A St. Paul religious sect that owns 32 residential properties, 11 businesses, a church and a school has filed for Chapter 11 bankruptcy, sparking concern among church members, neighborhood residents and housing advocates.

Christ’s Household of Faith is a community of nearly 500 members, including 200 children, who divest their assets, live rent-free in houses owned by the church and work unpaid for its businesses. The group filed for bankruptcy last month, after an estimated $11 million in outstanding bank loans were sold to a private equity firm that then moved to foreclose on the properties.

If the foreclosures occur, the religious group, with property mainly in the Summit-University and Ramsey Hill areas, “would be destroyed,” its CFO, Mark Alleman, wrote in a court declaration.

“Over 470 members ... would be forced to leave their homes … the businesses … would cease without the continued support of community members, and there would be no ability to support the church, the school and the church’s mission,” he wrote.

Dumping so many houses on the real estate market in essentially one St. Paul neighborhood would have serious implications for the community as well, he wrote.

The case also shines a spotlight on a home mortgage trend making headlines. The private equity firm that bought the group’s loans, which appears to be owned or controlled by the Dallas-based Lone Star Funds, has been in the national news recently as an “aggressive liquidator” of troubled home mortgages.

The possible foreclosures came as news to St. Paul city officials and neighborhood leaders.

“Our hope is a solution can be worked out between the existing owner and the lender,” said Patty Lilledahl, housing director for St. Paul’s Department of Planning and Economic Development. “If not, we would hope the new owner could work with the existing tenants so they can stay in place.”

“That’s a large footprint for our neighborhoods,” added Aaron Gjerde, president of the Ramsey Hill Association. “I don’t know if there’s much precedent for this happening. It’s a lot of property in a concentrated area and a lot of people affected.”

Christ’s Household of Faith claims $12.9 million in assets in court documents, mainly its properties and a fleet of about 200 vehicles. It lists $12.1 million in liabilities, of which $11.9 million is owed to Lone Star Real Estate Funds II, known as variations of “LSREF2 Cobalt” in the filings.

Attorneys for Cobalt, as well as Christ’s Household of Faith, did not respond to Star Tribune requests for comment.

1970s commune

Christ’s Household of Faith may be best known for running a small but high-achieving school on Marshall Avenue and several successful businesses, such as North Star Kitchens. Its founder and president is former Lutheran minister Donald Alsbury, who moved the conservative Christian commune from Mora to St. Paul in the 1970s.

Over the years, the church has purchased 32 houses, mainly in the Summit-University and Ramsey Hill areas, which have 56 living units, court documents say. It also owns a commercial property on Empire Drive.

Church members work in the school, at their homes, and at church-owned businesses such as Empire Builder Auto, North Star Remodeling, North Star Electric and the Electronic Easel.

A few have outside jobs but turn their wages over to the group. Members pay no rent, utilities or appliance costs, and receive a $16.33-a-week “cash stipend,” Alleman wrote.

The group has maintained a relatively low profile in recent years, following negative publicity in the 1990s over allegations by some members of harsh child discipline and cultlike operations. Its members appear to lead relatively ordinary lives among their neighbors. Teenagers in the church baby sit or teach piano lessons to other families in the neighborhood, one resident said.

Jens Werner, who became executive director of the Summit University Planning Council a year ago, said she’s heard no complaints from residents about the conduct of church members.

Loan sale, bankruptcy

In 2004, Household of Faith received loans from M&I Bank, which later became BMO Harris, using some of its businesses as co-borrowers or guarantors, according to Alleman’s declaration. Stung by the recession of 2008, Christ’s Household of Faith reached an agreement with the bank to sell certain properties and extend the loans. Both sides amended and extended the maturity date of the loan agreement over the years, he wrote.

That arrangement allowed the church to continue operating, and to pay down $3.2 million of the principal balance of the loans between 2010 and 2013, Alleman wrote. As recently as 2013, Christ’s Household of Faith “understood” that practice would continue, so it was “surprised” to learn that the loans had been sold to investment funds owned or controlled by Lone Star.

Alleman believes that Lone Star paid BMO $6.2 million for the loans, which he said is about 55 percent of the principal balance that the fund claims is outstanding.

After the sale, Lone Star refused to negotiate an extension of the maturity date of the loans, Alleman wrote, and caused the termination of a pending sale and lease of one of its commercial buildings. The investment fund then moved to foreclose on about 33 properties, 30 of which are the homes of church members, Alleman wrote. The trial in Ramsey County District Court was slated for Dec. 7 of last year. Household of Faith filed for bankruptcy Dec. 4.

“Despite the debtor’s extensive and good faith negotiation efforts, the debtor has been unable to reach a resolution” with the investment group, he wrote.

Housing advocates say the case points to a trend both in the Twin Cities and nationally, “namely, that private equity firms have played a major role in buying up privately owned affordable housing,” said Jack Cann, senior staff attorney at the Housing Justice Center in St. Paul.

The bankruptcy raises several questions, Cann said.

“How serious was the default?” he asked. “Was the equity fund using it as an excuse to get ahold of properties it sees as presenting a profit opportunity — as opposed to a lender who reached the final straw and had no choice but to foreclose?”

And what about the families living in the homes, who are unlikely to have any savings or private assets to rent on their own, he asked.

“They could end up homeless,” he said. “This could be a disaster.”