filed last year by Harvard Maintenance Inc. claiming it was owed about $247,000, appear to have been settled without going to trial. An attorney for the Minneapolis firm said Kaminski is paying off the debt in installments.

McPhillips Bros. Roofing Co. received the final installment on $42,500 it was owed last month, according to Larry Neilson, attorney for the North St. Paul firm. The amount includes interest under terms of an agreement for work done at the Parkdales late in 2008.

Neilson said the final payment came as a bank draft after an earlier check bounced.

Kaminski doesn't recall if the check bounced and doesn't believe it matters. "At the end of the day they got paid," he said.

Susan Feyder • 612-673-1723

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