Above: Work continued Tuesday on a parking garage at Fifth Avenue and Walnut Street in downtown Des Moines. On Monday, Bankers Trust Co. filed a foreclosure petition on the property. Photo by John Retzlaff Below:  The 40-story tower that has been proposed as part of the Fifth project. Rendering special to the Business Record

The city of Des Moines and developers of a massive multipiece downtown project appear to have reached an understanding in late August on how the development called the Fifth could move forward, avoiding potential legal action, documents provided to the Business Record show.

But within days of the apparent tentative agreement, things soured between city officials and Justin Mandelbaum, the developer behind the $200 million project, a portion of which is under construction at Fifth Avenue and Walnut Street, the documents show. 

“Please confirm whether the City Manager is willing to wrap up discussions with the Developer with the goal of keeping the Project moving forward for the benefit of all,” wrote Todd Lantz, Mandelbaum’s attorney, on Sept. 8 to Tom Fisher, Des Moines’ assistant city attorney. “You have acknowledged that sometimes litigation is unavoidable … this is not one of those times.”

Replied Fisher on Sept. 10: “Your letter … seems to present more of a media case than a legal one. It misstates both the status and the timing of these negotiations. …”

On Monday, Bankers Trust Co. filed a foreclosure petition in Polk County District Court that claims 5th and Walnut Parking LLC and developers Justin Mandelbaum and his brother Sean are in default on a $48 million construction loan that was due to be paid off on Aug. 31. 

The loan was used to pay for the construction of an 11-story parking garage at Fifth and Walnut. The garage is part of a development that was expected to include a 40-story tower with luxury apartments and a hotel, and a five-story commercial building with a multiscreen movie theater and restaurant.

Whether the project moves forward as it was originally envisioned is now uncertain.

“I suggest that your client would be much better off at this point agreeing to walk away from this project,” Fisher wrote to Lantz on Sept. 10.

A development agreement between the city and the Mandelbaum development group was approved in September 2017. The agreement, which has been updated at least twice, required construction of the parking garage to be completed by Aug. 16, 2020, and construction of one of the two other buildings to have started by late 2019.

Justin Mandelbaum and Des Moines officials had been in negotiations for nearly a year on an amendment to the development agreement to extend deadlines for completion of the garage and other parts of the project. 

Last spring, Mandelbaum was given until April 24 to accept proposed changes to the agreement. City officials, at the time, said Mandelbaum didn’t respond to the proposals. 

City Manager Scott Sanders, in a May 27 letter to Mandelbaum and others, wrote that the city would extend by one year the financing and construction grace periods. It’s not clear what projects Sanders was referring to in the letter.

Sanders also wrote that the city would eliminate a $1 million facility fee that Mandelbaum was to have paid; extend until March 31, 2021, the completion of an elevator shaft; and provide a $2 million incentive to Mandelbaum when construction of the tower was complete.

The letter also stipulated that Mandelbaum and Bankers Trust reach agreements on new amendments to the development agreement to be voted on by the City Council no later than June 22.

It’s not clear from the documents provided to the Business Record whether Mandelbaum or his attorneys responded to the city’s letter.

What is known is that on June 24, the city issued notices of default on the parking garage, tower and commercial building projects.

On June 30, Lantz wrote Fisher that the notices were “factually and legally baseless.” Lantz wrote that the city was in breach of the development agreement and was “interfering with [Mandelbaum’s] existing and prospective business relationships.”

However, by mid-August it appeared as if the two attorneys had reached a tentative agreement. On Aug. 21, Fisher emailed Lantz outlining issues discussed in a telephone conversation that day. 

Among the things apparently agreed to was an extension to March 31, 2021, of completion of the garage and elevator shaft and extension of the completion of a screen wall planned on the west side of the parking garage, according to a document provided to the Business Record.

What wasn’t addressed in the email was the construction schedule for the tower or commercial building.

Eleven days after the email was sent, Bankers Trust sent the developers a 10-day notice that payment of the construction loan was due. When the loan was not paid off, Bankers Trust filed the foreclosure petition.

According to court documents, Bankers Trust plans to list the parking garage property for sale unless the developers request a delay. The Des Moines-based bank also listed Christensen Development, owned and managed by Jake Christensen, as the firm that would oversee the remainder of the construction of the parking garage.

Mandelbaum told the Business Record that the filing of the foreclosure petition was avoidable.

“At the end of the day, we agreed to what the city demanded, and instead of moving forward as would be expected, the city walked away,” he said. “That’s what caused the domino effect of the foreclosure.”

Sanders has a differing view of the issue.

“To the extent that it is being asserted that an agreement was reached by the city to resolve the disputes in the matters involving the 5th and Walnut parking garage, that assertion is not accurate and further has no relevance to the foreclosure action filed by Bankers Trust,” Sanders said in a prepared statement. “The developer has been in default under its Development Agreement with the city since November 1, 2019 and the city served notices of default on the developer in June 2020.”

Read the letters

To read the Sept. 8, 2020, letter from attorney Todd Lantz to Des Moines city attorney Tom Fisher, click here. 

To read the Sept. 10, 2020, letter from Fisher to Lantz, click here.

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