Developers of the Fifth seek $101 million in counterclaim against city
MICHAEL CRUMB Sep 24, 2020 | 8:28 pm
4 min read time927 wordsAll Latest News, Law & Government, Real Estate & Development
The developers for a massive, multipiece downtown project called the Fifth have filed a counterclaim against the city of Des Moines, claiming the city reneged on its development agreement and seeking $101 million in damages. They also are seeking an injunction to keep the city from acquiring any of the project and to prevent what developers claim is further interference from the city.
In a statement released this afternoon, City Manager Scott Sanders called the complaint “disappointing, but not unexpected.”
“The developer has consistently failed to take responsibility for its inability to live up to the development agreement it negotiated and now appears to be asking the court to shift their responsibilities anywhere but with the developer,” Sanders said. “The city has been damaged by the developer’s breaches of that agreement and by other actions of the developer and anticipates filing its own claims to recover against the developer.”
Earlier documents show correspondence between city officials and the developers grew contentious at times.
“I suggest that your client would be much better off at this point agreeing to walk away from this project,” Tom Fisher, Des Moines’ assistant city attorney, wrote to Todd Lantz, an attorney for the developers, on Sept. 10.
The 29-page, seven-count counterclaim was filed late Wednesday in Polk County District Court. It details the agreement the developers, Justin and Sean Mandelbaum, entered into with the city for the construction of the $200 million project at Fifth Avenue and Walnut Street. It also outlines grievances the developers say led to Bankers Trust Co. filing a foreclosure petition against the Mandelbaums, claiming they defaulted on a $48 million construction loan that was to be paid by 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.
A statement provided to the Business Record from Mark Weinhardt, whose law firm is representing the Mandelbaums, said the developers “did not take this legal step lightly.”
“We are absolutely committed to build this project that will transform downtown Des Moines,” Justin Mandelbaum said in a statement provided by Weinhardt. “If the City allows us to continue, we are 100% confident that The Fifth will be built. We do not want to be in litigation with anyone. We want to be designing, supervising construction, and working hard to help Des Moines be a world-class city. But if the City simply refuses to allow this project to proceed, the consequences to us and many others are catastrophic, and the City needs to be held to account for those consequences.”
In the developers’ counterclaim, they allege the city’s filing default notices because they had not met deadlines for construction led to Bankers Trust filing its foreclosure action. They also say the deadlines were affected by the coronavirus pandemic. According to the developers, provisions for deadline extensions were included in the development agreement for “times like these.”
In their claim, developers say that under the city’s default notices, the city indicated it would take one of two remedies to resolve the issue. One would be for the city to take back the tower and/or the theater parcels and reduce the forgivable loan to the developer by the value of those properties. It could also take back the completed parking garage and other parcels. According to the counterclaim, the city would have to assume all the developers’ obligations under the loan, including paying all loan installments.
Instead, the city demanded ownership of the mostly complete parking garage, which developers claim was legally baseless because it was not listed as a possible remedy under the development agreement.
Developers say in their claim that the default notices dealt them a major blow because the city demanded deeds to the property but left them saddled with the construction debt.
The claim indicated that as a result of the city’s default notices and the subsequent bank foreclosure, they face more than $33.7 in liability, plus interest and legal expenses.
According to the counterclaim, the default notices resulted in a net present value loss to the developers of more than $67.4 million. That, combined with the liability on the parking garage, is resulting in damages that exceed $101 million, developers claim.
The city also demanded the Mandelbaums repay a $4 million loan it received from the city for the purchase of the property, but at the same time demanded that developers turn the property back over to the city, the claim states.
The Mandelbaums claim that they believe the city will “engineer a deal with the bank” that will result in the city taking ownership of the property, and use the foreclosure to accomplish what it can’t achieve under its own “dubious claims of the developers’ default under the default agreement.”
The Mandelbaums claim the city’s actions threaten to damage their reputation and ensure their inability to complete further developments in Iowa and elsewhere.
Besides violating the development agreement with the Mandelbaums, “the choices and actions by the city of Des Moines have jeopardized one of the most exciting and transformational construction projects in the history of downtown Des Moines,” the developers say in their claim.
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