SNOWMASS VILLAGE — Interest rates on $32.6 million in bonds two Base Village metro districts issued in July 2008 have shot up to 10 percent from 1 percent as a result of actions taken recently by the Related Cos., the former owner and developer of the project at the base of the Snowmass Ski Area.
James DeFrancia, an executive at Destination Snowmass Services, which was appointed as receiver for the financially struggling project, said the increase in the bond interest rates could force Base Village property owners in 10 years to pay off about $65 million in debt, not $32.6 million.
“They are causing the metro district and owners considerable harm,” DeFrancia said of Related. “I don't think it is very ethical business behavior.”
DeFrancia, who is also president of Lowe Enterprises Community Development, claimed that by forcing the bonds to be called last month under a tight deadline, Related was acting out of spite, likely as part of an ongoing legal and financial battle between Related and a consortium of European banks that now own the stalled project, where 611 residential units once were envisioned.
“There was no reason to do this,” DeFrancia said. “The Related people were shamefully uncooperative. They are obviously doing this to be obstructionist and intransigent.”
Dwayne Romero, president of Related WestPac, views the situation differently.
“Related WestPac is merely exercising its rights under the bond documents, which were negotiated back in 2008,” he said in a prepared statement.
New York silent but engaged
Executives from Related Cos. in New York declined to comment for this story.
Jeff Blau, the president of Related Cos., owns two properties in downtown Aspen, including a $1.4 million condo on Galena Street and another condo valued at $6 million on the Hyman Avenue mall in the name of Silver Slam Commercial LLC. Blau was once an enthusiastic promoter of the Snowmass project.
On November 15, Blau was copied on a letter from attorneys for Related WestPac that threatened legal action against U.S. Bank and the metro districts if a letter of credit tied to the bonds was extended by December 31.
The letter sparked steps that led to the hike in the interest rates, which DeFrancia said could financially hurt property owners in Base Village and the metro districts.
After Related sent its threat of litigation, DeFrancia said he appealed to Related executives to allow for another six-month extension so that the bonds could be restructured in what he called a “responsible” fashion.
“This was completely and absolutely unnecessary and has created a very unfortunate circumstance,” DeFrancia said. “I have no idea why Related is behaving in this fashion. They gain no current benefit.”
DeFrancia also said Related refused to even discuss the possibility of another extension.
“There was no condition under which they would agree to an extension of the letter of credit,” DeFrancia said. “They said, ‘Screw you, up yours, and give us the bonds.'”
But Romero, who is also president of Related Colorado and is based in Snowmass Village, said Related did put forward a proposal.
“As recently as last November, Related WestPac offered more favorable and flexible terms to the metro district in an attempt to help the district manage its obligations, but never received a response from the metro district board,” Romero said.
DeFrancia, however, said Related's proposal was overly complicated and unrealistic given the tight time frames that Related's actions created in the first place.
When Related declined to grant an extension on the letter of credit behind the bonds, it meant the bonds had to be called out — bought back from the bond investors — by December 23, which DeFrancia said created a lot of work over the Thanksgiving and Christmas holidays.
Minutes of a metro district board meeting on November 30 reflect that Romero did attend the meeting and “addressed certain proposals” concerning potential changes to the letter of credit.
And the meeting minutes show that “Mr. DeFrancia thanked Mr. Romero for his comments, and indicated that the boards would take the matter under advisement.”
(There are technically two Base Village metro districts, but they function as one entity with a joint board and joint meetings.)
Then the district board went into executive session to get legal advice concerning its bonds, which were soon to end up in Related WestPac's hands with a 10 percent interest rate on them.
Hypo sues over the bonds
Related's actions concerning the metro district bonds has prompted a lawsuit from its lenders on the Base Village project, the Hypo Real Estate Capital Corp. It is a subsidiary of the Hypo Real Estate Group, which is now controlled by a German government workout agency called FMS Wertmanagement.
On December 28, Hypo filed a lawsuit against two entities controlled by Related — Related WestPac LLC and Base Village Owners LLC.
The two corporate entities served as the primary developers of Base Village, with Base Village Owner as the borrower of record for a now heavily contested $520 million development loan from Hypo and Related WestPac as the public face of the project under Blau and California developer Pat Smith.
The banks claim that the two entities controlled by Related fraudulently transferred $32.6 million from Base Village Owner LLC to Related WestPac. And the banks claim that the entities transferred the money in a such a manner as to deliberately defraud the banks.
Now the banks are seeking to reclaim both the $32.6 million in cash and the bonds.
The lawsuit joins three other ongoing suits in New York County civil court that Hypo has filed over the Base Village deal against Related and entities it controls.
Related also has sued the banks for $406 million, saying the banks stopped lending them money to build Base Village.
The scuffle over the metro bonds came to life on Nov. 15 when Related threatened to sue U.S. Bank if a key letter of credit that backed the metro bonds was extended past December 31 for a third six-month period.
November 15 happened to be the day before Hypo was set to foreclose on the stalled Base Village project and take it out of Related's portfolio.
DeFrancia was incensed:
“They could have done exactly the same thing six months later,” DeFrancia said. “But you would have had responsible, sensible discussions about restructuring the bonds. They could have made a good faith attempt to deal responsibly with the bonds.”
DeFrancia said Hypo, as the new owner of the project, had just reached a position to make reasonably accurate cash flow assumptions about Base Village, which the German government has been soliciting bids for.
DeFrancia says it is obvious the metro bonds need to be restructured, as the 241 condos built so far in Base Village do not generate enough revenue to pay off the $32.6 million in debt.
A group of condo owners in Base Village has also filed suit in Pitkin County against Related and other development entities, accusing them of not fully disclosing plans to potentially issue the metro bonds in order to pay for a portion of the project. (The case is called Bruce L. Smith, et al, v. The Related Companies, LP, et al. It's case number 2011 CV 168 in Pitkin County District Court.)
There were two series of bonds, Series A, which were sold for $15.2 million, and Series B, which were sold for $32.6 million.
Both series of bonds — which represent debt — are to be paid off over 30 years through property taxes on the condos and retail stores in Base Village. The Series A bonds are to be paid off first.
In order for the bonds to find an initial market, they had to be secured by a bank through a letter of credit.
If the Base Village project were to fail, and no property taxes were forthcoming, the bank would have to pay off the investors who bought the bonds.
So U.S. Bank took an additional step to reduce its risk and required Related WestPac to sign a guarantee of $32.6 million against the Series B bonds.
All the bonds were then sold in 2008, and proceeds were spent to build parts of Base Village, which is about one-third complete.
“It is a way of passing on infrastructure costs to end users,” DeFrancia said of the use of metro district bond proceeds.
And he said the money “was used legitimately” to build public aspects of Base Village, including a bridge, utilities and other infrastructure. The bond proceeds were also slated to be used for amenities in the village, including the pools in an "aqua center."
A crash, two extensions and an increase
After the financial crash of September 2008, Hypo Real Estate Group had its credit rating downgraded, which triggered a potential default in the bond agreements.
At that point, U.S. Bank called for more than a guarantee from Related WestPac to secure the bonds. It wanted $32.6 million in cash collateral.
To get the money, Base Village Owner drew it down from the $520 million loan and then apparently gave the money to Related WestPac, which then put it up as collateral with U.S. Bank.
It's that transaction that Hypo's attorneys now claim is fraudulent, as Related WestPac got the money “to use as the cash collateral without giving the borrower anything of value or fair consideration.”
Then, in July 2010, Hypo brought a foreclosure action against Related, saying that Related defaulted on the $520 million loan in April 2009.
In the past year, as the foreclosure process dragged on, the metro districts and U.S. Bank agreed to two six-month extensions of the letters of credit behind the bonds. And both times, Related WestPac was silent on the extensions.
But on November 15, Related objected to the third extension.
And if the letters of credit were to expire, as Related apparently desired, the bank would be required to quickly pay off the investors who bought the bonds back in 2008.
“Related WestPac had no bona fide business reason for objecting to an extension of the U.S. Bank letter of credit,” attorneys for Hypo stated in their December 28 lawsuit against Related WestPac. “Related WestPac initiated the events … to try and prevent the lender from recovering those funds …”
Again, Romero sees things differently. He says Hypo was fully aware of the terms in the bond agreements that gave Related the right to object to an extension and call the bonds.
“They were parties to several relevant agreements,” Romero said of Hypo.
On December 23, U.S. Bank used its own money to pay off the investors, including principal and interest. The bonds were then owned by the bank.
Then the bank asked Related WestPac to honor its guarantee of payment on the bonds. It declined to do so.
So U.S. Bank took the $32.6 million that Related WestPac earlier had been required to put up as collateral against the bonds.
At that point, the bonds became guarantor bonds, owned by Related WestPac.
And when that happened, the interest rate on the bonds increased from 1 percent to 10 percent, due to previous agreements about the bonds.
And now the Base Village metro districts still have to pay the $32.6 million in debt, plus the new 10 percent interest rate.
For the metro districts, the problem of paying 10 percent instead of 1 percent in interest is not an immediate prospect, but a looming financial disaster.
“So far it is not a burden,” DeFrancia said, as the Series A bonds have to be paid off first. “But ultimately it is going to hit. They are driving the districts deeper into debt day by day. And it causes us to revisit the overall structure of the metro district.”
Editor's note: This story was published in collaboration with The Aspen Times on Sunday, Jan. 15, 2012.