by John H. Fischer on June 15th, 2009
One of the stories that has the potential to have an impact on Wausau’s downtown is the whole Fillmor situation. According to the Wausau Daily Herald, it hasn’t been open since April, and not only are the owners facing foreclosure, they are behind in property taxes and haven’t made any payments to the money loaned to them from Wausau’s Community Development Authority (CDA).
As always, before getting into what might be a touchy topic, I think it valid for people to understand my personal background. I don’t know the owners, I never was in the Fillmor because frankly, I am not really a people person so venues designed to draw large numbers of people are normally not high on my list. I really don’t know too much of the history of it except for what I read in Daily Herald or the City Pages. So, with this utter lack of background, why am I writing about the Fillmor? Maybe it is because of this lack of background. I can see the situation from a different perspective. I can look at the Fillmor from the perspective of someone who dabbles a bit in real estate and has been known to wade in the pool of distressed properties from time to time. Also, because dealing with distressed properties can be quite complicated, I will apologize in advance for the length of this post, but I think it better to be a little long winded in order to try to explain in simple terms some pretty complicated stuff.
Here is the situation as I understand it from what I have read in our local publications. Purchasing the old Rogers Theater and then converting it into the Fillmor was not cheap. The owners have a $600,000 mortgage through a non-local lender. In addition, they borrowed money from the CDA to the tune of $175,000, also secured by the property. I read that some of the contractors who did the work have not been paid in full for that work, and have filed construction liens against the property. In addition, the property tax bills are not current. This definitely meets the term of “distressed property” from a real estate perspective. This is when things start to get interesting for me (as a real estate investor).
According to the Daily Herald article, the owner has basically dumped every penny they had into this, and they have simply run out of pennies. They are hoping to find an investor to help them out. I agree that fresh money never hurts, but as an investor myself, now is not the time to jump in.
All of these amounts owed are basically liens against the property. The large $600,000 loan is a first mortgage and the CDA funds are a 2nd mortgage. The construction liens are all liens against the property as are the unpaid taxes. In checking with the City of Wausau Assessment Department’s website, the preliminary assessed value of this property with the improvements finished is $411,500. If you add up the total owed against the property in mortgages, liens and back taxes, the amount is approximately twice as much as the property value. To get in as an investor now, investing in a property that is worth $400K with $800K of liens against it is not a smart move from a real estate perspective. (I understand there is more to the Fillmor than the real estate, there is the business aspect of it as well – however, since I am a real estate guy, looking at the real estate only is just my perspective on things.)
Having this property go through foreclosure is pretty much required before investors are going to take a serious look at this property; some of these liens have to go away. Liens are on a property in a certain order. Taxes are always in first position. Mortgages are in the order that they were obtained (unless one of the mortgages agreed to let a later mortgage get into an earlier position). Other liens such as civil judgments and construction liens would be in line behind the mortgages, again in the order from the oldest to the newest.
Any lien-holder can foreclose on the property if their lien is in arrears. However, a foreclosure normally results in a Sheriff Sale. The proceeds of the Sheriff Sale get paid out as follows: First the party that foreclosed gets paid off. Second, any lien holders in line after the first party get paid off in proper order until the money runs out. (If they run out of money before they get to your lien, you get nothing.) If there is any money left, that goes back to the original owner. Notice I didn’t mention any money going toward any of the lien holders in front of the party that foreclosed. That is because those liens are still valid. If the CDA would foreclose on their second mortgage, it would eliminate all of those construction liens, but that $600K first mortgage would now become the CDA’s responsibility.
The current foreclosure action is being under taken by the first mortgage holder. Considering that the mortgage is for $600K but the property is only assessed at $400K, they will probably not get enough at the auction to pay off their first, which means no one in line behind them (including the CDA) will get anything. What will probably happen is the bank will bid $600K at the auction, no one else will bid. The bank takes it back, all the liens (except property taxes) get eliminated, and now they have to try to sell the thing.
Banks don’t like owning real estate. It is not what they are designed to do. REO’s (Real Estate Owned, the term used for bank-held properties that they took back) are a draw on their balance sheet and their resources. All banks know this. The problem is that larger banks really can’t look at individual properties. They have a procedure, they follow it… period. (This is why I noted that the mortgage is an out-of-town lender, this matters when trying to work something out with that bank.)
I know many people are ready to send a lynch mob after the CDA for loaning nearly $200,000 in return for a second mortgage on a property worth only $400,000 that ALREADY had a $600,000 mortgage on it. Although I will agree that the CDA, when underwriting, depends too much on that second mortgage interest and not enough on the financial strength of the applicant, I have a hard time finding fault with their actions in this case.
I look at this way. What if the $175,000 wasn’t a loan? What if it was a grant? You had someone who was willing to take a long-time vacant property and turn it into something that had the potential to be a regional draw, something that would bring people to Wausau from the region, and more specifically, bring people to Wausau’s downtown. There are discussions about investing anywhere from $500,000 to over $1 million into the 400 Block for this exact reason, to draw people to downtown. So, with that concept in mind, a $175,000 GRANT to the Fillmor seems like money well spent.
However, it wasn’t a grant, it was a loan. A loan secured by a second mortgage. A mortgage that is just adding to the weight of the total project right now.
If I was going to invest in the Fillmor, this is how I would do it (again, from a purely real estate perspective). I would be working my butt off with that first mortgage holder. I would do everything I could to show them the money they were about to lose by converting this to an REO property. Once you figure in the cost of sale and the unpaid taxes and the cost of selling it again, not to mention the maintenance costs until that happened, they would be lucky to walk away with $250,000 to $300,000. If this was a local bank, this would be easier to do as they understand the property, they understand the market, and it is in their best interest to have $250,000 in cash than a property that they MIGHT be able to net $250,000 on at some point in the future, maybe.
I would try my best to convince that out-of-state lender to sell me their first mortgage for $250,000 to $300,000, and along with it, their position in the foreclosure. They are happy because they have the cash NOW. I then take their place and continue the foreclosure action, only at auction, I don’t open the bidding at the $600,000 the mortgage is worth, I open the bidding at $400,000. For that, maybe the CDA will jump in and buy it to protect their second, or maybe one of the other lien holders. Or maybe the owner will now find an investor partner in the business who is willing to pay $400,000 for a property assessed at $411,500. If that happens, I am happy, I walk away with $100,000 profit. If no one else jumps in at auction, I am still happy. I have the property, I paid $300,000 for it, and once the taxes are paid, it is owned free and clear.
I think that the Fillmor will survive. I believe that it will become a regional draw to downtown Wausau as a live music venue. However, I also believe that this cannot happen under the weight of the debt this venue now carries. A foreclosure does not have to be the end of a dream. Instead, it can be a fresh beginning.