Dayton’s Project Developer Sues Mezzanine Loan Holder
The rooftop terrace of the Dayton’s Project overlooks the downtown Minneapolis skyline. Caitlin Abrams

Dayton’s Project Developer Sues Mezzanine Loan Holder

Building stands 98% empty after $350 million overhaul

It’s an emerging fistfight between big New York real estate and finance companies. But the fight is over a property in downtown Minneapolis: the Dayton’s Project.

New York-based 601W Companies acquired the former Macy’s department store in downtown in early 2017 for $59 million. Since then, it has undertaken an ambitious overhaul of the 12-story building with a tab topping $350 million. The vision called for a reinvigorated complex with roughly 750,000 square feet of office space and about 250,000 square feet of retail space anchored by a food hall. But after more than four years, the project is 98 percent vacant.

Last week, 601W Cos. filed a lawsuit against New York-based Monarch Alternative Capital, which now holds the mezzanine loan on the project. The mezzanine loan currently stands at $78 million and 601W is current on its payments. But while 601W is not in monetary default on the loan, it is in technical default because it has not met leasing hurdles stipulated in the mezzanine loan agreement.

The first leasing hurdle called for 250,000 square feet of space to be leased by May 9.

The original mezzanine loan from New York-based Angelo Gordon Management called for up to $21.875 million. The mezzanine loan was refinanced and increased to $60 million in 2019. In 2020 it was increased to $78 million. Angelo Gordon sold the mezzanine loan to Monarch in February, just a few months ago. According to its lawsuit, Monarch has threatened to foreclose on the property and “take over the project for itself.”

Technically the lawsuit against Monarch was filed by the 601 Minnesota Mezz LLC entity and Mark Karasick and Michael Silberberg, top executives at 601W.

The lawsuit sheds light on behind-the-scenes financial details of the project.

The project’s original construction loan was $145.6 million from New York-based JPMorgan Chase & Co. The financing includes a projected $90 million from federal and state historic tax credits. Developers routinely tap historic tax credits for redeveloping vintage buildings. 601W has invested more than $105 million in equity.

The status of the JPMorgan Chase loan is not clear, but JPMorgan would appear to be in the senior position as a lender on the project. A representative of JPMorgan Chase declined comment.

According to the lawsuit, “the construction of the Dayton’s Project has been largely complete since just before the beginning of the Covid-19 pandemic in February/March 2020.”

601W argues that the Minneapolis office leasing market has been “virtually frozen” for the past 16 months due to the pandemic and social unrest in the wake of the killing of George Floyd. It makes the case that these extraordinary events made meeting the leasing hurdles impossible.

601W says that it had “firm lease commitments” from two companies, including a “national accounting firm,” and was in “advanced negotiations” with another tenant for 150,000 square feet of space.

601W contends that two tenants bailed out due to ongoing civil unrest in Minneapolis. The suit further says that one company was set to lease half of the project’s office space, but also got cold feet: “For the same reason, a prospective anchor tenant (the national accounting firm) ended up deferring and drastically reducing the scope of its commitment to lease four of the eight floors of office space at the property.”

There has not been any buzz in the downtown office market about specific tenants who were close to leasing space at the Dayton’s Project.

601W’s suit also seeks significant damages: “Plaintiffs have been damaged by the actions of Monarch in an amount presently unknown but believed to be no less than $270 million, representing $105 million in contributed equity and $165 million in lost profits.”

Things were moving slowly at the Dayton’s Project before the pandemic and social unrest hit. In March 2019, developers announced that they were pushing back the opening date to the spring of 2020.

In 2019, the Dayton’s Project was close to leasing the entire third floor of the building to co-working giant WeWork. That deal evaporated amid WeWork’s financial meltdown.

March brought news that the Dayton’s Project had signed its first office lease, a modest deal of roughly 30,000 square feet with Ernst & Young.

The lawsuit makes no reference to any current lease negotiations or prospects. A representative of the Chicago-based Telos Group, which has an ownership interest in the project, told Twin Cities Business that it had no leasing updates to offer at this time. There is no projected opening date for the food hall, which was once slated to open in mid-2019.

Despite the building remaining almost entirely empty, the Dayton’s Project has received loads of local media coverage. That’s likely due in part to the historical importance of the building in downtown Minneapolis. It originally opened in 1902 as the Dayton’s department store. Even though it operated under the Marshall Field’s and Macy’s brands for its last 16 years of operation, many Minnesotans still think of it as Dayton’s. The Macy’s store at the site closed in March 2017.

Despite the new lawsuit, 601W appears to have ongoing support from downtown leaders.

“From a downtown perspective, certainly from our organization’s perspective, we have continued confidence in the 601W/Telos team to move this project to a successful final completion,” said Steve Cramer, president and CEO of the Minneapolis Downtown Council.

“That’s the outcome that we are rooting for.”

Cramer declined to speak to prospective tenants that had reportedly walked away from the Dayton’s Project. But he noted that 601W is hardly alone in facing a challenging commercial real estate market.

“They and real estate people across the country have been dealt a really hard hand over this last 15 months,” said Cramer.