Phoenix High Rise and Loft Condo Expert, Will Daly at www.WeKnowUrban.com

The Bankruptcy Court in Phoenix has been very busy the last couple months trying to come to a conclusion on the Mortgages Limited Securities case. Some parties ended up with smiles of relief, while the majority of investors are taking a major loss. A quick history lesson and recap of the current situation:

MLS (short for Mortgages Limited Securities) was originally a small private lender not funding more than $20 million projects. Scott Coles took over the company in the 1980's and slowly changed their company services. In the more recent years, Coles brought in thousands of outside investors all over town who contributed nearly $1 billion toward to company for funding major real estate developments accross the valley from Centerpoint Condominiums ($200 million for vertical construction) in Tempe to Main Street ($120 million for 500-acre land acquisition) in Glendale.

Recent Timeline:

March 28, 2008: Central PHX Partners, developer of the Chateaux on Central files a lawsuit against Mortgages Limited Securities for breach of contract, among others.

May 21, 2008: Rightpath Limited Development, developer of Main Street Glendale files a lawsuit against Mortgage Limited Securities for fraud and excessive fees, RLD asks for $25 million in damages

May 23, 2008: Avenue Communities, developer of Centerpoint Condominiums announces they need $50 million dollars to finish the towers because MLS was unable to fulfill the full loan.

June 2, 2008: Scott M. Coles, Chairman and CEO of Mortgages Limited Securities is found dead in his Phoenix home. Later learned to be a suicide.

June 20, 2008: Grace Communities, developer of Hotel Monroe Renovation in downtown Phoenix and X Wine Lofts in Scottsdale file a Chapter 7 bankruptcy petition against MLS. (MLS was funding both projects)

June 23, 2008: Mortgages Limited Securities files for Chapter 11 Bankruptcy after U.S. Bankruptcy Judge Randolph Haines orders for emergency hearing on the situation. MLS said they have about 70 outstanding loans worth around $925 million.

July 24, 2008: KML Development, developer of Roosevelt Gateway in Phoenix and Mosaic in Tempe files a motion to request a Chapter 11 trustee to the case, in addition to allegations of unfulfilled loans in excess of $100 million.

August 1, 2008: Avenue Communities gives MLS an ultimatum, settle the case through subordinating its two loans for the project or face another lawsuit.

August 7, 2008: U.S. Securities and Exchange Commission and the Securities Division of the Arizona Corporation Commission opened investigations on the dealings of MLS and a company called Radical Bunny that lent it nearly $200 million.

August 11, 2008: MLS said in Bankruptcy court they will soon begin to foreclose on properties being developed by Grace Communities and Rightpath Limited Development.

August 20, 2008: Centerpoint developer Avenue Communities reaches tentative deal to keep MLS as lender as long as MLS pays $4.6 million up front to protect the two towers while the remaining $75 million is to be funneled from outside investors through MLS to Avenue Communities at a later date.

August 21, 2008: Bankruptcy Judge Haines granted MLS a $5 million interim financing proposal from Stratera Portfolio Advisors. In a separate case regarding the thousands of outside investors for MLS, the judge ruled in favor of a new payment agreement.

Conditions for both agreements granted on August 21, 2008:

• Mortgages Ltd. will immediately begin paying interest to investors in loans that borrowers are currently paying. These payments could begin within a month.

• Investors will receive only interest, not principal amounts that borrowers have repaid.

• Mortgages Ltd. will help find financing for Avenue Communities's Centerpoint condominium towers in Tempe and Rightpath Ltd. Development Group's Main Street Glendale. Centerpoint could be within 90 days of completion on the first tower, while the second tower is 80% complete. Centerpoint will receive an initial $4.6 million and $75 million later. Rightpath Limited Development intends to drop the lawsuit if MLS fulfills the agreement on new loan terms and $85 million more in financing.

• Mortgages Ltd. said it also has agreed to enter mediation to resolve conflicts with Grace Communities, the developer of Hotel Monroe in downtown Phoenix.

• The lender also has a settlement in the works with KML Development, which borrowed a loan for a high-rise condo project at University Drive and Ash Avenue in Tempe. That project has not started.

Centerpoint developer Avenue Communities has a hearing on Monday to determine if they will receive $2.8 million in emergency funding. Plans for the developer to receive the rest of the promised $4.6 million are unknown.

Rightpath Limited Development does not have a hearing yet regarding its timeline to receive new financing.

This whole situation is not over, and is going to continue to make headlines, in which we will provide consistent updates...stay tuned.

The Arizona Republic recently reported on infrastructure problems at the high rise condo building Landmark on Central and alleged misrepresentation by sales agents at both Landmark and the downtown high rise condo building Orpheum Lofts.

I certainly can not defend the situation or the conditions at either building. We have been hearing rumors on problems with the electrical, pluming and air conditioning stystems at Landmark on Central for at least six months and believe that they are true. And the problems with the parking at Orpheum have been well documented and pubicized for years.

Now, I can't say whether or not all these buyers were mislead or duped by unscrupulous Cambridge Properties sales agents. The courts will have to decide that.

However, I do not believe that the buyers were totally innocent either. I think the desire for profits undermined common sense and reasonable precautions.

When Orpheum was first marketed for sale the real estate market was just starting to heat up. People wanted to buy in the next hot high rise building and MANY of them were solely interested in profit. And many of these investors did not intend to keep their purchase but rather intended to flip them for a quick dollar to the next guy or gal.

How do I know this?

In late 2005 we noticed that almost 30% of the condos in Orpheum that the developer had sold to the public were already back on the market for rent or resale and this doesn't count the units that weren't on MLS. Clearly a ton of investors had purchased at Orpheum. I too was one of them.

Early in the sales process I reserved a condo for myself and also one for each of two clients. Within a couple months the problem with the parking became obvious. When the developer would not put his promises of building more parking in writing my clients and I bailed out. We knew better than to bank on an undocumented promise. Thank goodness!

I find it hard to believe that all the other investors were oblivious to the problem. I suspect instead that many of them weren't concerned with the parking issue as they thought real estate was a "sure bet" and afterall they weren't going to live there anyway. [Note: I will say that I did hear a senior person at Cambridge Properties state that parking at Orpheum wasn't important as he "could sell around it."] Nonetheless I do not believe that this relieves the buyer from asking the right questions and protecting his and her own interests.

I wasn't involved in any transactions at Landmark on Central. But I would not be surprised if the same irrational investor exuberance that clouded good judgement at Orpheum didn't also exist at Landmark on Central. The condos sold very very fast and I believe it was mostly profet inspired. And again, right after closing about 30% of the units were right back on the market for sale or rent. These folks weren't in this for the long haul and I doubt they asked questions or investigated the building infrastructure.

Although the condominium market has been slow for a while, newspapers like to keep people excited and ready for the eventual opening of projects. I think it is great that the Phoenix Business Journal, AZ Republic and East Valley Tribune are still reporting on real estate development updates, whether their information is new or just repeated. In the last week or so, two separate articles have been published that highlight Tempe's Mill Avenue district and the much anticipated opening of Centerpoint.

By now, most of you have at least heard a rumor or read one of the many articles regarding the Mortgages Ltd. situation. It is pretty simple, the primary construction lender for the Centerpoint project, Mortgages Limited Securities filed for Bankruptcy in June, which has caused the project to temporarily halt construction. Avenue Communities, the developer of the project is working out some legal issues at this time and hopes to bring a new lender on immediately.

Mill Avenue has drastically changed shape over the decades and ever since Tempe Town Lake was filled, a new energy has fell upon the hotspot. Mill has great restaurants, great bars, a great atmosphere for walking on the weekend, but few residences. Several developments that were supposed to add over 1000 condominiums to Mill Avenue have been put on hold or are another victim of Mortgages Limited. Mosaic, a 212 unit, 21-story tower planned for the north west corner of University and Ash is also suing Mortgages Limited.

Many projects have been proposed for the Mill Avenue area, while few have materialized. Some of these projects are victims of an this unfortunate lender situation, while others are "waiting" for the market to slightly recover. A few of these projects will probably never happen, but the ones that do will be a great new home for the Arizona Urbanite. If you think Mill is a hotspot now, just wait until several hundred more people call it home in the next two years.

For everyone who was hoping to see the internationally renowned Le Meridien hotel come to Tempe Town Lake, unfortunately it isn't going to happen.

The hotel was originally planned years ago to sit behind the Edgewater tower in the Hayden Ferry Lakeside development. Suncor Development Company, who is developing the HFL project, sold the parcel two years ago to Valhalla Development Group of Scottsdale. Valhalla had worked out a deal with the Starwood Group (Starwood Hotels and Resorts Worldwide) to bring the European-style hotel with 143 rooms and 43 condominiums. Due to several factors, Starwood pulled out of the deal a year ago, but Valhalla still planned to build a hotel on that site.

Recent plans are to reconfigure the uses, with more hotel rooms and less condominiums, which would cater better to the current market conditions. Representatives of Valhalla Development Group emphasize that the new hotel will be just as good or even a step up from the Le Meridien. This new, four-plus-star unknown hotel will feature 240 total rooms with only 24 condominiums. A deal is supposed to be inked within 30 days and construction is supposed to start by the end of the year with a 2011 completion.

There have been numerous newspaper articles reporting on the financial woes for Avenue Communities and its downtown Tempe high rise condo developement, Centerpoint.

What I have not understood is how can a project that has sold 20-25% of its condominiums over the last three years survive current market conditions AND the bankruptcy of its construction lender?

But I'm starting to understand. Here's my take on it:

The construction lender referenced above, Mortgages Limited, funded approximately $100 million of a $175 million loan. So they funded approximately $75 million less than the loan commitment stipulated. Then the company filed bankruptcy.

Avenue Communites is out looking for lenders to supply the $75 million so that it can complete construction of the building.

One can easily understand that a lender might be hesitant to loan $75 million on a $200 million project in today's market. However, what if the $75 million takes priority over the $100 million already spent? In other words the new lender would loan $75 million for assets valued at $200 million. That seems pretty safe even today doesn't it?

Apparently this is possible because the bankruptcy court can force the first lender (the $100 million lender) to subordinate to the next lender (meaning going from first position to second position) thus changing them from a first mortgage to a second mortgage if you will.

I guess the reason this is allowed is because it is better for the $100 million lender to be in a position if doing so is the only way to save the project. This way the lender as a chance to get something instead of all of nothing.

What I haven't understood is that if the project was originally projected to cost $200 million and profits were based on 2005 prices or higher and prices have gone down since 2005 then how can the project survive?

A case can easily be made that new construction high rise condo prices have gone down a minimum of 30% and maybe as much as 50% over the last three years. IF this is true then total sales could end up as low as $130 million (taking into account a 30% profit for the developer). So how does that work? Total sales of $130 million for a project that cost $200 million to build?

I'm guessing that the new lender, the one coming in with $75 million gets paid principal plus interest or $85 million, the original lender which ended up in second position gets paid $.30 for every dollar loaned or $30 million and then the developer gets the rest (about $15 million). But guess what? the project would be successful at these prices and survive!!! Granted the developer would not make as much profit as they had expected and the original lender would lose a ton of money but again, something is better than nothing. And of course, if I'm wrong about the value of high rise condos today and they actually sell for more then the developer and the second lender end up with more in their pockets.

And, Tempe and the Valley would see the completion of a fantastic urban community. One that would add significantly to the popularity and ultimate success of downtown Tempe.

NOTE: PLEASE KNOW THAT I AM TOTALLY PULLING THESE NUMBERS OUT OF THE AIR. I HAVE ZERO INSIDE INFORMATION. I AM PROBABLY WAY OFF ON THE VALUE OF THE FINISHED CONDOMINIUMS, THE DEVELOPER'S PROFIT, THE LENDER'S INTEREST AND THE AMOUNT THAT THE SECOND LENDER WOULD LOSE BUT AT LEAST THIS MAKES SOME SENSE. I WELCOME ANYONE TO PLEASE CONTRIBUTE TO THIS ARTICLE (LEAVE A COMMENT OR E-MAIL YOUR INPUT TO ME AND I'LL POST IT FOR YOU) ESPECIALLY IF YOU HAVE ANY EXPERIENCE OR KNOWLEDGE IN SUCH MATTERS.

We would love to see Centerpoint succeed and any dialogue that helps us better understand how that might be possible would be much appreciated.