Developer hopeful McQuillen Place can be completed, despite foreclosure steps

By Bob Steenson, bsteenson@charlescitypress.com

A trial date has been set for a court petition seeking foreclosure on a mortgage for the McQuillen Place in downtown Charles City, as well as for several counterclaims filed against the lending bank by the developer, Charles Thomson.

And a recent ruling by the Iowa Economic Development Authority takes away several hundred thousand dollars in tax credit financing for the project.

In spite of those developments, Thomson said he still has hopes that the housing and commercial development project can be completed.

“We continue to look for financing,” Thomson told the Press. “We have a dispute with the bank that we are vigorously contesting … but we hope to have something done before the trial date.”

A jury trial in the civil foreclosure case and counterclaims has been set for Feb. 19, 2019.

Thomson said last week the time had come to “provide the public with information.”

“In brief, the owners went to great lengths to accommodate the state of Iowa to make McQuillen Place a showcase development, only to have the rug pulled out from under us — by the state of Iowa,” Thomson said.

“In mid-summer of last year, with construction on the residential units at McQuillen Place more than 90 percent complete, McQuillen Place Co. was informed by the state of Iowa that the Enterprise Zone tax credits promised by the state in 2013 as part of the original financing incentives for undertaking the development would not be forthcoming,” Thomson said.

“The reason behind the state of Iowa withdrawing these tax credits is controversial and will be the subject of litigation,” he said. “However, it suffices to say that the problem arose because of a clerical error at the Iowa Economic Development Authority — theirs, not ours — and officials at the authority believed that they could not correct the problem absent legislation.”

Thomson said he worked closely with state Sen. Waylon Brown, R-St. Ansgar, to restore the Enterprise Zone tax credits through the Legislature earlier this year, but the session ended without passing the legislation.

“Last week, the IEDA issued its formal ruling that it would not provide McQuillen Place the tax credits it had previously promised,” Thomson said in a statement Thursday.

Earlier this year, Cedar Rapids Bank and Trust Co. filed a petition in Floyd County District Court to foreclose on a construction mortgage on the McQuillen Place project, naming as defendants McQuillen Place Co. LLC, Charles Thomson, Robert Thomson (Charles’ father), Amelia Management LLC, Amelia Trust and Cerro Gordo County.

The foreclosure petition says that McQuillen Place Co. borrowed $3.88 million on Dec. 31, 2014, from Cedar Rapids Bank and Trust Co., payable by June 30, 2016. That note was amended four times, in June 2016, December 2016, March 2017 and June 2017.

The final due date of Dec. 15, 2017, passed without payment being received, the bank alleges, and as of the time the foreclosure was filed, the total due with principal, interest and late charges was $4.36 million, with interest continuing to accrue at 11.75 percent annually, increasing an additional 5 percent per year.

In August, Cedar Rapids Bank and Trust was granted a motion to substitute First Security Bank and Trust Co. of Charles City as the sole plaintiff and owner of all the claims in the foreclosure action.

According to court documents, First Security provided the majority of the original construction mortgage.

In addition to the Thomsons’ own money and the mortgage, financing on the project was to include a $2.94 million forgivable loan from the Iowa Economic Development Authority, Iowa development tax credits through the Enterprise Zone program, tax increment financing (TIF) incentives, state sales tax reimbursements, and a forgivable loan from the city of $900,000.

The project was originally expected to be completed in 2016, but Thomson said in January 2017 that the project had been delayed by weather, lack of available skilled labor in the area and the complexity of the project.

In counterclaims to the foreclosure lawsuit, he also said that a reason for the delay was the refusal of a key vendor to work with MidAmerican Energy and “multiple changes in standards and design parameters imposed unilaterally by staff of MidAmerican Energy.”

The foreclosure petition filed earlier this year asks the court to foreclose the mortgage without redemption, which means if the foreclosure is granted the bank can sell all the collateral property put up to guarantee the loan immediately, unless the borrower asks the court to delay the sale.

The amount of collateral required to finance the loan is one of the items identified by Thomson in one of 16 counterclaims against the bank.

The foreclosure documents list the collateral that Thomas and the other defendants in the suit committed to the loan. It includes:

• McQuillen’s rights in the $2.8 million state forgivable loan.
• $800,000 in six properties owned by Amelia Management.
• $150,000 in equity in Thomson’s home.
• $125,000 in Thomson’s beneficiary interest in his father’s life insurance.
• $250,000 in Thomson’s interest in a farm in eastern Iowa.
• $900,000 in TIF benefits.
• $900,000 in a personal guaranty from Thomson’s father, Robert.
• $500,000 in the state’s Enterprise Zone tax credits.
• Not less than $100,000 in the value of the lots for McQuillen place.

The face value of the collateral package was $6.52 million for the $3.88 million loan, a ratio that Thomson in a counterclaim alleges far exceeded typical collateral requirements.

He alleges that First Security Bank engaged in “restraint of trade” because it controls the Charles City lending market and didn’t allow Thomson to obtain a mortgage from another source that would have required less collateral, and didn’t allow him to refinance the mortgage with a competing lender.

Kurt Herbrechtsmeyer, president and CEO of First Security Bank, said he couldn’t comment on the claims and counterclaims while the matter was in litigation.

But when asked if he thought there was a way for McQuillen Place to be completed, Herbrechtsmeyer said, “I think so. It’ll require both parties to come to some terms, but there are some hopeful things.

“We have gotten together a couple of times and tried to work on some solutions. And I think we will still,” he said.

Some other of the 16 counterclaims Thomson has made against First Security include:

• Not acting in the best financial interest of the Thomson family, which has a long history as customers of the bank and therefore had established a confidential relationship.
• Breach of duty of good faith by failing to notify the borrowers of the state requirement that the Enterprise Zone tax credits had a two-year expiration rule, despite the borrowers relying on the Cedar Rapids and Charles City banks’ claims of expertise in such matters.
• Breach of contract for not taking due care to protect McQuillen Place’s financial interests on the Enterprise Zone credits.
• Arguing the bank should not be able to recover from McQuillen Place’s inability to repay the mortgage since it was the bank’s own actions in failing to notify the borrowers about the limitations in Enterprise Zone credits that caused the default in the first place; the so-called “unclean hands” doctrine.

The construction mortgage was part of the financing to construct what was announced in January 2013 as McQuillen Place, a 50,000-square-foot collection of retail stores and apartments with a total price tag that has been variously listed as between $8.6 million and $13 million.

The project was announced by brothers Charles and Peter Thomson, who jointly operate Amelia Management, a Charles City-based real estate development company. Another brother, Steven, was also a partner. Steven died in November 2017.

The proposal was for a Victorian-style building to be constructed on nine lots in downtown Charles City that had been vacant for more than 20 years, with 33 apartments on the second and third floors of the building and a row of up to eight retail stores on the ground level along Main and Clark streets.

“Even though it will appear to be a historic building it will feature the most modern and efficient building systems available,” Charles Thomson had said when the project was announced.

After construction stalled in 2016, work picked up again for a while in the summer of 2017 as finishing on the outside of the building resumed and a clock tower and weathervane were installed on the corner of the building.

In late July 2017, the building was blessed by a Catholic priest as construction continued, but it soon stalled again.

In June this year, as there continued to be no apparent progress on completion, the Charles City Council agreed to replace the sidewalks around the building, which had been removed for construction in 2014, and assess the costs against the project.

Thomson said last week, “There is a huge demand in Charles City for high-quality rental apartments. It’s clear that one of the factors holding back Charles City’s economic development is this shortage of housing.”

He said McQuillen Place now faces two “significant obstacles” — the decision by the state to not renew the tax credits, and the action by the bank to start foreclosure proceedings.

“The owners of McQuillen Place believe that the value of the building, even in its current incomplete state, is sufficient to support additional financing to complete construction. In addition, the owners believe that the anticipated rental income from McQuillen Place’s 33 residential units will be sufficient to provide construction lenders with appropriate compensation.

“Accordingly, the owners are hopeful that McQuillen Place Co. will be able to complete construction of the building when new financing becomes available, and we are avidly seeking that financing,” Thomson said.

Regarding the state’s decisions on the tax credits, Thomson said, “For the IEDA under a Republican governor to pull the rug out from under this development speaks volumes about their real agenda.

“Last year, the state of Iowa found more than $200 million to give to Apple so they’d put something in Des Moines. Yet for a struggling rural area where there’s actually a real need for economic development, they can’t bring themselves to honor their commitments for less than one hundredth of that amount.

“I just wish we had known about the IEDA’s real agenda before we relied on their promises,” Thomson said.

In the foreclosure case and counterclaims, First Security Bank and Trust is being represented by Larry S. Eide and Randall E. Nielson, of Pappajohn, Shriver, Eide & Nielson PC of Mason City.

McQuillen Place Co., Charles Thomson and Amelia Trust are being represented by Judith O’Donohoe of Elwood, O’Donohoe, Braun and White LLP of Charles City.

Robert Thomson is being represented by Eric W. Johnson and Thomas C. Verhulst of Beecher, Field, Walker, Morris, Hoffman and Johnson PC of Waterloo.

The case has been assigned to District Court Judge Colleen Weiland.