Dayton's Project owners ask court for time to get financing together

After a brutal volley of accusations, the future ownership of the Dayton's Project office building on Nicollet Mall is in the hands of a Minnesota judge.

During a virtual hearing Tuesday, Hennepin County District Judge Susan Burke weighed a temporary restraining order requested by the current owners to prevent the sale of the ownership interests of the 12-story former department store building in downtown Minneapolis that is beloved by generations of Minnesotans.

In the latest round of the fight, the Dayton's Project owners — 601W Minnesota, 601 Minnesota Mezz and managing members Mark Karasick and Michael Silberberg — want the temporary restraining order to fend off a New York-based hedge fund lender that they claim bought the mezzanine loan at a discount from another investor in February.

They accuse the lender, Monarch Alternative Capital, of now trying to "steal" the project from them by "illegally" using default "technicalities" imbedded in the mezzanine loan agreement.

Monarch Alternative Capital insists owner 601 failed to lease 20% of the building by May 9 as promised and therefore owes leasing "failure deposit" penalties and other fees and expenses worth $10 million. Monarch Alternative argued that 601 hasn't paid that money and is now in default.

Monarch intends to auction off 601 W's collateral stake in the building on Aug. 23, unless the court intervenes.

Monarch's attorney Dan Perry told Burke that 601 doesn't have the $10 million and doesn't have the nearly $100 million needed to finish future tenant improvements in the still-vacant building.

The Dayton Project's owners need a restraining order to prevent the Aug. 23 auction and to buy it time to finalize financing with Winthrop Strategic Real Estate and the Fortress Investment Group, Sullivan said.

Monarch's failure to negotiate and its rush to auction off the membership interests in the 601W LLC would cause "irreparable harm" to the city and to the various 601 parties that put in four years of construction and $105 million worth of equity into the $350 million Dayton's renovation project, Sullivan said.

Sullivan said Monarch ignored the brutal impact of the pandemic and the months of civil unrest in Minneapolis that crippled the commercial leasing industry and Dayton's ability to woo tenants. Several tenants backed out and it took more than a year to land the first and only tenant, Ernst & Young accounting firm.

Perry, Monarch's attorney, told Burke that the court should not grant the temporary restraining order because 601 not only missed its leasing deadlines but also failed to pay the resulting penalties to Monarch and stopped paying interest and building expenses into reserve funds as required under its J.P. Morgan mortgage.

In an amicus brief filed Monday, the city of Minneapolis said it hopes that 601 will be allowed to continue with the Dayton's Project because it has done a "fantastic" job renovating the landmark structure with a nod toward Dayton's history and its role as a city centerpiece.