Gary Porter Elvis greets customers at the Michigan Street Diner, 220 E. Michigan St. It’s been a diner since the 1930s but may be evicted because of hotel plans. Plans for a downtown hotel have led to a foreclosure suit that could evict the diner
Usually when a commercial lender files a foreclosure suit, the main target is a developer who's defaulted on his loan.
But longtime downtown Milwaukee diner operator Gary Kuhn thinks he has a bull's-eye painted on his back.
Kuhn owns the Michigan Street Diner that operates in leased space in the Loyalty Building at the northwest corner of E. Michigan and N. Broadway streets. The building's owner, First MKD LLC, an investment group led by Chicago-area hotel developer Stephen Schwartz, is facing a foreclosure suit pending in Milwaukee County Circuit Court.
The suit, filed by Sir Mortgage & Finance of Arizona Inc., could result in Sir Mortgage taking ownership of the Loyalty Building, a historic office building that Schwartz wants to convert into a Hilton Garden Inn.
If Sir Mortgage took control of the building it would terminate the lease that Kuhn has with First MKD. That means Phoenix-based Sir Mortgage could evict both the diner and the building's only other remaining tenant, a dental practice, without having to buy out their leases, said Kuhn and his attorney, Michael Krill.
Kuhn has so far refused offers by First MKD to buy out his lease so that Schwartz's main firm, First Hospitality Group Inc. of Rosemont, Ill., can begin converting the building into a 128-room hotel. The two sides are far apart on how much money should be paid to buy out Kuhn's lease.
"That's the only motivation behind the foreclosure suit," Krill said.
"It's not a result of somebody's inability to pay the mortgage," he said. "It's a result of someone refusing to pay the mortgage because you can't get the tenants out."
Kuhn has operated Michigan Street Diner for 21 years and has about four years remaining on his lease. After a 2004 fire, Kuhn says he invested $90,000 to remake the restaurant into a 1950s theme diner, with black-and-white tile, new kitchen equipment and '50s décor , including life-size statues of Elvis Presley and Marilyn Monroe.
"That's when my business took off," he said.
Schwartz said he wants to resolve the dispute and proceed with the hotel project. He said that investment by First Hospitality, which operates around 40 hotels throughout the Midwest, will preserve the Loyalty Building, which was built in the 1880s, while adding more than 100 jobs and generating more property tax revenue.
Schwartz said in June the project's $18 million to $20 million cost would be financed with a bank loan and federal historic preservation tax credits, as well as equity from the developer. The tax credits help pay for a portion of a project's exterior renovation costs as long as the historic restoration meets federal standards.
First Hospitality also would use the nearby Grain Exchange Room at the nearby historic Mackie Building as the Hilton Garden Inn's banquet and catering facility. The Loyalty Building would include smaller meeting rooms, along with guest rooms and an atrium lobby.
However, the project is in limbo until the diner and the other tenant move out, said Jeffrey Lyon, First MKD's attorney.
Fueling Kuhn's suspicion that the foreclosure suit was filed primarily to evict the diner is a letter he received from Lyon before the suit was filed.
It says First MKD needs a new loan commitment to proceed with renovating the building - which means the remaining tenants need to move out. If those agreements aren't reached, Sir Mortgage plans to file a foreclosure suit and proceed with the hotel redevelopment, Lyon says in the letter.
That will not only end First MKD's ownership of the building but also terminate the diner's lease without any payments from Sir Mortgage, the letter says. That's because the lease includes a subordination clause.
The subordination clause can be used that way because Kuhn's lease doesn't include a non-disturbance agreement, Krill said.
Many commercial leases don't contain non-disturbance agreements, Krill said, because subordination clauses usually are not invoked to oust tenants. He said their main purpose is to reassure lenders that they'll be able to collect on defaulted loans ahead of any claims made by tenants against building owners. Without that assurance, Krill said, it would be difficult for building owners to refinance their mortgage loans.
Lyon said in an email that First MKD is not cooperating with Sir Mortgage on the foreclosure suit in an effort to terminate any leases. Sir Mortgage's attorney, Terry Teper, declined to comment.
"Sir Mortgage is exercising its rights under the mortgage and according to the terms of the leases in order to protect its economic interest in its loan," Lyon wrote.
According to the suit, Sir Mortgage lent First MKD $1.5 million on March 1. Another First Hospitality affiliate in March bought the Loyalty Building, 611 N. Broadway St., and the Mackie Building, 225 E. Michigan St., for $1.7 million, according to assessment records.
The loan agreement included a provision that First MKD's failure to obtain a $10 million construction loan commitment for the project within 60 days would result in a default, the suit said.
First MKD has failed to secure that construction loan, and Sir Mortgage has demanded full payment of its loan, the suit said. First MKD hasn't made that payment, leading to the lawsuit.
If there is a foreclosure judgment, First MKD will have no rights to the property, Lyon said. That's why the building owner continues to have discussions with buying out the tenant leases, he said.
Reasonable buyout agreements were reached with several other tenants, Lyon said. He also said Kuhn initially accepted an offer before reneging.
"It appears that the diner may be trying to exact a sum that is not appropriate to compensate for some other failings," Lyon wrote.
The last offer from First MKD, of $30,000, is well below what Kuhn says he needs to pay for new restaurant equipment and other relocation expenses. Kuhn wants $160,000, and says the diner is popular, especially among the downtown worker breakfast and lunch crowd.
"We have a very good business," Kuhn said.
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