Court plan restructures project debt; ‘we’ve been very, very conservative’

SANTA ROSA – The U.S. Bankruptcy Court in Santa Rosa confirmed the reorganization plan for a 193,000-square-foot industrial real estate complex in southwest Santa Rosa.

Judge Alan Jaroslovsky on Aug. 20 confirmed the Chapter 11 reorganization plan for Industry West Commerce Center LLC, which developed and operates a four-building complex by the same name at 237 Todd Road.

The owners filed for reorganization on Jan. 11, claiming liabilities of $18.8 million and assets of $24.3 million, primarily consisting of the property.

Liabilities include a $15.9 million construction loan from Central Pacific Bank of Honolulu. Second and third deeds to Windsor and Roseville investors total $2.8 million.

The developers sought court protection because they couldn't arrange takeout financing when the construction loan came due in July 2009, neither from the bank or other sources amid a stalled lending environment at the time, according to the manager of the investment group, Vince Rizzo of Rizzo & Associates.

"We were never in default of the loan and had more cash flow than debt service when the loan expired," he said.

The reorganization plan calls for Central Pacific to write a seven-year interest-only loan on the remaining balance with a 4.95 percent annual interest rate and other attorney's fees. On Sept. 3 the bank and borrowers agreed to a principal balance of $15.87 million.

However, the bank objected to the loan term and interest rate. It filed a notice of appeal Sept. 2, asserting that the property should be sold to pay creditors in full. The bank wanted 8.5 percent interest on any new loan.

In a Sept. 15 filing, the bank's attorneys asked the court whether "the only reason to require appellant to wait seven years was to provide the equity holders of the debtor a speculative opportunity to obtain a possible return on their investment?"

Despite the objections, the reorganization plan as confirmed on Aug. 20 is moving forward.

The bank's attorneys also questioned the confirmation of the plan given projections of an uncertain future for commercial real estate loans nationwide in the next four years plus high vacancy in the property.

Industry West Commerce Center is 62 percent occupied following the dissolution of 24,000-square-foot tenant Billington Imports, according to Mr. Rizzo.

However, the property has three prospective tenants, including two from outside the area, in lease negotiations for spaces ranging from 8,000 to 23,000 square feet.

Still, Mr. Rizzo said that the ownership has been careful to maintain cash flow even with the vacancies.

"We've been very, very conservative in the safety of the project," he said. "We saw signs of a slowdown, so we made sure debt service was manageable."

That included maintaining cash reserves and not taking distributions from rent income.

Other terms of the reorganization plan were cash payments of $200,000 from equity owners to pay down the second deed from $932,560 to $750,000 under a three-year loan with the same 12 percent annual interest rate.

The third deed would be reset with a seven-year term and 5 percent annual interest rate.