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TO:
Robert J. Temple, Acting Director
San Bernardino Economic Agency
FROM:
Eugene H. Wood
DATE:
November 2, 1990
SUBJECT: Schurgin Development Companies Analysis .. Recommendations
At your request I have undertsken a complete review of the RDA loan for
Schurgin Development Companies know as: Central City Promenade.
BACKGROUND
At the beginning of 1985, the City of San Bernardino issued $7.5 million in
Industrial Revenue Bonds ("IRB") to support Schur gin Development Com-
panies' ("Schurgin") development of the Central City Promenade in the 700
block of West 2nd Street, south of Central City Mall. The bonds, which
were secured by a 1st Trust Deed, were interest only until 1989, with the
principal all due and payable December 1, 1989. Chase Manhattsn Bank of
New York purchased and continues to hold these debt certificates.
To give added impetus to the project, the Redevelopment Agency ("RDA")
loaned $690,000 to the project secured by a $540,000 2nd Trust Deed against
Parcel ".\" and a $150,000 2nd Trust Deed against Parcel "C". Parcel
"B" was sold and was not part of this entire transaction.
The notes called for interest accrual, interest and principal payment
according to the following schedule:
1. Zero interest the first two years.
2. Interest accrual on both notes beginning in 1987.
3. Interest only payments beginning April 4, 1990 on Parcel
"e".
4. Interest only payments beginning September 16, 1990 on
Parcel "A".
5. Principal payments due in 1995.
According to an August 14, 1990 RDA stsff report on Central City Promenade,
the following are the values of the center:
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1. Total Acres:
7.1
2. Improvements Sq. Ft.:
97,746
$12,000,000
$11,240,000
$12,250,000
3. Replacement Cost:
4. Market Approach
5. Income Approach
CURRENT STATUS OF !RB'S
On October 18,1990, at RDA's request, Mr. Barry Schumacher, Account Officer
in the Chase Manhattan Bank Special Assets Division, was contacted to
determine the status of the IRBs. The Special Assets Division is the arm
of the bank specializing in problem credits.
Mr. Schumacher indicated the following had occurred with regards to interest
and principal payments on the IRBs:
1. Schurgin had made interest only payments on the IRB's
though not in a timely manner.
2. Schurgin has missed the October 1, 1990 interest payment.
3. Schurgin was unable to pay the principal on the IRB's on
December I, 1989.
4. Chase Manhattan extended the principal payment date to
first February 1, 1990 and later September I, 1990.
Schur gin was still unable to make the principal payment.
5. Chase Manhattan extended the principal payment to March
I, 1991 and has no intention or "",lrjn.g a further eztension.
Schumacher also indicated that property taxes on the development were
now two years delinquent.
Finally, he indicated that Chase Manhattan has notes against thrE'e other
Schurgin shopping centers and were reviewing a request by the developer
to refinance all four of their centers. The bank will reach a decision on
this issue on November 1. 1990. My instinct is that a positive decision is
very unlikely.
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Mr. Schumacher said he realizes that RDA is in second position on the
Schurgin properties in San Bernardino and could be harmed financially
should Chase Manhattan decide to foreclose. While no commitments were
made, it is again my instinct that there is a chance to work with the bank
in order to protect the Agency's position. I say this in part as Schumacher
intimated that the Chase Manhattan does not want to take the properties
back if it can avoid doing so.
CURRENT STATUS OF RDA'S NOTES
As of today, Schurgin has made no interest payments on its $690,000 in
notes to the RDA. Several letters sent by RDA to Schurgin requesting
current payment and year-end financial statements have resulted in no
payments and poorly prepared company financials. The latter do not permit
either a cash flow or asset evaluation of the firm.
Further, a check of the file indicates that RDA holds no proof of insurance
on the Central City Promenade development since the policy in the file
expired on June 30, 1987.
A request has been made to 1st American Title Co. to conduct a title search
of Parcels "A" and "c" to determine if taxes are in fact delinquent, and
whether other liens have been filed against these properties.
Finally, it appears that Schurgin's San Bernardino properties are delivering
a decent cash flow to the company. This can be checked by asking the
City Clerk's office to do an analysis of the cash flow being generated from
taxable sales in the development. If it is the case, it would appear the
company is using the funds for problems with other centers.
RDA'S POSITION SHOULD CHASE MANHATTAN DECIDE TO FORECLOSE
Should RDA take no action against Schurgin, and should Chase Manhattan
end up undertaking foreclosure proceedings beginning March 1, 1991, RDA
has a likelihood of losing its $690,000 investment in the project.
It is my understanding, though legal counsel's opinion is advised, that the
foreclosure process entails a 90 day waiting period after notice of default
is recorded, followed by a 20 day waiting period after notice of a trustee's
sale is recorded. Should Schurgin not make payment by the 15 day of the
latter period, the property is sold to the highest bidder.
Normally that bidder would be Chase Manhattan, and normally they would
bid what Schurgin owes to them. At that point the property would belong
to Chase Manhattan free and clear. All junior liens, including RDA's 2nd
Trust Deeds, would be eliminated.
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Only in the unlikely event that someone should outbid Chase Manhattan
would any sale proceeds, over an above those needed to retire the IRB
interest and principal, go towards paying RDA.
Under this scenario, the most likely situation is that RDA could only protect
its position by agreeing to pay Chase Manhattan its $7.2 million, plus
accrued interest, and taking control of the property.
RDA'S POSITION SHOULD RDA DECIDE TO FORECLOSE
Should Schurgin continue to be in default of its agreement to pay interest
only to the RDA, the Agency could institute foreclosure proceedings. In
this event it is likely that Schurgin would wait until the deadline process
has nearly run out, and then make the Agency whole in order to protect
their position.
Should that not occur, RDA would be able to acquire title to the property
subject to Chase Manhattan's first .trust deed. As the IRB's will again
become due March 1, 1991, the Agency would have to make the bank whole
at that time, or again lose control of the property.
RECOMMENDATION
Based upon these conditions, Wood-Husing makes the following recom-
mendations:
1. RDA open negotiations with Ch.sse Manhattan to develop a
mutually agreeable strategy for dealing with Schurgin.
Chase Manhattan does not want to take the Schurgin
property back. As a bank under regulatory review, they
would most probably like to find a way to turn this
classified asset into an asset they can again fully value
on their books.
RDA has the option of filing a notice of default today,
which would have an adverse effect on Schurgin's ability
to secure third party financing. However, given the firm's
performance to date such an action may be warranted.
2. As part of this strategy, RDA may end up filing for
foreclosure immediately or Chase Manhattan may end up
filing foreclosure in the event Schurgin defaults on the
IRBs.
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In either case, RDA should offer to assume Schurgin's $7.2
million note at an interest rate commensurate with the
Agency's solid financial position and non-profit status.
Such a note to be written for three years interest only.
Chase Manhattan would end up with an unclassified,
tax-exempt asset instead of a problem loan, and the
probability of being stuck with a center far from their
operating base.
The Wells Fargo experience indicates that the Agency can
be shown to be an acceptable client to a major bank, and
at favorable rates.
The Agency :would of course have to hire a firm to manage
this asset. However, as the center appears to be throwing
off a positive cash flow, RDA could well have an income
stream sufficient to make both management company
payments and payments on both the Chase Manhattan and
RDA loans.
3. RDA should sell the center during the three year time
period.
Schur gin currently owes RDA $690,000 and Chase Manhattan
$7,200,000. That is a total principal of $7.890,000. If the
staff income approach appraisal of $12,250,000 is accurate,
a sale at 64.4% of appraisal would cover both loans. A
sale at 70% would therefore cover that amount plus any
accrued interest.
4. RDA should send a negotiator to work out an agreement
of this type face to face with Chase Manhattan
The amount of money at risk in this situation, and the
complexity of the situation, would seem to warrant face to
face negotiations with Chase Manhattan. Wood-Husing would
be pleased to reJ;>resent the Agency in such a circumstance
should you find our services useful.
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