On April 10th the HRA approved a resolution accepting payment in the amount of $25,000 from the Hmong American Partnership to a loan made in 2003 to D&N,Inc doing business as Mai Village Restaurant, and adding D&N, Inc to the adverse lending list. I have received a lot of e-mails, letters, and phone calls about this mostly because the people writing believe that we "sold" the building for $25,000. This is not true. Please allow me to explain the buy-out of this distressed building.
In April of 2003, Western State Bank, the U.S. Small Business Administration, and the Saint Paul HRA provided financing to D&N, Inc to construct Mai Village Restaurant at 394 University Avenue West. Financing was as follows:
Western State Bank, $1.86 million, 52%, 1st position
Small Business Administration, $751,000, 21%, 2nd position
Saint Paul HRA, $400,000, 11%, 3rd position
D&N, Inc Equity, $595,000, 16%
The position for each of the lenders is important to this story and you will see why later.
D&N, Inc had difficulties from the beginning paying the loan off. Several amendments were made to the financing agreement with the HRA. The second amendment required D&N to lower operating costs. The third amendment increased amounts owed to the HRA to $512,000 and deferred payments. The Western State Bank and SBA loans were also not being paid by the time of the third amendment, and SBA's exposure had grown to $880,000. Western State Bank initiated foreclosure proceedings against D&N, Inc in September of 2012. Western State Bank is the first mortgage holder (first position). The HRA's loan is in third position and therefore subordinate to Western Bank's and SBA's mortgages. The debt owed on the first and second position mortgages exceeds the value of the real estate. Thus, the HRA is owed nothing in the building foreclosure because current foreclosure law requires Western State Bank to be paid off first, SBA to be paid off second, and the HRA to be paid off third when the property is sold. Since the property is not worth the combination of the three mortgages, the HRA would not be entitled to any payments by Western State Bank for its 3rd position. The Ramsey County tax assessor valued the property for taxes payable 2014 at $1.065 million.
The HRA and SBA also held a 50/50 interest (shared 1st position) in the furniture, fixtures, and equipment as collateral for their loans.
In order for Western State Bank, SBA, and the HRA to make any money on this foreclosure, someone would have to step forward to actually purchase the property. Hmong American Partnership (HAP) has stepped forward to purchase the property at 394 University. They offered to pay Western State Bank most of the remaining mortgage owed. HAP offered to pay SBA $100,000 and the HRA $25,000. The HRA asked SBA to share the $125,000 offered by HAP in proportion to the total debt. The HRA debt was 37% and SBA debt was 63% of the remaining debt. This would have increased HRA's recovery to $46,250 and lowered SBA's recovery. However, the SBA is in 2nd position (remember I told you this would be important), and they rejected this request. Since SBA holds 2nd position, they were completely within the bounds of their legal rights to reject the offer.
That brings us to the April 10th HRA meeting. The HRA Commissioners had two choices: accept the $25,000 offer or reject it. Had they decided to reject the offer, they would have to initiate a lawsuit to take possession of the furniture, fixtures, and equipment and then try to sell 10-year-old, used equipment to a second buyer assuming one could be found. The value of this sale would have to exceed $50,000 since we would have to share proceeds of the sale with SBA, and it would not make any sense to go thru all this work and legal expense to end up right back where we started with $25,000 in hand. The HRA voted to accept the $25,000 offer as the best of two bad alternatives.
The question most callers and letter writers ask is "Why didn't we just sell the building?" The short answer is that it was never ours to sell. It was Western State Bank's to sell. Councilmember Thune believes that the owners of Mai Village did the best they could to honor their debts, but the expected revenue never materialized. They are good people and serve wonderful food. They did start a renaissance on that corner that has led to one other new building, a major facelift to another large multi-tenant building, and a planned historic renovation on that corner. But investing in restaurants and bars is a risky business.