Three office buildings in northeast Ann Arbor are caught in litigation as the owner and lender fight for control of the 25-acre property.

The buildings, called Northeast Corporate Center, generate a little more than $1 million per year in tax revenue, making them the 11th largest taxpayers in Ann Arbor in 2009.

But now the lender says the owner is in default on $40 million in loans, based in part on a series of events following the departure of a key tenant in the building: Pfizer.

And as the lawsuit heads toward an August trial in U.S. District Court, the buildings have been moved into receivership. That is leaving some local real estate sources to wonder if the buildings - now part of a securitized loan under oversight of a “special servicer” - will be sold at a discount by the lender.

Green Road Investments LLC bought the properties, located near Plymouth Road and US-23, from C. Michael Kojaian in 2005 for $36 million, or $157 per square foot.

The company refinanced the properties for $40 million in early 2007 with Connecticut-based Greenwich Capital Financial Products Inc.

Northeast Corporate Center Address: 2350 Green Road, 2500 Green Road and 2600 Green Road Location: Northwest of the Plymouth/US-23 intersection in Ann Arbor Total size: 228,000 square feet Assessed value: $18,738,400 2009 tax payments: $1,053,819 Owner: Green Road Investments #2 LLC, a West Bloomfield entity. Managing partner: Allan Adelson

According to court documents, that loan was signed as Pfizer announced that it would leave Ann Arbor, vacating its 2-million-square-foot campus on Plymouth Road and letting off-campus leases expire.

At the time, Pfizer was leasing 40,000 square feet in the Northeast Corporate Center, and according to court documents, both the owner and lender anticipated the company leaving its space before the lease expired in December 2009.

The departure of Pfizer was an issue immediately after the loan closed, according to the court filings by the owner, since it threatened Greenwich’s attempts to sell the loan.

And, according to the lawsuit filed in August, it also triggered a “cash trap provision” that let the lender to take control of the rental income and make all payments.

“Even though Greenwich was aware of the Pfizer public announcement prior to (the loan) losing and decided to proceed with the closing nevertheless, Greenwich soon took the position that Pfizer’s announcement justified Greenwich in declaring (the cash trap provision),” according to the filing.

The lawsuit, filed by Birmingham attorney Mark Demorest, claims that Greenwich used the threat of the cash trap to coerce the owner in to a loan modification -providing $1 million in a letter of credit that would be refunded when it re-leased the Pfizer space.

But both sides “were operating under the mutual mistake that Pfizer would be willing to terminate its lease early in order to enable Green Road to re-lease the space,” according to the filing.

Instead, Pfizer kept equipment onsite and kept paying $127,000 per month in rent.
According to the lawsuit, “to the surprise of all parties … Pfizer would not terminate its lease early, even after there were no employees working (there).”

Because the owner couldn’t lease that space, the lawsuit says, it had to post an additional $500,000 letter of credit.

And it had to turn away the University of Michigan, which was interested in leasing the space, the lawsuit said.

Pfizer finally left the space in late 2008, and paid the owner $1.42 million to terminate the lease early.

And the owner signed a lease with Foresee Results for 56 percent of the former Pfizer space.

But by February 2009, the owner was notified it were in default since it had never paid that additional $500,000.

Most of the $40 million loan was sold as a mortgage-backed security and is under oversight of the Securities and Exchange Commission. And as a loan in default, it was assigned a special servicer, CWCapital of Massachusetts.

Now, the owner’s attorney says in the lawsuit, CWCapital has the option to purchase the defaulted loan - and in effect the properties - and “has a self-interest in driving Green Road into default.”

Complicating the already complex issue is that - to move forward on the original loan deal - both parties agreed to back the loan using the Ann Arbor offices and two others, one each in Livonia and Oak Park, which also were the security for a separate, $28 million loan. Now they’re all connected in the legal and financial battle.

But the Ann Arbor properties remain the center of the dispute. According to the filing, “CWCaptal’s actions seem calculated to drive Green Road … into foreclosure.”

In the counter-claim filed by Alan Greene of Dykema Gossett in Bloomfield Hills on behalf of CWCapital and Wachovia, the loan servicer, the lenders maintain that the Green Road owners violated the loan agreement, and need to pay the special servicer the additional $500,000 and the $1.42 million paid by Pfizer to leave its lease early.

The cases are wending through federal court, which appointed Matt Mason of Ann Arbor-based McKinley Inc. as the receiver of the property. Mason is managing the property until the lawsuits are resolved.

Unclear so far from court documents is the role in this case of the effort among national lenders to clear their books of “bad debt” - including properties worth less than the original loan balance.

Also unclear is who will end up controlling one of Ann Arbor’s larger office properties.

But the owner makes the claim in the filings that all payments - including taxes - were made on time. And that the lenders were aware of Pfizer’s then-pending departure, and that fulfilling the obligations associated with finding a replacement tenant were impossible as long as Pfizer remained in the space.

All of which means that watching this case could give Ann Arbor an up-close look at a number of issues facing the nation's commercial real estate: Defaults, devaluation and the selling of seemingly current loans to clear them from the books.

Paula Gardner is Business Director of AnnArbor.com, where she covers real estate and development. Contact her by email or follow her on Twitter.

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