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Anchorage developer battles AHFC over debts on McKinley Tower

Dermot Cole
Financial troubles faced by Anchorage developer Marc Marlow on the McKinley Tower make it more unlikely that he will pull off a miracle in Fairbanks on the Polaris, which is still looking for love. Dermot Cole

FAIRBANKS -- The banner that stretches over four floors on the west end of the dilapidated Polaris Building in downtown Fairbanks proclaims: “Looking for Love Again.”

Despite this heartfelt plea, a public art project installed two-and-a-half years ago to generate interest in renovation, the chance that the Polaris will ever find true love grows dimmer by the day. Polaris owner Marc Marlow is facing financial difficulties in Anchorage with the McKinley Tower, a landmark building of similar size, constructed in 1952, the same year as the Polaris.

For a time, the political establishment in Fairbanks considered Marlow a miracle worker. They figured that since he had managed to redevelop the McKinley Tower, formerly the McKay Building, on Anchorage's Fourth Avenue, he might work the same magic with the Polaris. Local developers who judged the rundown Polaris a hopeless wreck didn't share his vision, but Marlow found believers right here in river city.

Marlow’s specialty is unconventional financing, in which he takes advantage of a bewildering array of local, state and federal government subsidies, and seeks tax credits and tax waivers to piece together development deals. For the McKinley Tower project, the Legislature amended a state law in 1999 and the Anchorage Assembly approved property tax exemptions, still worth about $3,000 a month to Marlow.

But now he faces a conventional problem with the McKinley Tower -- a shortage of cash.

He has been in federal court in Anchorage in a Chapter 11 bankruptcy proceeding because the much-heralded McKinley Tower success story didn’t last. He owes millions to the Alaska Housing Finance Corp., which was foreclosing on him for missing payments when he filed for bankruptcy protection in July 2012.

Marlow’s package of financing for the McKinley Tower included tax exemptions from the Municipality of Anchorage,  tax credits from the National Park Service for historic buildings, loans from Northrim Bank, AHFC and the U.S. Department of Housing and Urban Development.

The financing for the top 10 floors, which contain 100 apartments, came from HUD. Those opened in 2006. That part of the building is owned by one of Marlow's limited liability companies.

A separate Marlow LLC owns portions of the basement, the first floor and floors 2-4. That part of the building was designed to contain 52 units of assisted living quarters for senior citizens.

Both the upper and lower parts of the building are owned by a family trust, the beneficiaries of which are Marlow and his wife.

It is on the lower part of the building, which opened in 2007, that Marlow ran into the most financial trouble.

Two appraisals say that segment of the building is worth about $2.5 million, about $3 million less that what Marlow owes AHFC under two separate loans for that part of the tower.

“Long story short, financing that would once, on paper, have paid off the combined $5,450,000 debt to AHFC, is now valued at $2,700,000, more or less,” U.S. Bankruptcy Judge Herb Ross wrote Oct. 9. “Not only is the first promissory note under water by more than several million dollars, the second promissory note is completely unsecured.”

“AHFC contends that Mr. Marlow is not solvent because of many recent large unpaid judgments against him. Debtor has not contested this claim of insolvency and Mr. Marlow’s testimony at the hearings on the classification motion on Oct. 4, 2013 confirms it,” Ross wrote.

In documents submitted to the bankruptcy court, Marlow said the McKinley Tower plan fell apart because three months after the building opened in 2007 the state reduced the amount it paid him for assisted living Medicaid clients from $127 a day to $99 a day.

The $28 per person reduction meant “it was no longer practical to use the project for assisted living,” his attorney wrote, and Marlow turned the floors into regular rentals. They now rent for $675 a month, with gross income of $33,000 a month.

In his October order, Ross said Marlow suggested the AHFC shares the blame for his Chapter 11 woes because it is owned by the state and it was another state agency that changed Medicaid payments.  Ross said AHFC doesn’t control Medicaid rates.

“Both the debtor and AHFC had the rug pulled out from under them due to the change in projected Medicaid subsidies,” he wrote.

AHFC took various steps both before construction and after completion to help Marlow by easing terms, waiving some requirements and reducing payments. The AHFC dropped  a loan requirement that the rooms be for assisted living and it moved $1 million of the debt into a category that did not require monthly debt-service payments.

One of the 30-year AHFC loans, a 1.5 percent deal for $1.3 million, included a provision that regular monthly payments only had to be made out of “excess cash flow.”

“Debtor has never had to make annual installment payments on the second promissory note because it never earned enough for payments to kick in,” Ross wrote. A balloon payment is due on that loan in 2037.

There is a provision, however, that in case of default on the first loan, $4.1 million at 7.4 percent, the second one can be accelerated.

Marlow’s attorney faulted AHFC for not allowing the debt to be reduced “to make the project economically viable.”

Ross rejected an effort by Marlow to have the unsecured AFHC loan placed in a different classification than other unsecured debts.

The importance of the classification decision is that had the judge agreed with Marlow, the developer would have been able to get his plan approved by the other unsecured creditors.

That’s because a business associate of Marlow’s, Knud Nielsen, purchased a $575,000 unsecured debt that was owed to Northrim Bank by the Marlow LLC, paying $20,000 for the privilege.

Northrim had opposed the bankruptcy reorganization plan and voted against it. That it sold the debt for $20,000 means the bank had little hope of collecting.

In any event, AHFC said Marlow asked Nielsen to approach Northrim to purchase the Northrim claim, with the idea that Neilsen would change the Northrim vote and allow Marlow to have his reorganization plan approved. AHFC said Nielsen testified that he did not know who decided to file the motion asking the court to allow a change on the Northrim vote.

AHFC said “the law does not countenance the trafficking of votes in order to confirm or block a plan of reorganization.”

Marlow’s attorney responded that Nielsen’s interest is in keeping both the bottom four floors and the top 10 floors of the McKinley Tower under Marlow’s control. A change in the ownership of the lower floors would increase the chances for conflict and a lack of coordination, he said.

The judge said that since the debts will not be reclassified as requested by Marlow, he did not have to rule on whether Nielsen would be allowed to change the Northrim vote in favor of Marlow’s plan.

Ross said the “separate classification of the AHFC’s claim is a disfavored attempt to manipulate the voting on the plan to meet the confirmation standard of having at least one class of noninsider claims approve the plan.”

Ross rejected the Marlow settlement plan and set a Nov. 12 deadline for a new proposal.

Dermot Cole can be reached at dermot(at)alaskadispatch.com. Follow him on Twitter at @DermotMCole.