January 11, 2009 - Triyar Hospitality and Hunt Construction Group, Scottsdale AZ

Hunt Construction Group, Triyar Hospitality in $20 million battle

Hunt Construction Group shows off the luxury JW Marriott Desert Ridge and Sheraton Wild Horse Pass resorts in the portfolio of projects on its Web site. But there are no snapshots of its latest hometown hotel project: the trendy W Scottsdale.

Hunt and the hotel's developer, Triyar Hospitality, are locked in a legal battle that threatens foreclosure of the 224-room property and hangs a cloud of uncertainty over it during an already challenging time for hotels.

At issue in the case: $20 million Hunt says is still owed for work on the hotel, which opened in early September after repeated delays. It is Arizona's first W, the hip sister to the Sheraton and Westin chains, and became an instant social hotspot with its sushi restaurant and bars.

Triyar, a division of Los Angeles-based commercial real-estate developer Triyar Companies, is making its first foray into hotel development. It says Hunt did poor work, went over the $57 million budget by millions of dollars and delayed the hotel's opening by more than a year.

Scottsdale-based Hunt is one of the country's largest contractors, with several high-profile projects in metro Phoenix, including the convention center expansion and University of Phoenix Stadium. It blames Triyar for the delays, saying the extra work was at its insistence.

Hunt and its subcontractors, whose claims make up a large portion of the $20 million Hunt is seeking, aren't alone in taking legal action against Triyar.

Two other Valley companies who worked on the W, but not under Hunt, have sued for non-payment. In all, nearly 30 liens have been filed against the property on Camelback Road, just east of Scottsdale Road, since November.

Officials with Triyar and Hunt declined to comment on the litigation.

Disputes between contractors and developers are common, especially when the economy is weak and money is tight, construction attorneys say. Still, the wrangling over the W stands out to many. Hunt's $20 million lien, which started the legal feud when it was filed in November, is one of the largest ever recorded in the state.

"That's not your average, run-of-the-mill case," said Phoenix construction attorney Claudio Iannitelli, whose Phoenix law firm represents Canyon State Electric. It filed a lawsuit to recover more than $180,000 owed for work on the hotel's condominium units.

Janet Summers, whose Tucson firm has filed liens on behalf of several subcontractors on the project, said it's been a long time since she's seen this many liens on a project.

"Even some (housing) subdivisions that have lots and lots of lots don't get this many liens," said Summers, the president of Van Rylin Associates. "All that tells me is it's a very troubled project."

A first hotel

The big question for many is whether Triyar Hospitality has financial woes or is playing hardball because it has a legitimate gripe with the work of Hunt and the subcontractors on the project.

Triyar Companies is privately held and doesn't release financial information.

The family-run commercial real-estate business - the "Yar" is for the Yari family behind it - has roots going back to the 1950s in New York real estate. In the Valley, it has developed office buildings and retail centers, including the strip center near the W that houses its headquarters and Sprinkles cupcakes. Triyar also has interests in top Scottsdale nightclubs, including Axis/Radius, and previously proposed an entertainment district in the area.

The parent company also has Hollywood ties through an affiliated company, Yari Film Group, which produced the Oscar-winning movie Crash. An arm of that company filed for Chapter 11 recently after a dispute with creditors. A company official blamed the filing on the tight credit markets.

The swanky W is the hospitality division's first hotel development, soon to be followed by a new aloft hotel nearing completion in Tempe. It is doing the latter and future hotel projects in a $160 million joint venture formed in 2007 with a private equity fund, Warburg Pincus Real Estate.

Unpaid bills

Some W vendors with unpaid bills said they got no answers from Triyar when they tried to collect. But others said Triyar mentioned at various times over the summer that it was waiting for money to be released from the bank or for invoices to get approved.

The firm's construction lender was a New York division of German bank HSH Nordbank, which, like other lenders, has been hurt by the worldwide credit crisis. The bank's CEO was replaced last fall after heavy losses.

Mesa small-business owner Chad Baltrusch was thrilled to be asked by Triyar to set up the rooms at the hotel and repair some damaged furniture.

"We were jumping through hoops to perform for them," Baltrusch said of his firm, Marbecc Custom Design. . "When they needed something, they needed it right now."

He said Triyar quit paying over the summer, leaving about half its bill, or $65,000, unpaid. Company officials told them it was waiting for money to be released from the bank.

Baltrusch said he met with Triyar Hospitality CEO Michael Mahoney to go over the invoice for the balance. He said Mahoney personally signed and approved the invoice and said it would be processed for payment.

"But that never happened," he said.

Marbecc can't easily swallow $65,000, especially in a recession, and is trying to "cut corners everywhere," Baltrusch said. He has kept his sense of humor through it.

"If we foreclose on it (the hotel), it'll be easy," he said. "We'll just flip the W upside down and make it an M."

Stephanie Haldiman, one of Canyon State's owners, said her firm was supposed to do $300,000 of work on the W condominiums this summer but stopped in October because it hadn't been paid for any of the work. The firm is a subcontractor of DG Fenn Construction, the condominium contractor, and is owed $182,300.

"We've never not received any money on a project before," Haldiman said.

$20 million lien

Scottsdale-based Hunt Construction, the 33rd-largest contractor in the country last year by revenue, according to trade publication Engineering News Record, began the legal feud when it filed the $20 million lien against Triyar.

Triyar responded with a civil lawsuit alleging breach of contract for "poor and defective" work and excessive cost overruns and delays. It did not detail the allegedly shoddy work. The developer says Hunt said it could build the hotel in 18 months, which would have set an opening day in July 2007.

Hunt denied the accusations and just before Christmas filed a counterclaim, contending that Triyar is to blame for the delays and extra costs.

It cites more than 215 revisions to the original plan, the latest less than two months before the hotel opened. Its lien says it did $21.4 million in extra work "at the special insistence and request of" Triyar.

Hunt contends the project was behind from the start, with Triyar providing late, and sometimes incomplete or faulty, drawings and other building plans. It said the original design of the parking garage ramp, for example, couldn't accommodate certain types of cars.

"It's very common for disputes to arise between owners and contractors in terms of extra work and change orders because as a project goes on there's always some amount of interpretation as to what was included in the original plans and what may be additional work," said Mike King, partner with the Phoenix law firm Gammage & Burnham.

In a memo to subcontractors the day after it filed the lien, Hunt said it spent a few weeks meeting with Triyar to resolve issues but didn't make much progress.

Financial pressures

Liens and lawsuits, because they spook lenders, often have the effect of getting both sides back to the negotiating table.

"It is pressure, plain and simple," said Ron Messerly, partner with the Phoenix law firm Snell and Wilmer. "The lenders are a lot more heavy-handed with the developer than the contractor might even have the right to be . . . All of a sudden their cash flow is cut off because of this situation."

Another incentive to avoid trial: Construction cases are complicated and expensive to litigate. Messerly estimated that attorney fees in a case of this magnitude could easily run up to $2 million, fees that are typically paid by the loser.

The outcome likely will come down to finances, King said.

"If there's enough money to go around, people tend to compromise and reach an economic solution," he said. "If it's a matter where, for some reason, either egos and personalities get involved, or there simply is not enough money to fix the problem, then it gets litigated."

Original Story - Arizona Republic

Foreclosure proceedings begin against 'W' developer

The bank that financed the new W Scottsdale Hotel and Residences has begun foreclosure proceedings, the latest in a string of legal and financial woes for the high-profile project.

HSH Nordbank, a German lender, filed a notice of trustee's sale, the legal precursor to a forced sale of the 224-room property near Scottsdale Fashion Square. A public auction is scheduled for April 15, unless the matter is resolved before then or the auction is postponed.

The bank lent W's developer, Triyar Hospitality Scottsdale LLC, $73 million, according to Maricopa County documents. The documents do not say how much Triyar owes or how far behind it is in payments. What to do if You Can't Pay the IRS Tech Degree, IT Certification or Both? How to Keep Your Teeth White and Healthy

Triyar Chief Executive Officer Michael Mahoney declined to comment.

The trendy W, which debuted in September more than a year behind schedule, remains open. It is managed by hotel giant Starwood Hotels and Resorts, which owns and manages the Phoenician, and manages several other resorts in Arizona.

Arizona's first W, at 7277 E. Camelback Road, was highly anticipated by hip travelers and fans of Scottsdale nightlife. It features a second-story infinity pool with a bar and mountain views, an outpost of Los Angeles sushi hot spot Sushi Roku, and a lobby bar called the Living Room.

The timing of the opening probably couldn't have been worse, with the recession and a spike in new hotel rooms sharply pushing down occupancy and room rates. The metro Phoenix hotel market has seen among the biggest declines in the country in key industry measures for several months running, according to Smith Travel Research.

The first public hint of financial problems came in November, when Scottsdale-based Hunt Construction Group, the general contractor on the hotel, filed a $20 million lien against Triyar for non-payment.

Triyar responded with a lawsuit against Hunt for breach of contract, blaming it for excessive cost overruns and delays and saying its work was poor.

The original budget for the hotel portion was $57 million, according to the contract with Hunt. Hunt said it did $21.7 million in extra work at Triyar's insistence. Hunt started foreclosure proceedings of its own against the hotel.

Several subcontractors also have filed liens against the hotel, and a couple followed up with lawsuits.

They all likely will now have to get in line behind HSH Nordbank. Construction lenders typically have superpriority in such cases, real-estate attorneys say.

"Contractors can be left holding the bag," said Ron Messerly, a partner in the Phoenix law firm of Snell and Wilmer.

Hunt officials did not respond to calls requesting comment.

How the foreclosure unfolds from here will depend on the next moves by Nordbank and Triyar.

The bank has the option, with court approval, of appointing a receiver to operate the property in the period between the filing of the notice of trustee's sale and the scheduled auction, experts said. Lenders do this in cases where they want to keep close watch on the asset underlying the loan.

"Typically, a lender (who appoints a receiver) is worried about the upkeep of the property and controlling any revenues that the property may be generating so that it doesn't get siphoned off into somewhere else," said Jacob Steele, associate director of the special-assets group of Marcus and Millichap, an investment real-estate brokerage firm.

It is also not unusual for developers to file for Chapter 11 bankruptcy when faced with the prospect of a trustee's sale. In Arizona, roughly one-half of commercial real-estate properties facing foreclosure file for bankruptcy protection, Steele said.

"What you want to do is slow down the foreclosure process," Messerly said.

The contractors, for their part, will likely try to dispute the lender's priority status or sue the lender to recover what they're owed, among other moves, he said.

Updated Story - Arizona Republic

Update Story - February 27, 2009

The developer of the new W Scottsdale Hotel and Residences missed several key project and loan-payment deadlines and still owes the entire balance on its loans, according to a new lawsuit.

The lawsuit, filed against two principals of Triyar Hospitality Scottsdale by German bank HSH Nordbank, provides new details about the financial struggles that landed the hotel in foreclosure proceedings and in major disputes with contractors.

Triyar Hospitality, which took out $83 million in construction loans on the 224-room hotel and 18-unit condominium project and received $78.1 million to date, committed "numerous defaults" of the loan agreements dating back more than a year, according to the suit filed this month in U.S. District Court in the Southern District of New York.

Among them:

• Not completing the project by Dec. 31, 2007. The hotel, on Camelback Road just east of Scottsdale Road, opened in September 2008. The lawsuit says the project still is not complete.

• Missing a June 30, 2008, deadline to sell at least nine condominium units and to use the proceeds to make a mandatory principal payment. No condos have been sold, the bank said.

• Not making regularly scheduled monthly interest payments. Triyar did not make the payments in September, October and November 2008, the lawsuit said.

• Having mechanics liens filed against the property. General contractor Hunt Construction filed a $20 million lien in the fall.

• Failing to repay loans when they matured on Dec. 28, 2008.

The lawsuit was filed against Steven Yari and Shahrod Yari, who goes by Shawn.

The Yaris are principals in Triyar Hospitality and parent Triyar Cos., which are based in Los Angeles and have a Scottsdale office.

The Yaris did not respond to requests for comment. Shawn Yari lives in the Phoenix area and has the higher profile of the two locally.

The bank is taking action against them because they signed guaranties for the loans when Triyar secured them in December 2005. The guaranties covered $14.5 million of the first loan ($62 million) and all of the second loan ($21 million), meaning the Yaris are personally responsible for those portions of the loan if Triyar goes into default.

HSH Nordbank said it is seeking the entire loan balance plus interest and other costs from the Yaris - $82 million in total - because they violated terms of a separate "indemnity and guaranty agreement."

It says they failed to maintain minimum net worth and cash balances set out in the agreement. According to the loan documents, Shawn Yari was required to maintain a minimum tangible net worth of $35 million and Steven Yari, $44 million.

In addition, each was required to maintain $1 million in cash or other "liquid" assets in a U.S. financial institution.

It is not unusual for banks to seek personal guaranties on commercial projects in addition to their secured stake in the underlying property. The goal is to cover any gap between the foreclosure sale price, if it comes to that, and the loan balance, said Jacob Steele, associate director of the special-assets group of Marcus & Millichap, a national commercial real-estate brokerage firm.

If the property is sold for the amount owed on the loans, "then there is no deficiency, and the personal guaranty doesn't really mean anything," Steele said.

The hotel's trustee sale is set for April 15.

Starwood Hotels and Resorts, parent of the W brand and manager of the W Scottsdale under a long-term contract, has repeatedly said it is business as usual at the hotel.

Confusion has grown about whether foreclosure means the hotel is going to be closed, with one hotel Web site last week citing insiders as saying it would be closed by the end of the year.

A spokeswoman for Starwood Hotels quickly put those rumors to rest, reiterating that the dispute is with the hotel's developer and that the hotel will remain open.

The InterContinental Montelucia Resort and Spa, another newcomer on the Valley's hotel scene, also is facing foreclosure. Both opened late last year as the economy cratered and Phoenix-area occupancy rates and room rates plunged to a degree not seen in most cities.

Update Story - Arizona Republic