Deadbeats, Inc.

Minneapolis swallows another developer's debts

It was the $80 million that stuck in Victoria Heller's craw. To be more precise, it was the $80 million that the Toronto-based real estate giant Brookfield Properties reported as its first-quarter profits this past April. Heller tracked down the figure after reading reports that Brookfield is likely to default on some $28 million in loan payments owed to the City of the Minneapolis for its role in bankrolling Brookfield's flagging downtown retail venture, Gaviidae Common. And then she got mad.

"It just outraged me," says Heller, a retired accountant, West Bank property owner and longtime critic of city-backed development deals. "Out of one side of their mouth, Brookfield is telling stockholders and Wall Street that they're doing great. Out of the other side of their mouth, they're telling us they can't pay their debt. They're just trying to stiff the taxpayers of Minneapolis."

Armed with the earnings report, Heller sent a post to the online discussion group Minneapolis-Issues. In the hopes of generating a grassroots protest, she compiled a list with contact information for Brookfield executives and urged fellow list members to "call, fax, write, and e-mail as many of the following people as you can." As if that were not enough, Heller also encouraged people to trash-talk Brookfield to stock analysts.

Whether her battle cry has made an impact in the Brookfield boardroom--or even penetrated the consciousness of its executives--is tough to know. The company did not respond to City Pages' phone calls or written questions about the status of the Gaviidae loans. Through a local public-relations firm, Miller Meester, the company released a written statement saying only that it was "hopeful that a meaningful resolution can be reached that will maximize the benefit to the city of Minneapolis."

City officials are less optimistic. According to Pat Born, the city finance director, there is little likelihood the city will collect on either of two 1987 loans connected to Gaviidae that were supposed to be paid off this year. The first loan, which calls for an $11.3 million payment related to the Saks building, is due June 15. If Brookfield defaults on that loan, Born points out, the city will be able to recoup some of its losses because, under the terms of the deal, the city can seek ownership of the building. (Last week city council members voted unanimously to proceed with the seizure option after rejecting an offer from Brookfield to settle its debt for $4.4 million.)

Given the slumping market, municipal ownership of the Saks building is less than ideal, the finance director concedes. But it is a far cry better than the likely scenario that awaits the city for the "north parcel loan," the loan for the part of Gaviidae whose chief tenant is the M & I Bank and for which a $17.4 million payment is due at the end of September.

According to Born, the city has scant prospect of recovering anything--money or real estate--on that loan, because the city is a secondary mortgage holder. "At present, our experts tell us, the value of the parcel is less than the amount of the first mortgage loan. That basically means our mortgage is very difficult, if not impossible, to collect any money on today," Born notes. "We made the loan thinking and expecting that the value of the property would be sufficient to satisfy the first mortgage holder and the second mortgage holder. It didn't turn out that way."

So why can't the city simply go after the apparently thriving Brookfield Properties to collect? That, says George Kissinger, is a product of the complex way in which big real estate development deals are structured. "Brookfield is a many-bodied organization, and the borrowers of this money are not the parent corporation. There are layers and layers of ownership," explains Kissinger, who is the project manager for Gaviidae at the Minneapolis Community Development Agency (MCDA). In the case of the Saks building, the corporation liable for the loan is an entity known as Brookfield Markets, Inc. That company's only asset, Kissinger notes, is the Saks Building. In the case of the north parcel, the primary mortgage holder that stands in the way of the city's taking possession of that property is another Brookfield entity, called Brookfield Investments, Inc.

As to why the MCDA didn't negotiate better repayment guarantees in its loans to Brookfield, Kissinger says he can only hazard a guess. He was not involved in either of the original 1987 loans, he notes. But he points out that, at the time the deals were made, city leaders were preoccupied with the prospect that downtown would lose its retail base to the Mall of America; as a result, they were willing to forge risky deals. (Over the years Brookfield has enjoyed cozy relations with city leaders. Longtime local Brookfield executive Harold Brandt was a frequent and generous donor to the campaigns of former Mayor Sharon Sayles Belton.)

"It was just part of this desperation mentality that the public has to step up to the plate and fill in for the private sector: 'We should be thrilled there's a Neiman Marcus here, we should be thrilled there's a Saks,'" observes Lisa Goodman, who represents the Seventh Ward, which includes parts of downtown, on the city council.

If Brookfield defaults on the loans, the city should quit doing business with the corporation, Goodman opines. "I don't think we should be in the business of making loans to anyone who has shown an inability to repay them. No bank would do that. No private financing organization. I don't think we should be in a position of working with an organization that clearly has assets, and that sets up shell corporations to avoid paying off their debts."

Mayor R.T. Rybak, who was a reporter for the Star Tribune covering downtown development when the Gaviidae loan was made, is less critical of Brookfield--and less inclined to put the company on a city blacklist. "We obviously want them to perform, and obviously there will be consequences if they don't. But I liken the situation to a separation in which you have joint custody of the kid," Rybak says. "We need to have a professional solution that takes some of the emotion out of the game and make sure we're making smart decisions because there are millions of [public] dollars involved."

As it happens, the city is bound to be dealing with Brookfield for the foreseeable future. Not only is the company a minority partner in the much-ballyhooed (and much-criticized) Block E retail-entertainment complex; it also has an additional outstanding $37 million loan due to the city in 2008. (Both finance director Born and the MCDA's Kissinger say they are confident that that loan, for a third component of the Gaviidae project that includes the Dain Tower and Neiman Marcus department store, is better secured than the other two loans at issue.)

And even if the city takes possession of the Saks building, Brookfield may play a continued role in--and earn profits from--that property, says Kissinger. "We will need to make some sort of property-management arrangements, and Brookfield has said they will cooperate," he adds. "So it's possible there may be a deal where some small fees are involved, and they'll manage the property."

Those are not the hardball tactics critics like Victoria Heller are hoping for. Rather, she believes responsibility for the Gaviidae loan failure ought to be subjected to intense public scrutiny--and that hard public-policy decisions need to be made. Brookfield, she opines, has employed "Enron-like smoke and mirrors" to avoid paying its debts. But in her book the MCDA deserves plenty of blame as well for being all too willing to dole out loans while applying far too little skepticism to its partners.

"I just think the city should get out of the lending business," she adds. "If a business can't borrow money from a conventional lender, then the deal must not make much sense." How many other outstanding MCDA loans are at risk for default? she asks. How many have already defaulted?

That, as it turns out, is a question to which no one seems to know the answer. "I don't have any reports saying, 'Here's the number of loan defaults over the last 30 years,'" says finance director Born. "We tend to deal with these things on a one-by-one basis."

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