Downtown Tacoma’s iconic Winthrop hotel building is in bankruptcy court, but it’s not bankrupt.
The Prium-controlled subsidiary that owns it can afford loan payments to both Union Bank and the City of Tacoma, which together financed Prium’s $6.5 million purchase in 2007.
It can’t afford to repay the principal, and that’s what Union Bank wants. So Winthrop Hotel LLC is in Chapter 11 to force the bank to negotiate, and to ensure the $2 million city loan is paid, said a lawyer representing one of Tom Price and Hyun Um’s companies.
“Our fear is (the bank will) liquidate the property, then not pay the city, and not pay unsecured creditors,” said Brett Wittner, a Tacoma attorney who filed the bankruptcy paperwork Oct. 20.
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Wittner, who isn’t involved in any other Prium matter, said he’s confident a deal will be worked out that ensures both Union and the city’s loans are paid. Spokesman for Union Bank and the city wouldn’t comment on details, citing active litigation.
Wittner said his clients believe Union Bank is being unreasonable. Plus, they’re concerned about having to personally repay the $2 million city loan if the bank sells the building out from under them.
“The Union Bank attorney indicated it was never the intention of the bank to foreclose on the property, or to sell and not pay the city,” Wittner said. “But my clients think we can’t trust the bank these days.”
Meanwhile, The News Tribune has found a third mortgage on the property that wasn’t listed in the Winthrop’s bankruptcy filing. When the newspaper brought it to his attention last week, Wittner said he wasn’t aware of it.
“If there was a debt, it should have been included,” he said. It’s easy to remove a debt, but everything is supposed to be listed.
The third mortgage isn’t a clear-cut loan. Its value is questionable, and its effects on the Winthrop aren’t predictable. It’s tied up in a complicated loan and property swap involving a Bellevue-based Centrum Financial and Prium’s one-time ownership partner Bingo Investments.
Its existence shows even the Winthrop, a relatively straightforward part of Prium’s portfolio, wasn’t immune to Price and Um’s baroque financial structure. The men are in personal bankruptcy, with as much as $350 million in collective debt related to their business. Creditors have accused them of playing a shell game. A major hearing in their cases is scheduled for today.
HOW PRIUM BOUGHT THE WINTHROP
The City of Tacoma loaned $2 million to Winthrop Hotel LLC in 2007 as part of an attempt to take the 1925 Winthrop back to its roots. Frontier Bank was the primary lender with $4.5 million, which has been paid down to $4.1 million. The building is collateral on both loans.
The city’s loan came from a revolving fund of federal money intended to help with economic development. It was a 60-month loan, with quarterly interest-only payments of 4 percent. It relied on Frontier Bank’s due diligence, city documents show, and Frontier believed Prium was a good risk.
Frontier later collapsed under the weight of its soured real estate loans.
As is common practice when lending to an LLC, the city required the personal guarantees of its members. Those make people behind the company personally responsible for the debt if the company can’t repay it.
Prium promised to convert the Winthrop into a historic boutique hotel and condos. They promised to build new units of affordable housing. They had 36 months.
They didn’t get it done. The economy crashed, and multiple Prium projects went south. Though Prium has been in default on the city loan for years, the city hasn’t called it. To gain satisfaction on its debt, it would have had to pay off the first mortgage.
Timing is a major factor when mortgage holders line up to collect. Centrum Financial issued its third mortgage two years after the city’s. If it wanted to collect its debt by seizing the property, it should have to pay off the city and Union Bank first.
The historic structure at South 9th and Commerce streets contains about 200 apartments, most of which are low-income housing and governed by a federal contract. Unlike all other Prium properties, the Winthrop is operated by a third-party management company. The Winthrop’s balance sheet shows $110,000 in reserve to pay debt.
But until July of this year, the Winthrop was almost a year delinquent in its payments on the city loan. It made a $60,000 payment on July 5, and now has fallen behind again. Its last payment was due Sept. 30.
CONFUSING THIRD MORTGAGE
In January 2009, the Winthrop was among dozens of properties Prium pledged to Bellevue-based Centrum Financial. Unlike many deeds, it didn’t have a dollar figure. Instead, it referenced a “restructuring agreement.”
Last week, a document filed in Price and Um’s bankruptcies helped connect the dots. A letter from the men’s attorneys to the forensic accountant said the Winthrop had a third-position loan from Centrum, and the note’s current balance is $36 million.
That note is listed in an appendix to forensic accountant Daniel Harper’s report of the men’s business activity. The appendix outlines a deal that resembles the real estate version of 52-card pickup.
Harper showed at least nine Prium loans as part of a swap involving other loans and property from Centrum and Bingo. Centrum and Bingo now are in litigation to determine who owns what.
The loans, for as little as $2 million and as much as $6 million, were second and third mortgages and used multiple properties as collateral. Harper said neither Centrum nor Bingo could prove they had a claim on property supposedly secured by many of these loans.
He was dubious about whether Price and Um really owe Centrum anything, much less tens of millions.
“These amounts are the result of convoluted agreements, for which the underlying terms may or may not have been complied with,” he wrote.
After The News Tribune told Winthrop attorney Wittner about the third mortgage, he conferred with his clients.
The Centrum debt is “in the process of being removed and it will be removed very, very shortly,” Wittner said later that day. “The owners have said just that it will be a nonissue for the bankruptcy.”
Harper’s report also said those nine Prium loans now have little to no value. And he noted that a Centrum representative, and Price and Um, are trying to settle for pennies on the dollar.
WHAT’S NEXT FOR THE BUILDING
While the legal machine grinds on, the 86-year-old historic building is hurting.
In 2009, the Tacoma Housing Authority hired an engineering firm to assess its needs over the next decade. Prium had offered the building for sale, and the THA was considering it.
The building is leaking inside and out, from the plumbing system, the roof, windows and the walls, according to the assessment by Criterium-Pioli Engineers of Seattle.
“There is evidence of current structural damage that we can see and it is certainly likely there is much more that we cannot see,” engineers wrote.
The report noted that the building’s elevators are original, as is the plumbing system of galvanized and cast iron pipes. The electrical and fire detection systems haven’t been updated since the 1970s, when it was converted from a hotel to apartments.
The building needs a new plumbing system and envelope – the barrier between the outside and inside walls – immediately, they said. They also recommended replacing the roof, windows, and the fire detection system, as well as repairing the plumbing and the masonry.
Repairs for the first three years could cost around $8 million, Criterium-Pioli estimated. For the two years after that, an additional $5 million.
The building isn’t waiting. In April, a piece of masonry fell and hit a person on South 9th Street. The building now has an open city nuisance complaint, and the owners have been fined $250 for not making repairs by an agreed-upon deadline. Scaffolding has hugged the building since repair work began in August and could be there through the spring.
In court documents this year, Union Bank said water damage from last winter has made some parts of the building uninhabitable. One of the ballrooms also has a 25-foot-square water spot.
The legal maneuvers aren’t likely to immediately affect the people living there. What’s unclear is what would happen to the residents if the property is sold. A federal contract for subsidized housing comes with the building. It pays the owner directly to provide low-income housing, so it seems unlikely that any new owner would turn down a guaranteed revenue stream.
Part of the requirement of that contract is to keep the building in good order. An unscrupulous owner could take advantage of that, some housing advocates say, and let the building deteriorate until the contract is taken away.