Fayette County

Lexington lost more than $1 million on 3 downtown condo projects. What went wrong.

Downtown Lexington had few apartments and condominiums more than a decade ago.

To fix that, a new fund was created in 2004 through the city and a consortium of nine local banks called the Lexington Downtown Housing Fund. The purpose was to provide “gap” financing for developers to spur more housing downtown.

As part of the plan, the city of Lexington borrowed $1.36 million through the Kentucky League of Cities Funding Trust to loan to developers. The Lexington Downtown Housing Fund financed other downtown housing projects in addition to the city-backed projects.

The housing materialized, but the city lost nearly $1.2 million in taxpayer dollars — nearly all of its investment — in loans to three different condo projects.

Those loans include:

  • $600,000 to Artek Lofts, an Old Georgetown Street condominium complex
  • $400,000 to CenterCourt condominiums on South Upper Street
  • $355,000 on the 500s on Main condominium project across from Rupp Arena

All three developments offer market-rate condominiums or apartments.

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The $1.36 million the city borrowed from Kentucky League of Cities was ultimately turned over to U.S. Bank. Even though the city was responsible for the loans, the developers directly paid U.S. Bank, said David Barberie, a lawyer for city.

In 2013, U.S. Bank informed the city it would only continue financing the Artek Lofts and CenterCourt projects if the city restructured the loan at a higher interest rate or made the developers repay some of the principal. For years, the developers made interest-only payments on the loans, Barberie said.

The city was responsible for the loans but had no direct agreements with the developers. Those agreements were with the housing fund. Legally, the city was in a tough spot, Barberie said. Its credit rating could be hurt if the developers defaulted. The city ultimately decided to pay off the loan rather than refinance, he said.

“LFUCG made a decision, through the council, that rather than refinancing it would pay U.S. Bank the money it was owed ($1,008,000) and attempt to collect as much money as possible from the respective developers,” Barberie said.

The city didn’t want to be in the business of putting developers out of business during the downturn, he said.

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Charles Bertram cbertram@herald-leader.com

The city paid off both Artek and CenterCourt loans for $1,008,000 in June 2014, according to city documents.

A year later, Artek Lofts entered into a re-payment agreement with the city. That 2015 agreement said Artek and Holly Wiedemann, its CEO, would repay the city $150,000 in April 2019, five years later. Wiedemann paid the city at the end of April, according to city officials. With Wiedemann’s repayment, the city’s losses on the projects went from $1.3 million to $1.2 million. In addition to the $150,000, Wiedemann also paid $20,000 in closing costs at the time of the 2015 repayment agreement.

A year after that, one of Wiedemann’s companies was hired to act as a development agent for the more than $32 million renovation of the former Fayette County courthouse. Wiedemann’s companies made more than $1 million on that project, records show.

Weidemann said she made all of the interest payments on the loan prior to it being paid off. Artek Lofts on Old Georgetown Street has also spurred development in the now-bustling Jefferson Street corridor, increasing property taxes in that area, she said. AU Associates has also built 1,045 affordable housing units, most of which are in Lexington.

The companies that developed CenterCourt condominiums on South Upper Street, originally owed the city $400,000. Since the June 2014 pay off of the loan, CenterCourt I LLC has made one payment: $25,000 in May 2016.

Bill Lear, a lawyer and registered agent for the company that developed CenterCourt, said the group does not have an agreement like the one the city struck with Artek Lofts — sometimes referred to as a ‘work out’— that would allow the group to repay a fraction of what is owed the city.

“They have never proposed a ‘work out’ with us,” Lear said.

Barberie said the city tried to meet with Lear and housing fund officials to get an agreement but it did not work out.

The city still hopes it can get the money CenterCourt condominiums owes, but it can’t sue or put a lien on the property, city officials said.

“LFUCG did not place mortgages on the properties because it did not directly loan the money to the developers, the fund did,” said Sally Hamilton, chief administrative officer for the city of Lexington. Hamilton was not CAO at the time the fund was created or the loans were approved by the council.

Meanwhile, CenterCourt has been mired in legal woes over its construction. Condo owners sued Lear and others involved in the development alleging that poor construction, negligence and building code violations in the complex near the University of Kentucky have cost them millions in repairs and rental income from tenants who had to move. A class-action lawsuit filed by condo owners was settled in January 2018.

Lear said CenterCourt is trying to repay the city.

“Every time we sell a unit, we try to pay some of it back,” Lear said.

When asked if he thought CenterCourt should have the same repayment plan as Artek Lofts, Lear declined to comment.

Darby Turner, a lawyer for the Lexington Downtown Housing Fund, said CenterCourt owes the fund another $600,000 in addition to the city-backed loan of $400,000. In contrast, Artek Lofts loan was only backed by the city. That meant only the city had to sign off on the repayment of the loan.

The city has no hope of recouping the $355,000 it loaned the 500s on Main condominium project. The original developer, Schneider Designs, was involuntarily placed in bankruptcy protection in April 2009 by its creditors.

There is some good news.

Barberie said the city has no other outstanding loans with developers through the housing fund.

“None of the projects that LFUCG loaned money to (through the Fund) were financially successful, although the goal of providing additional downtown housing was largely fulfilled,” Barberie said. The downturn in the housing market during the recession was partly to blame, he said. But the city also learned it needed to have agreements directly with the developers.

“It is LFUCG’s understanding that the lack of success of these projects was at least in part driven by changes in how condominium projects/loans were financed, with much more stringent requirements as well as a general downturn in the housing market,” Barberie said.

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