Stearns Bank says Duluth Central High School site developer has defaulted on $5.6M loan

Stearns Bank has fired back at developer Lazar “Luzy” Ostreicher after the developer blamed the St. Cloud lender for the woes of a mammoth Duluth real estate project.

Stearns said this week that Ostreicher’s Incline Plaza Development has defaulted on a $5.6 million loan, giving the bank rights to foreclose on 30 acres of Duluth hillside property.

Stearns made the claim on Tuesday in response to a suit filed against it by Incline Plaza earlier this month. It was the bank’s first public comment on a dispute that has festered for six weeks.

Ostreicher’s project, dubbed Incline Village, was hailed as an economic balm for Duluth. Plans call for over 1,200 residential units — basically a new neighborhood — on 53 acres of land that was once the site of Central High School and had gone undeveloped for years.

Incline Plaza claims Stearns failed to make a critical commitment for the project’s first phase, causing a $45 million financing package to implode.

Stearns says that it never “guaranteed,” as Incline claimed, that it would issue a $27 million letter of credit to backstop the financing.

In December, Stearns Bank representatives joined city officials and Ostreicher at a festive public groundbreaking.

Key financial information was missing, construction contracts were in default and little work had been done.

DEDA gave Incline Plaza 45 days to cure the contract breach. Incline contested some of the city’s findings and asked for a 120-day extension to fix the problems.

Ostreicher’s companies have invested more than $10 million into the project, including $8 million for the land.

But last week, DEDA voted to terminate the development agreement. By doing so, DEDA axed $75 million in tax increment financing (TIF) for Incline Village.

The project is now in limbo.

The developer claims that DEDA’s actions “are the direct and proximate result” of Stearns Bank’s failure to transmit the $27 million letter of credit through SWIFT, a global communications system for banks.

Incline Plaza has said “that the bank deliberately or negligently misrepresented” that it was connected to SWIFT and could send the letter of credit.

The letter of credit was supposed to backstop a $45 million equity investment into the project by SGGI Holdings.

Aside from the letter of credit issue, Stearns Bank in November granted Incline Plaza a $5.6 million short-term loan to begin work on the project’s first phase.

The loan helped pay off an existing mortgage that Incline Plaza had on the property, Stearns said in a court filing.

The bank says it is owed a total of $5.8 million, including accrued interest and late charges. It is asking the court for a judgment on loan and the ability to foreclose on the loan.

It’s not clear what happens next with the project.

Incline Village’s construction management firm ICS terminated its contract with Ostreicher on July 3, according to its president, Andy Faulkner.

The company had suspended work June 2 because it had not been paid, but worked with the city to protect the site, which it had been working on for several months. The company still has not been paid, Faulkner said in a statement.