The owners of the repurposed Dayton's Project on Nicollet Mall have sued one of its financiers, accusing it of predatory lending and using COVID-related leasing delays in an attempt to take over the $350 million building project in Minneapolis.

601 Minnesota Mezz LLC sued New York-based investment firm Monarch Alternative Capital LP in Hennepin County District Court this week.

The lawsuit claims that Monarch Alternative Capital acquired the "mezzanine debt" position on the former Dayton's Department store building just four months ago but wants to take over the 1902 building in a "predatory 'loan-to-own' scheme."

Officials at 601 Minnesota Mezz said Monarch acknowledged that 601 is "completely current in its debt service obligations," but claims that because of slow leasing activity, 601 is in "technical default, and therefore subject to massive additional potential penalties under the mezzanine loan documents."

The court complaint says 601's leasing hurdles were set before anyone understood how severe and long lasting the pandemic's effects would be on Minneapolis' commercial real estate sector.

In an e-mail late Thursday, a Dayton's Project spokeswoman said that in the midst of the pandemic, Monarch Alternative Capital purchased a mezzanine loan for the project at a discount "and has held the project to not only unrealistic but truly impossible standards of leasing during a pandemic and the long-overdue racial justice movement. If these standards hold, the lender will take over the asset, resulting in the deterioration of The Dayton's Project and marking yet another loss for Minneapolis."

Monarch Alternative Capital could not be reached for comment.

The former department store at 7th Street and Nicollet Mall was converted into offices, which originally planned to open a year ago with an international food court and market on the basement floor, stores filling the first and skyway floors and office tenants filling out the rest of the 12-story building. That didn't happen.

The $350 million redevelopment was largely finished by February 2020, but the building didn't reopen until September.

The project also didn't score its first tenant until March of this year, when Ernst & Young accounting firm became the first tenant to sign a lease for 30,536 square feet of space in the massive 1.2 million-square-foot structure.

In its lawsuit, 601 Minnesota Mezz said two key tenants backed out of leases and a major anchor tenant deferred its lease during COVID, which prevented it from filling the building as originally planned.

"For the past 16 months … the Minneapolis leasing market has been virtually frozen as a result of COVID-related lockdowns and the shutdown of retail and office operations," the complaint said. "Like so many parts of the nation's economy, the occurrence of the pandemic and the emergency measures put in place to contain the COVID-19 outbreak created an indeterminate suspension of the Dayton's Project's leasing program."

According to the lawsuit, 601 Minnesota Mezz wants an injunctive relief court order stopping Monarch's practices.

It also wants "damages against a predatory lender that is seeking to drive the owner-developer of a local Minneapolis real estate project out of business and to take over the project itself."