Superior Vista condo mired in court, receivership; other developers hunker down, await market rebound.   5/20/2009 by Richard Thomas

(Photo: Superior Vista.)

In 2003 condominium developer Tim Wiklund set his sight on the Buena Vista Restaurant, Lounge and Motel on the picturesque hill overlooking Lake Superior near the intersection of Central Entrance and Mesaba Avenue.

As he testified later in a deposition, he got the idea from one of the Buena Vista owners, who suggested, “It would be a dandy idea to build condominiums up there.”

Asked during the deposition whether the Buena Vista was a historic place, Wiklund replied, “Infamously historic, possibly, yeah.”

“Duluth’s original greasy spoon?” asked the unidentified questioner.

Wiklund’s condo project, Superior Vista, is earning its own brand of infamy as the poster child for Duluth’s stalled condominium market. The 45-unit development is only half sold and in receivership.

Wiklund did not return phone calls for this story.

He “is broke, emotionally burnt out,” said Glenn Bergman, attorney for Alliance Bank, one of the project’s lenders, during a fall 2008 hearing. “He built a nice project and it crashed and burned.”

“Tim lost many, many, many dollars,” said Wiklund’s attorney, Paul Loraas of the Duluth law firm Fryberger, Buchanan, Smith & Frederick. Loraas notes at least Superior Vista is finished, unlike similar Twin Cities projects that were cancelled amid construction. “It adds a nice big chunk to the tax base,” Loraas said.

“It’s a great building. The view is incredible,” said Donald Bergman, chief executive at Kingwood Management, the court-appointed receiver. “The only thing holding us up from marketing it is the foreclosure process.”

That process has been long and drawn out. Last fall, Wiklund agreed to voluntary foreclosure initiated by lender North American Banking Co. But the foreclosure is on hold until the matter of a $1.5 million lien, filed by general contractor Kraus-Anderson, is settled.

On March 26, the court upheld Kraus-Anderson’s claim. But that’s not the end, as both sides are fighting over attorney fees.

The travails of Superior Vista are chronicled in two related cases underway in St. Louis County District Court in Duluth: North American Banking Co. vs. Superior Vista, LLC and the heftier (six volume) court file Kraus-Anderson Construction Co. vs. Superior Vista, LLC.

Wiklund’s story

Depositions and complaints in the two cases reveal this chronology.

Wiklund, a graduate of East High School and the University of Minnesota Duluth, entered the home building business in 1976. The economic downturn in the late 1970s and early 1980s, as mines closed and interest rates hit 20 percent, forced him to move to the Twin Cities. He later returned and launched his company, Premier Builders & Development Inc. on Garfield Avenue.

When he was ready to move with Superior Vista, he had difficulty getting local funding. “No one up here at the time…had any interest with the way the economy was already starting to go, and the real estate market was starting to wane at that point,” he said in his Dec. 18, 2008 deposition.

At first he negotiated with Republic Bank. “They only wanted to lend, you know, a small amount up front until we had so many sales made, and to me that was pretty much financial disaster to do that because who knows.”

Kraus-Anderson agreed to lend him $1.3 million toward the site purchase as long as the company was the general contractor. Wiklund and the contractor signed their agreement in April 2005. Wiklund secured most of his funding for construction from Twin Cities-area banks: CoPar Finance Co., North American Banking Co. and Alliance Bank.

The Buena Vista was demolished in October 2005 and construction on the condos began the following spring. By March 2007, he had run out of funding, but Kraus-Anderson continued work to complete the project.

In October 2007, Kraus-Anderson filed the $1.5 million mechanics lien against the other lenders and the owners of the units that had sold —including Janet Hook, wife of Gary Hook, former Kraus-Anderson vice president.

“What we have before the court is a somewhat remarkable situation where we have a foreclosure by action which, by its design, is to resolve questions,” Steven Prince, attorney for Kraus-Anderson, stated in court on Oct. 21, 2008.

State District Judge Shawn Floerke appointed Kingwood Management of Stillwater as receiver to run the development.

Of 45 units at Superior Vista, 23 have sold, but in ever dwindling numbers: 16 in November-December 2006, four in 2007 (including Wiklund himself, though he later moved out) and three in 2008.

Wiklund told BusinessNorth in March 2007 he had sold 33 units. Loraas, his attorney, said those were reservation agreements.

“People started canceling once it started spiraling. They pulled back their deposits,” Loraas said.

In February 2009 Wiklund appeared in court without representation because he had run out of money, Loraas said. By then, the fight was between Kraus-Anderson and the banks.

Kraus-Anderson lawsuit

According to the plaintiff’s pre-trail brief filed Feb. 11, 2009, “Mr. Wiklund, with his company Premier Builders, was an experienced homebuilder and contractor, but he lacked the experience to manage a large project like Superior Vista, and the financial resources to fund a project expected to cost $14.5 million.”

Kraus-Anderson attorneys also blame the bank lenders. “CoPar, without providing any of its own capital on the Project, pocketed tens of thousands of dollars from the Project financing intended for construction costs, and, along with its financing partner (North American Banking Co.) ultimately drove the project into receivership.”

Until October 2006, CoPar assured Wiklund his project was in “good shape” with plenty of financing to finish, according to the Kraus-Anderson brief. It refers to North American Banking Co. as NABC. “While CoPar and NABC were concealing their unwillingness to advance further funds, NABC was demanding, and receiving, every dollar of proceeds from those condominium units that were sold,” the brief states.

Kathryn Bergstrom, attorney for NABC and Superior Vista unit owners, did not respond to phone calls for response. (Bergstrom, of the law firm Gray Plant Mooty, had a high-profile role in the investigation of the I-35 bridge collapse in Minneapolis.) NABC president Bradley Huckle declined comment.

Phone calls to Tom Hansen, president of CoPar, were answered by a recording with no option to leave a message.

In court on Oct. 21, 2008, Kraus-Anderson’s attorney said, “We did not sign up to be the bank and that’s why we’re foreclosing.”

Speaking for the lenders, Bergstrom replied, “Kraus-Anderson is not a bank. You know what they needed? A bank. And you know what the terms that the bank set forth were? We’re not going to come in and we’re not going to be the construction finance lender here, unless you subordinate your interest and you agree to a complete and utter standstill of any litigation.”

Speaking for Alliance Bank, attorney Bergman warned of the difficulty of selling the units. “That mechanic’s lien has been of record now for a year so you’re screwed— excuse me— if you attempt to sell through the receiver…They’ve been unable to get realtors to come in because it’s too darn hard to sell these units through a receiver, all the vagaries of court proceedings. What buyer wants to get enmeshed in that?”

Local condo market scales back

Superior Vista is a casualty of the real estate bubble that burst in 2006 and the notoriously mercurial boom-and-bust cycle of condos.

“If there’s one thing we’ve learned in recent weeks, and months, it’s that in markets, perception is everything. If you think it’s going down, well, pretty much that’s what happened,” said Bergman.

The national condo market exploded from the late 1990s until 2006, when the bubble burst. Cities like Miami, Las Vegas, San Diego and Los Angeles became so overbuilt that Web sites such as “condovultures.com” sprouted up to market foreclosed units.

Duluth had its own explosion with around 20 developments in the early part of the new millennium. Now, most are only partially sold. Entire projects, such as the Duluth Housing and Redevelopment Authority’s 47-unit Seasons at Harbor Highlands, have been put on hold.

The Duluth housing market typically is several years behind the national curve, which in this case is a blessing, said Gregg Swartwoudt, an appraiser in the city assessor’s office.

Duluth’s condo market is “not hugely overbuilt. We were on the verge, but it stopped,” he said. “There are a lot of plans waiting to go into effect.”

The pricey Ledges on Lake Superior (ranging from $465,000 to $1,025,000) has nearly sold out despite the recession, mainly because the units typically aren’t built until they are sold, said developer Ron Edmunds. Only 18 of the 46 units planned have been built, he said. “In this climate, (the project has been) extremely successful,” he said.

Edmunds Company scaled back its Matterhorn Ridge development plans from 107 units to 72. Its Island Beach Resort near Island Lake Reservoir is platted but undeveloped.

Meanwhile, Sherman Associates has sold 24 of its 33 condos, 311 Superior, atop the Sheraton Duluth Hotel, according to Duluth city assessor records. But only seven sold in 2008, and none so far in 2009. Waterfront Plaza in Canal Park planned 60 units in 2007 but to date has sold only seven.

Despite the floundering market A &L Properties is forging ahead with construction of 14 residential condos in its downtown Wieland Block project. (See story, page 10.)

“Our prices are affordable compared to others with Lake Superior views,” said property and leasing manager Katherine Marinac. The finished units range from $260,000 to $415,000. (311 Superior sales prices have ranged from $290,000 to $793,000.)

Neighborhood Housing Services built 16 condos in Central Hillside, but has sold only four. “Our issue wasn’t the neighborhood. Everyone (other condo developers) had the same problem,” said George Garnett, executive director.

The units were built partially with federal funds, so were restricted to families that make less than $74,000 annually. “We lost some buyers who were over the limit,” he said.

The nonprofit has resorted to renting the units until the market comes back. The $8,000 tax credit for new homebuyers within certain income brackets authorized by the American Recovery and Reinvestment (federal stimulus) Act of 2009 has created new interest in the condos, Garnett said.

Wells McGiffert, developer of Beacon Point, on the edge of Lake Superior near South 21st Avenue East and Water Street, has sold 32 of 50 units. McGiffert has resorted to rentals and fractional ownerships. Unit owners who spend long periods away from their units often lease them out.

In the Superior Vista case, attorney Glenn Bergman representing Alliance Bank spoke of the “stigma” that renting puts on condo developments. “Eventually somebody, out of desperation, might have to start renting units and that might hurt the existing owners.”

Superior Vista’s receiver indeed has rented some units. But converting to rental does not affect a condo’s property value, said city appraiser Swartwoudt. The developers still intend to sell the units once the market comes back, and “a high end unit is unlikely to get a renter that’s not high end.”

Rentals haven’t been a problem, said Carol Burns, president of the Point at Beacon Point homeowners association. “For our building it hasn’t changed things much at all. We haven’t noticed parties or noise,” she said. “It hasn’t negatively affected our sense of community.”

The only downside about Beacon Point she noted was negative publicity about the development, built close to the water’s edge, conflicting with the public’s desire to extend the Lakewalk.

The condo residents are supportive of the Lakewalk, she said, but have concerns about its construction infringing on residents’ privacy. “Our goal is to make sure people have access without going across our property,” she said. “We think it’s possible, but we haven’t seen that plan.”

• Investment in colleges, universities totals $270 miliion since 2000 -8/25/2010
• Despite recession, Range Readiness Initiative continues -8/17/2010
• Wide Open Future -8/10/2010
• Highway design change sends customers elsewhere -8/3/2010
• Visitors make Bayfield a business destination -7/27/2010