November 4, 2022 – The Debtor requested Court authority to enter into a $1.5mn Post-Petition Loan Agreement (the “Agreement”) with SP 180 Fund, LLC (“Lender”)*[Docket No. 227, with a form of the Agreement attached at Exhibit A.] 

The proceeds of the debtor-in-possession ("DIP") financing are to be used to renovate the Debtor's Denver, Colorado off-campus student housing development (the "Property")…"to make it more attractive to tenants so that the Property could fetch materially higher rents…The resulting improvement to cash flow will dramatically increase the value of the Property [in advance of an expected sale process]." 

The Debtor (again) points a finger at Fortress Investment Group ("Fortress") for delays in renovations, noting that "Prior to Fortress’ exercise of remedies, the Debtor was in the process of renovating and improving the Property…As a result of the receivership and Fortress’ motion to excuse the receiver from turnover of the Debtor’s property, the Renovations have been further delayed."  

Fortress purchased $51.1mn of secured notes from Cantor Commercial Real Estate Lending, L.P. (“Cantor”) in November 2021 and declared that debt to be in default two months later. On January 31, 2022, the Debtor was placed in receivership, with Fortress subsequently pushing for a foreclosure sale in respect of the Property. On June 9th, 2022, hours ahead of a foreclosure sale scheduled for that date, the Debtor filed for bankruptcy noting: "The primary driver of the Debtor’s bankruptcy filing was the foreclosure proceeding…"

* Lender is an entity formed by Patrick Nelson, the Member of Nelson Partners, LLC, which is the Debtor’s Member and Manager.

So why is Patrick Nelson looking to fund the Debtor notwithstanding an overtly hostile realtionship with a secured lender holding a $51.1mn claim? Apparently because it believes that the property as renovated would return value to its equity holders, ie to Mr Nelson and Nelson Partners, LLC. The motion provides: "The sale of the Property, if successfully carried out after completion of the Renovations, is expected to generate proceeds sufficient to pay all allowed secured and unsecured claims, and generate a return to equity."

Case Status

On June 9, 2022, 5280 Auraria, LLC, d/b/a Auraria Student Lofts, (“Auraria” or the “Debtor”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Colorado, lead case number 22-12059. At filing, the Debtor noted estimated assets between $50.0mn and $100.0mn; and estimated liabilities between $50.0mn and $100.0mn.

On October 17, 2022, the Debtor filed a Chapter 11 Plan of Reorganization and a related Disclosure Statement [Docket Nos. 201 and 202, respectively].

The DIP Motion

The post-petition financing motion [Docket No. 227] provides, “Prior to Fortress’ exercise of remedies, the Debtor was in the process of renovating and improving the Property to make it more attractive to tenants so that the Property could fetch materially higher rents (the ‘Renovations’). The resulting improvement to cash flow will dramatically increase the value of the Property. The original Cantor Loan contemplated that such renovations would occur over a two-year period that would coincide with the scheduled maturity of the Cantor Loan.

As a result of the receivership and Fortress’ motion to excuse the receiver from turnover of the Debtor’s property, the Renovations have been further delayed. Now that the Debtor is operating the Property, the Debtor will complete the Renovations that began in 2020 and market the Property for the sale, consistent with the terms of the Debtor’s Plan of Reorganization filed with the Court on October 17, 2022 (Docket No. 201) (the ‘Plan’).

The Debtor believes that the Property currently has a value of $65 million or more. Moreover, the Renovations the Debtor is in the process of resuming should enhance the value significantly. The sale of the Property, if successfully carried out after completion of the Renovations, is expected to generate proceeds sufficient to pay all allowed secured and unsecured claims, and generate a return to equity.”

Lender is proposing to loan the Debtor up to $1,500,000.00 (the ‘Loans’) for the following purposes, all in accordance with a proposed renovation budget (attached hereto as Exhibit B) (the ‘Renovation Budget’), the Cash Collateral Order and the Professional Fee Reserve (defined below): 

1. Costs of completing the Renovations; 
2. The cash shortfall, if any, resulting from ordinary course operations; 
3. Interest or adequate protection payments (to the extent monthly rents are not sufficient) to the Debtor’s prepetition lender as ordered by the Bankruptcy Court or required by law; and 
4. the costs of the Debtor’s case administration approved by the Bankruptcy Court, including the funding of a professional fee reserve as set forth below and in the Agreement.”

Key Terms of the DIP Financing

• Borrowers: 5280 Auraria, LLC
• Lender: SP 180 Fund, LLC
• Borrowing Limit: $1,500,000.00
• New Money: $1.5mn
• Interest Rate: 10%.
• Default Rate: 12%.
• Use of Loan Proceeds: The proceeds of the Loan shall be used by the Borrower for the following purposes, all in accordance with an approved budget: 

1. Costs of completing renovation for the “Property”; 
2. The cash shortfall, if any, resulting from ordinary course operations; 
3. Interest or adequate protection payments (to the extent monthly rents are not sufficient) to the Debtor’s prepetition lender as ordered by the Bankruptcy Court or required by law; and 
4. the costs of Borrower’s Chapter 11 bankruptcy administration approved by the Bankruptcy Court, including the funding of a professional fee reserve as set forth below.

• Professional Fees: The Debtor shall deposit $450,000 into a segregated reserve account for the benefit of professionals employed under Bankruptcy Code section 327, except not brokers (the “Professional Fee Reserve”). The Professional Fee Reserve shall be available as security for the fees payable to Borrower’s professionals and shall not be subject to general administrative expense claims or claims of secured lenders.
• Maturity: The earliest to occur of: (a) August 31, 2023; (b) the date the Loans are accelerated after an Event of Default; (c) the effective date of any substantial reorganization of the Debtor that is confirmed by the Bankruptcy Court (unless such plan is proposed by the Debtor and repayment of the treatment of the Loan in order of priority from net proceeds of sale of the Debtor’s property); (d) the date of dismissal of the Chapter 11 Case; (e) the date of the conversion of the Chapter 11 Case to a case under Chapter 7 of the Bankruptcy Code; (f) the date of the appointment of a trustee in the Chapter 11 Case; or (g) a sale of all or substantially all of the Debtor’s property under section 363 of the Bankruptcy Code.

Case Background

The Fortress Relationship

The Debtor's Disclosure Statement [Docket No. 202] provides: "Fortress Credit Corporation ('Fortress') presented itself to the Debtor as the best refinancing source. After discussions with the Debtor, Fortress negotiated, signed, and delivered a Term Sheet, dated May 18, 2021. The Term Sheet set forth the terms of a contemplated loan from Fortress in the amount of $56,205,202.00, the proceeds of which would be sufficient to repay both the Cantor Loan, a second mezzanine loan, and to fund certain deferred maintenance and improvements.

The Term Sheet contained specific provisions for the amount of the loan, use of proceeds, maturity, security, interest rate, extension of maturity, reporting and other matters. The terms appeared acceptable to the Debtor. The Term Sheet also required that the Debtor pay Fortress a $100,000.00 application fee. Consistent with the Term Sheet and in reliance upon the expectations created thereby, the Debtor paid $100,000.00 to Fortress.

Unbeknownst to the Debtor, Fortress at some point commenced negotiations to acquire the Cantor Loan. Fortress acquired the Cantor Loan through an entity it created called DB Auraria, LLC ('DB Auraria'). DB Auraria recorded an Assignment and Assumption Agreement in the real property records of Denver County indicating the Cantor Loan was purchased for $46 million. Approximately one month thereafter, Fortress provided the Debtor with a payoff letter as of December 14, 2021, demanding $49,875,161.41. In other words, Fortress demanded almost $4 million more to pay off the loan than the amount if paid five weeks prior. The payoff figure of $49,875,161.41 was overstated and designed to prevent the Debtor from paying off the loan through an alternative source. By acquiring the Cantor Loan one month prior to maturity, Fortress calculated it would place the Debtor in a position to which it was vulnerable to its predations. On December 14, 2021, just five days after the loan matured, Fortress sent the Debtor a Notice of Default.

Notwithstanding the Notice of Default, Fortress representatives assured the Debtor that they intended to work with the Debtor and encouraged the Debtor to rely upon Fortress for loan accommodations, rather than seeking third-party financing. In early January 2022, the parties negotiated and executed a Pre-Negotiation Agreement, in which Fortress represented its intent to engage in discussions regarding the Cantor Loan, which could be lengthy. There were no substantive discussions. Instead, within a few weeks, Fortress commenced a Public Trustee foreclosure and separately filed and obtained the appointment of a receiver, thereby depriving the Debtor of any access to the rental revenues while increasing the costs it could append to any payoff.

On January 28, 2022, Fortress filed a Verified Complaint for Ex Parte Appointment of a Receiver in the District Court for the County of Denver (“State Court”), Case No. 2022CV30256….The Receiver took possession of the Real Property on January 31, 2022….The primary driver of the Debtor’s bankruptcy filing was the foreclosure proceeding in Denver County District Court, Case No. 2022CV031030, filed by Fortress. The foreclosure sale date was set for June 9, 2022 at 10 a.m. The Debtor commenced this bankruptcy case on June 9, 2022, in order to prevent the foreclosure."

A February 21, 2022 article published by the New York Times reports, "A student-housing operator that tenants and investors say has badly mismanaged high-end properties across the country has added a Wall Street colossus to the list of legal opponents.

Fortress Investment Group, an investment firm managing money for institutional and private clients, has mounted an attempt to seize control of a high-rise student apartment building in Denver from Patrick Nelson and his company, Nelson Partners Student Housing.

Nelson Partners, which operates housing complexes in eight states, has been sued by investors who say Mr. Nelson owes them tens of millions of dollars. His tenants say they’ve been stuck in properties with elevators that are busted, fire alarms that malfunction, utilities that have been shut off for weeks at a time and piles of uncollected trash….

Earlier this month, a company controlled by Fortress filed a legal notice in Denver to begin the process of foreclosing on a $46 million loan that Mr. Nelson’s firm took out in November 2019 to finance the purchase of the Auraria Student Lofts. The Fortress affiliate took the action after declaring Mr. Nelson’s firm in default on the loan and went to district court in Denver to get a receiver appointed to oversee the property. One of the first steps the receiver took was to replace Mr. Nelson’s firm as the property manager for the building."

About the Debtor

According to the Debtor: “Auraria Lofts off-campus student housing apartments near the University of Colorado, University of Denver, Metropolitan State University and Denver Community College. Auraria Student Lofts provides an enjoyable student housing and social college experience. Two-story clubhouse with game tables, cinema room and so much more. In addition, we have a new management team that is dedicated to our residents and their needs.”

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