Precisely what will happen with two downtown Cedar Rapids office buildings central to a yearslong financial dispute is unclear.
Deutsche Bank in June 2017 sued entities that own the three-story building at 600 Third Ave. SE and the five-story Town Center at 221 Third Ave. SE to begin foreclosure proceedings.
The 600 address houses Wellmark Blue Cross and Blue Shield, Clifton Larson Allen and Morgan Stanley. Town Center currently is home to digital marketing company Hibu, RBC Wealth Management, Palmer Group and Terry Lockridge and Dunn.
As trustee, the bank argued that Second Progression LLC, which owns the Wellmark building, and Second Succession LLC, which owns four parcels that include the Town Center building, were in default of a $25 million loan.
The two LLCs, both subsidiaries of the same Lexington, Ky., holding company, used those funds to purchase the properties from prominent Cedar Rapids developer Steve Emerson in late 2013.
Roscoe-Danial Holdings owns 75 percent of Second Progression and 70 percent of Second Succession, while Emerson’s SLE Investments owns the balance of both entities, according to court records.
Among Deutsche Bank’s claims against the borrowers were that they failed to make loan payments on time and didn’t get the bank’s approval before commissioning more than $2 million in Town Center renovations, which led to liens when the borrowers failed to pay.
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The owners also kept the bank out of the loop on tenant lease changes for Town Center, including when they agreed to terminate then-Rockwell Collins’ lease there and entered into a new lease for that space with Hibu, Deutsche Bank alleged.
A judge in June 2017 appointed Cushman and Wakefield Iowa Commercial Advisors in West Des Moines to manage the properties and, in April 2019, issued a foreclosure judgment on them.
A public auction for both the Wellmark and Town Center buildings originally was scheduled for July 30 at the Linn County Sheriff’s Office.
As of July 2019, the borrowers owed $30.6 million from a principal loan payment, interest and late fees, court records show.
Legal moves from Second Progression and Second Succession were the cause of some delays
The day before the rescheduled public auction, on Sept. 11, Second Progression filed for bankruptcy in the U.S. Bankruptcy Court for the Northern District of Iowa, resulting in the sale’s cancellation.
Second Succession and two guarantors of the $25 million loan followed suit two days later.
Deutsche Bank’s attorneys pushed back, arguing that the LLCs had filed in “bad faith” to delay the sheriff’s sale and keep the bank “from realizing value from its security interest” in the two office buildings.
“Notwithstanding all of this, the property is well under-water and its value is less than the amount owed” to the bank, Deutsche Bank’s attorneys said in a federal court filing.
The Wellmark building has an assessed value of $4.8 million, while the Town Center properties have a total assessed value of $14.3 million, city property records show.
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The bank attorneys noted that the building owners previously filed state court motions to halt the scheduled August sheriff’s sale, prompting its postponement until September, before the court ordered there was “no basis” to stay the proceedings.
The bankruptcy cases later were dismissed, but not before a planned Sept. 16 trial for the foreclosure was canceled.
Attorneys in the case now could agree to a new trial date at a Jan. 16 scheduling conference.
Deutsche Bank said in court filings the borrowers owe it at least $11 million in damages from “numerous” defaults under the loan documents.
Second Progression and Second Succession have counterclaims pending against Deutsche Bank and loan servicer Wells Fargo, alleging that breaches of contract and fiduciary duty led it to fall behind on mortgage payments.
And Emerson said Tuesday he still is seeking nearly $2 million his company, Aspect Inc., is owed for building out Town Center’s middle three stories between November 2016 and April 2017 so Hibu could take over Rockwell’s space.
Deutsche Bank is entitled to recoup money owed before other claimants, per the court’s foreclosure judgment.
Still, what started as Aspect’s mechanic’s lien against Second Succession evolved to include counterclaims against Deutsche Bank, including for unjust enrichment, as Emerson said the bank profits from Aspect’s unpaid work through Hibu’s monthly rent payments.
“I’m still going to be trying to chase (the $2 million) because I haven’t been paid,” he said. “Even if they sell the building in a sheriff’s sale, technically, they’re selling the improvements I’ve never been paid for. If they get $10 million, $2 million of that is improvements I put in the building.”
Sales of the two buildings would not result in any changes for tenant leases, Emerson said.
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