Commercial Real Estate financier Mortgage Ltd. Files For Bankruptcy.

Mortgages Ltd. filed for Chapter 11 bankruptcy Monday night, under pressure from a borrower that earlier had filed a petition seeking to liquidate the lender’s assets.

The move by the Phoenix-based commercial real-estate lender comes three days after Scottsdale-based developer Grace Communities, one of its borrowers, filed a petition to force Mortgages Ltd. into Chapter 7 bankruptcy.

The important point is this is not another residential mortgage lender blowing up. Mortgages Ltd. is a commercial real estate developer. They have contracts to fund some of the largest commercial projects going on right now in downtown Phoenix.

Downtown Phoenix Projects In Limbo

Key Phoenix projects are at risk as Lender’s downfall puts downtown in limbo.

The financial storm brewing around Mortgages Ltd. has touched two key downtown Phoenix projects, a blow to ongoing efforts to reinvigorate the city’s heart. There is no more loan money to fund construction and renovation work for Hotel Monroe, a high-profile luxury project, the developer said Tuesday.

And a proposed Jackson Street entertainment district is looking for new lenders for a land deal.

“One segment of the market is slowing down, but there are a lot of positive things going on in downtown Phoenix,” said Phoenix’s downtown-development director John Chan, adding that the Mortgages Ltd. meltdown is a symptom of the national credit crisis.

Yet, the Mortgages Ltd. fallout left two projects scrambling for new lenders.

Radical Bunny LLC owed $197.2 Million

The Arizona Republic is reporting Largest Mortgages Ltd. creditor may be owed $197.2M.

Hundreds of Valley real-estate developers, investors and businesses could feel the impact of lender Mortgages Ltd.’s proposed reorganization.

The Phoenix-based real-estate financier filed for Chapter 11 bankruptcy Monday night, seeking to trump a petition one of its borrowers filed Friday to force it into liquidation under Chapter 7 proceedings.

Mortgages Ltd., which has pledged financing to some of metro Phoenix’s biggest commercial real-estate developments, provided an initial glimpse of specific players who stand to profit or lose in a list of its 20 largest unsecured creditors it filed with U.S. Bankruptcy Court for the District of Arizona Monday night.

Mortgages Ltd. owes banks, law firms, accountants and several other entities almost $200 million, according to the list, a standard filing in bankruptcy proceedings.

Secured creditors are those that have ownership rights to a debtor’s assets under previous agreements they entered together. They stand a better chance of recouping their claims if a debtor goes bankrupt.

One unsecured creditor represents the lion’s share of Mortgages Ltd.’s unsecured debt. Phoenix-based Radical Bunny LLC has a claim of $197.2 million, the document states.

Dead CEO Empire Crumbles

Valley Fever has another interesting take on Mortgages Ltd. and the recent death (June 2nd) death of Mortgages Ltd. CEO Scott Coles. See Is dead CEO’s mortgage empire crumbling?

Mortgages Ltd. CEO Scott Coles, 48, was found dead on Monday in his $11.3 million home. The cause of death has yet to be determined, but the unfortunate event may fit the scenario of CEO suicide during an economic downturn. Mortgages Ltd. isn’t a small-time residential loan operation. It’s one of the biggest in Arizona and specializes in massive construction loans for commercial projects, brokering $3.3 billion in 2006, according to the company’s Web site.

Interestingly, Mortgages Ltd. settled a large lawsuit over a $47 million loan just three days before Coles died, Maricopa County Superior Court records show. The lawsuit alleged that Mortgages Ltd. had insufficient funds to provide the $47 million loan it guaranteed. The suit is one of eight involving Mortgages Ltd. since January.

Radical Bunny In The Spotlight

There is more on Radical Bunny in yet another story on Mortgages Ltd.

After Coles’ apparent suicide, local CPA Tom Hirsch became the trustee for a short while, but he relinquished his position because of a conflict of interest, according to probate documents filed in Maricopa County Superior Court.

Hirsch is the principal of Radical Bunny LLC, a Phoenix-based company that is Mortgages Ltd.’s largest unsecured creditor, with a claim of $197.2million, according to court documents.

Hirsch’s attorney, Shelton Freeman, said at the hearing that his client lent money to Mortgages Ltd., which the company used to fund its own loans to developers.

Hirsch raised the money for his loans to Mortgages Ltd. through about 900 investors at Radical Bunny, Freeman said. The attorney said Hirsch believed he was getting a security interest in the properties that Mortgages Ltd. helped finance.

Mortgage Ltd., who bills itself as “Arizona’s leader in private lending”, made this announcement.

As many of you have read in the June 24, 2008 edition of the Arizona Republic, on June 23, 2008 Mortgages Ltd. filed a motion to convert a petition for an involuntary Chapter 7 (liquidation) Bankruptcy to a voluntary Chapter 11 (reorganization) Bankruptcy. The original petition was filed on June 20, 2008 by one of our borrowers who has loans in default.

Under the circumstances, we are pleased to announce that on June 24, 2008, the judge granted our motion, and Mortgages Ltd. is now in a voluntary Chapter 11 bankruptcy. This means, among other things, that we are in a position to secure funding to carry on our business operations and to help our borrowers finish some of the projects under construction. The goal is to see these projects to completion making it easier for our borrowers to secure the long-term financing they need to fulfill their obligations to us and to payoff their loans at maturity so that your principal may be returned to you.

For the near-term, all interest payments to investors have been suspended. This action is part of the bankruptcy process and is necessary while the judge gains an understanding of how we operate and determines what is the most fair action moving forward.

Sifting through this nightmare arrangement I will be astonished if there is not fraud and criminal investigations coming right up on this one. However, one key person cannot talk.

Expect more stories like this one. Lots more. Commercial real estate values are crumbling, lease rates are dropping, vacancies are rising, and there is enormous overcapacity in the sector.

Mike “Mish” Shedlock
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