April 28, 2009 - Opus West, Phoenix AZ

Opus West owes more than $160 mil, lenders group says

One of the Phoenix area's largest commercial developers is showing signs of financial stress that local experts say is a symptom of widespread economic problems facing the industry this year.

Opus West owes more than $160 mil, lenders group says

One of the Phoenix area's largest commercial developers is showing signs of financial stress that local experts say is a symptom of widespread economic problems facing the industry this year.

A group of lenders led by Bank of America has filed a complaint in Maricopa County Superior Court claiming that Opus West Corp., based in Phoenix, owes the banks more than $160 million in unpaid construction loans, interest and legal fees.

The complaint, filed April 15, accuses the developer of failure to pay off the 10 loans on time.

Opus West is one of the Valley's largest developers, usually ranking in the top three in terms of square footage developed each year.

It is an operating company of Opus Corp., based in Minneapolis, and developer of projects such as Tempe Gateway in downtown Tempe and the Scottsdale Waterfront Residences high-rise condominiums at Scottsdale and Camelback roads.

A week after the Bank of America lawsuit was filed, Opus West sister company Opus South in Atlanta filed for protection from its creditors in U.S. Bankruptcy Court.

Opus representatives did not return calls seeking comment Monday. In a news release issued April 22 about Opus South's Chapter 11 filing, Opus Corp. Chairman and Chief Executive Officer Mark Rauenhorst said the company never has faced greater economic challenges in its 56 years of operation.

Still, he said each of Opus Corp.'s regional subsidiaries was experiencing a different degree of financial strain.

Phoenix-area real-estate analysts and competitors said the industry has been abuzz in recent weeks with speculation about Opus West.

Marc Huisken, a partner at Grubb & Ellis/BRE Commercial LLC in Phoenix, said more lawsuits and bankruptcies are expected as debt-laden commercial developers struggle to make good on past loans despite sharp decreases in property values and lease rates.

"Every developer is going to have to deal with it in one way or another," Huisken said.

Mesa real-estate investor Michael A. Pollack said many developers are facing a twofold dilemma.

Most projects are built with short-term loans that must be refinanced when they mature. A developer that borrowed the maximum loan amount at peak real-estate prices generally owes 80 percent of what the project cost when the market was still hot.

Not only have property values declined, but lenders have pulled back on the portion of a property's value they are willing to lend.

It's more like 60 percent now, Pollack said.

Therefore, any company hoping to refinance a construction loan would have to come up with enough cash to cover the property's lost value plus 20 percent of what the bank had originally loaned.

Pollack said the resulting shakeout could sink as much as 25 percent of the Valley's development industry.

"There's no question, there are projects out there that are highly overleveraged," he said.

Original Story - Arizona Republic

One of the Valley's largest and most influential developers is considering bankruptcy as its construction debt continues to mount.

Phoenix-based Opus West Corp., the Valley's second-most-prolific commercial builder in 2008 after retail giant Vestar Capital Partners, confirmed Friday that it has hired an attorney to "explore restructuring options."

Because of its size and long history, Opus West is considered a bellwether of the local commercial development industry.

Right now, that industry is in serious trouble.

"When it can happen to them, it truly can happen to anybody," said analyst John Smeck, principal and managing member of Johnson Capital in Phoenix, who counts Opus West among his list of clients.

The most recent threat to Opus West's stability is a pending foreclosure action on its Glendale Corporate Center.

According to documents filed with the Maricopa County Recorder's Office, California-based Bank of the West is seeking repayment of a $30.9 million construction loan for Phase 1 of the center. The center is a 300,000-square-foot complex between 99th Avenue and Loop 101, west of University of Phoenix Stadium. A foreclosure auction is scheduled for Aug. 13.

Debt-restructuring agreements with its creditors remain a possibility. Opus West typically provides about 75 corporate jobs, regular employment for hundreds of contractors, and thousands of dollars in contributions to local charities as part of a longstanding pledge to donate 10 percent of its annual profits.

Opus West has built a variety of projects, including the Scottsdale Waterfront Residences high-rise condos, the Arizona Department of Environmental Quality headquarters in Phoenix and portions of the Camelback Esplanade.

It completed nearly 1 million square feet of office, industrial and other commercial space in Arizona last year and manages about 4 million square feet statewide.

Most commercial projects are built with short-term loans that mature within a few years. The developer either must sell the building to pay off the loan or seek long-term financing based on lease revenue from tenants.

In the current economic climate, though, most commercial buildings are worth less than the value of their construction loans, and new tenants are scarce.

Smeck said Opus West is in such straits because it was involved in so many projects when the commercial lending market imploded and property values plummeted last year.

"They were the most active," he said. "They had the most chips on the table when the music stopped."

The pending foreclosure is just one of numerous financial blows to strike Opus West, one of six regional operating companies formed by Minneapolis-based Opus Corp.

Those include a lawsuit filed in April by 10 banks contending that Opus West owes them $160 million, the pending foreclosure and bankruptcy of a Texas shopping mall financed with those loans, and the bankruptcy of its Atlanta-based sister company, Opus South, in April.

Opus West's president and chief executive officer of the past 20 years, Tom Roberts, stepped down in May and was replaced by John Greer, former executive vice president.

Opus Corp. spokeswoman Winston Hewett in Minneapolis indicated that Opus West is considering Chapter 11 bankruptcy reorganization. "We've hired an attorney to explore restructuring options," Hewett said.

Hewett added the company would make an announcement if Opus West files for reorganization, just as it did when Opus South filed on April 22, and when Texas mall operator Hill Country Galleria filed on May 5.

A group of 10 construction lenders led by Bank of America initiated foreclosure action April 14 on the Austin-area mall, which is 73 percent owned by Opus West, according to documents filed with the U.S. Bankruptcy Court for the Western District of Texas.

The banks then filed a lawsuit April 23 in Maricopa County Superior Court, demanding $160 million in past-due loans, interest and legal fees.

Smeck said that every commercial developer is feeling some amount of financial pain and that continued job losses are likely to prolong it.

"Until we get some economic stability, the commercial real-estate market is not going to get better," he said.

Update Story - Arizona Republic