Shadow over Minneapolis condo market

Banks are foreclosing on three condominium projects in downtown Minneapolis, adding to the growing list of canceled or postponed condo developments.

Each of the three projects being foreclosed on has its own set of issues, but the deteriorating condo market appears to be the common backdrop.

San Francisco-based Bank of the West has begun foreclosure proceedings on the Sexton, a 123-unit development at 521 S. 7th St., according to bank spokesman John Stafford. He said Tuesday a receiver has been appointed to oversee the bank's interest in the property.

The project has been caught up in a tangle of lawsuits among the development partners with allegations that include mismanagement of a $26 million construction loan from the San Francisco bank. Stafford and attorneys for the developers said slightly more than half of that loan has not been repaid.

Minnwest Bank M.V. is in the midst of foreclosing on one completed and another proposed condo project.

The Minnesota bank recently was the high bidder at a sheriff's sale of Mill Trace Condominiums, a 50-unit project at 619 SE. 8th St. that was developed by Niles Schulz of Dolphin Development. Russ Bushman, chief credit officer for the bank, said the developers have until March 2008 to redeem the property.

Schulz declined Tuesday to say how much his firm owes the bank, but said he is confident it will be able to repay the debt and reclaim Mill Trace. He said the problems are due to sluggish sales, with only 16 units sold so far.

"We think we've corrected that problem," he said, with the installation of a new sales team.

Minnwest also has begun foreclosure proceedings on property at 10th Street and Park Avenue S. that was acquired in 2004 by Heritage Development. The developers had proposed a mixed-use project that was to include 382 condo units in two towers and street-level retail.

Bushman said a sheriff's sale of the property is scheduled for Oct. 25. He declined to comment further. Michael Moriarity, a principal of the development firm, which has been renamed Omni Investments, also declined to comment.

The legal dispute at the Sexton began last spring, when two partners that together hold a 50 percent interest in the project, Heather Enterprises II and Medved LP, sued JJT Development, which holds the other 50 percent. The suit accused JJT of a variety of misdeeds, including selling units in the building for more than the advertised prices and paying real estate agents inflated commissions. It also claimed that JJT owed Heather several million dollars for capital contribution loans.

JJT countersued, also claiming a variety of fraudulent acts, including the mishandling of the construction loan.

Last month another suit against JJT was filed by Gooter Investments Inc. of Wausau, Wis., which bought a minority interest in JJT in 2005.

The suit accuses JJT chief manager Brett Thielen of misleading Gooter about several aspects of the Sexton, including the existence of the disputes among the developers and the mishandling of the construction loan.

The suit also claims that when Gooter finallly became aware of the problems and tried to tender its stake in JJT, it was not repaid under a provision that had been laid out in the original investment agreement.

Thielen's attorney, Ben Houge, on Tuesday called the charges in both suits against his client "false and scurrilous." He said the other partners' mismanagement of the construction loan is the main reason for the foreclosure, because some of the money was supposed to be used to build a parking ramp. Without the ramp, many potential buyers backed out of purchasing condo units, Houge said.

Mary Bujold, president of the Minneapolis multifamily housing consultant Maxfield Research Inc., said she does not believe that foreclosures will become a widespread problem with area condo developments.

Unit owners in developments that are foreclosed typically aren't affected much unless they want to sell their units quickly, she said. That's because foreclosures usually result when developers have failed to sell enough units to repay their construction loans. "Obviously, it's going to be more difficult to obtain financing [to buy a unit] if there are a lot of other unsold units in the building," she said.

Bujold said it's likely that the soft market will cause more developments to be put on hold. That already has happened, with some projects canceled altogether and others redrawn to eliminate or reduce the number of residential units planned.

Earlier this year, the developers of a 290-unit condo building planned for the Downtown Jaguar site at Hennepin and Washington avenues changed plans and decided to proceed with a retail-only development.

Slower-than-expected sales also stalled development of the Revue, a 108-unit condo project planned near the new Guthrie Theater.

Another project that's been put in a holding pattern is the Nicollet, a 350-unit development originally planned to be the tallest downtown residential tower.

The development partners for the project at 10th Street and Nicollet are mulling new plans for the building, which they now expect to become a mixed-use property.

Susan Feyder • 612-673-1723

Susan Feyder • sfeyder@startribune.com