Developer Losing Hartley, Darron properties – Lee’s Summit, MO

http://www.lsjournal.com/2011/03/31/64945/the-heart-of-downtown.html

Thursday, Mar. 31 2011 6:50PM
The heart of downtown
Economy plays part in local developer losing Hartley, Darron properties
Miranda Wycoff, Journal Staff

Editor’s Note: This is the first in a series of stories detailing the foreclosure and sale of the Hartley Block and the Darron property at Third and Douglas streets in downtown Lee’s Summit.
“I’ve always been a downtown Lee’s Summit person,” Kurt Pycior said as he reminisced about “cruising” down Third Street in downtown Lee’s Summit as a teenager. As an adult he had great success as a homebuilder in Lee’s Summit prior to the housing crisis, but it wasn’t long before that success allowed him to purchase and redevelop properties in his beloved downtown Lee’s Summit.
“It was always a dream of mine to be in downtown,” he said, sitting in his Main Street office Tuesday morning, a photo of the famed Hartley’s Heart directly above him.
But on March 7 and March 11, two of the redevelopment projects he was most passionate about – sitting on the most prominent pieces of land in nationally-recognized downtown Lee’s Summit – were sold to the highest bidder on the Jackson County Courthouse steps in Kansas City.
And what perhaps adds insult to injury, is that these buildings – the Hartley’s Block at Third and Douglas and the Darron property just across the street to the north – formerly owned by Froehlich Pycior and Company, now just Pycior + Company are now owned by Rialto Capital Advisors, a company with a New York City address.
Hartley’s Block was sold at 2 p.m. March 7 for the sum of $2.675 million. And the Darron property, the property that Pycior bought from his uncle in 2007, was sold at 2 p.m. March 11 for $1.125 million.
But this story isn’t just about a developer losing his property. For many in Lee’s Summit, downtown is the heart of the community. It’s where they work, play, live and shop. It’s living history. It’s the “best downtown in the nation,” as recognized by the Great American Main Street award last May. And the question is now, will these new absentee owners share the vision Pycior had?
Vision of the heart
In April 2006 Hartley’s Home Furnishings, a staple in downtown Lee’s Summit closed its doors after nearly 54 years in business. Owners Dale and Cliff Hartley were rightfully concerned about the future of their property so they sought a local buyer.
“They were really intent on making sure it was a Lee’s Summit person to take care of their property, their legacy,” Pycior said.
So Lee’s Summit Economic Development director Jim Devine approached Pycior, who had already developed the Main Street Centre in 2002, one of downtown Lee’s Summit’s first revitalization projects and the Grand Street Quarters, a project he considers his first true-mixed use development.
“Pycior is a home-grown boy,” Dale Hartley told the Journal in 2006. “We feel comfortable with his plans.”
So Pycior got to work. They brought in a planner and laid out the block, got approved for some historic tax credits and the city approved a Tax-Increment Financing overlay district and Columbian Bank loaned him $8 million for the purchase of the property and its redevelopment.
The project consisted of a mix of redevelopment and new development and covers 9,000 square feet of retail and office space on the Hartley property and rehabilitation of 3,000 square feet of store front along Douglas Street. The project also included 4,000 square feet of new retail space and 23,000 square feet of living space in the form of 18 new condominiums and a multi-level parking garage.
“With Hartley’s announcing that they were going to retire, the use of that building really came into question,” said Jeanine Rann, director of Downtown Lee’s Summit Main Street. “It was in such a prominent position. But Kurt took the metal siding off and brought that building back to its historic integrity.”
Rann said Pycior’s redevelopment of that block made a significant difference in downtown, both visually and functionally.
“You don’t make a profit investing and redeveloping downtown Lee’s Summit like you do other places. It’s truly a labor of love.”
And just a year after purchasing the Hartley block, Pycior sought the purchase of the Darron property and developed office and retail space which now houses the Scrapbook Boutique, candid Marketing and Maggie’s Authentic Mexican Foods among other businesses.
The beginning of the end
The former Columbian Bank was the lender for both projects – with $8 million for the Hartley property redevelopment and another $2 million for the Darron property.
“It was a marriage made in heaven,” Pycior said about his loans with Columbian Bank “They wanted our loan. They were active partners in this.”
So off they went with the reconstruction. And everything was going great, Pycior said.
His homebuilding business allowed him to reinvest most of his profit into his downtown projects.
But things were about to go downhill, and fast.
“The day I really knew there was a problem was the day Countrywide quit funding home loans. And that’s the day I stopped building houses.”
But Pycior still had to finish the 18 condos in the Vogue building on Douglas – part of the Hartley property mixed-use project.
“Here I was building 18 condos, and there wasn’t a condo loan to be found,” Pycior said.
That was in early 2008.
But they made it through, or so he thought.
“Then the bank started acting weird. There were three or four days before I would get calls returned. But I knew that if I couldn’t finish this project, no one else would give me the loan to do it.”
So Pycior kept pushing forward.
On Aug. 28, 2008, the Federal Deposit Insurance Corporation came in unannounced and shut down Columbian Bank. All the checking accounts and some loans were transferred to Citizen’s Bank, but the FDIC took control of all the real estate loans.
“It was a pretty dark day,” Pycior said. “I didn’t speak to anyone for weeks.”
Pycior had no idea what the future held for his loans or his beloved projects. He just knew he had to get some answers. A few weeks later, he walked into the offices at the new Citizen’s Bank where the FDIC had set up offices.
“I will always remember vividly this phrase they used,” he said. “’It’s business as usual.’ I will never forget that.”
But for Pycior it wasn’t just “business as usual.” The Hartley Block and the Darron building, two of the most prominent spaces in downtown Lee’s Summit, were in peril. His business was in peril.
“What was I supposed to do? I just kept going. I knew there was no way this project was going to survive if I didn’t.”
Almost as soon as Pycior got the phone call about Columbian’s closure, he began making phone calls to other banks around town, but he already knew the answer. No one was willing to fund a half-completed development project. Not at the onset of one of the biggest economic crises in recent history.
“They told me, and I’ll remember these words forever, ‘we’re not going to be able to fund your loan. The FDIC is not a lender,” he recalled as he leaned back in his chair and reflected upon that critical time.
“Why couldn’t they have told me that Aug. 28, I don’t know,” Pycior said
“Not only did the FDIC say they weren’t going to fund the draw, but they weren’t going to fund the remaining loan to finish the building. They said I needed to move the loan somewhere else,” Kurt Pycior said recalling the day the Federal Deposit Insurance Corporation, that had taken over Columbian Bank in Lee’s Summit, told him they weren’t a lender.
He had two of his most beloved projects on the line – the Darron property and the Hartley Block, two prominent redevelopment projects across the street from one another in downtown Lee’s Summit.
But there was nowhere else to go. No one was lending to developers. No one was lending for real estate. And no one would fund a loan from a bank that had been seized by the FDIC.
Pycior said he looked everywhere. He finally found Ken McClain, the man who owns nearly all of the Independence Square, and McClain agreed to help Pycior buy the loan from the FDIC. So McClain and Pycior teamed up with Hawthorn Bank and started discussions with the FDIC. Pycior said they went back and forth on a price and finally settled – verbally.
But before they could get anything down on paper, Pycior got a letter saying Rialto Capital Management had purchased the loan from the FDIC.
Rialto, a company from New York City, is “a real estate investment management company focused on distressed real estate asset investment, management and workouts,” according to the company’s website. The company is also affiliated with the Lennar Corporation, a homebuilding company based in Florida.
That was about March 2010.
Pycior said he was experiencing emotional highs and lows depending on the days during his talks with the FDIC, but when he got that letter from Rialto, he thought things would take a turn for the better.
“I was sure they would want to make a deal,” Pycior said. “I thought, for sure they wouldn’t want property in downtown Lee’s Summit. Maybe I could be part of the group that would buy the loan back and finish this project.”
But making a deal wasn’t quite as easy as Pycior had hoped.
“From the beginning, they told me they wouldn’t even speak to me until I signed a letter restating and giving away any rights. It was a pretty one-sided letter,” he said.
“Looking back, I don’t think I ever had a chance. I don’t think the outcome would have changed if I didn’t sign that letter.”
So Pycior signed it, but even then he said he didn’t get much information on the company’s intent.
So he made an offer for the loan, and he never heard anything. He assumed they didn’t understand what he was offering, so he invited them to come to Lee’s Summit to look at the property.
“No one ever came to Lee’s Summit,” Pycior said.
He flew to New York – twice – to meet face to face with the so far faceless Rialto.
Still, Pycior said, no real progress was made. In fact, on the second trip to New York, Pycior brought a $3 million offer for the loan.
“He basically threw it back at me, insulted by the offer. He said it was too low,” Pycior said.
But then again, Pycior didn’t even know what Rialto expected. They never did give him a number to work with, he said.
But it was during that meeting Pycior mentioned the Tax Incremement Financing agreement he had with the city of Lee’s Summit. And Rialto’s ears perked up.
“The conditions the TIF requires in order to receive the money have not been met,” he said.
The TIF
In 2006, when Pycior began the Hartley development, the city of Lee’s Summit decided to help Pycior with his project. After all, it was exactly in line with the 2004 Downtown Master Plan.
“This project supported the Downtown Master Plan in five very distinct ways and took a very valuable space on an important corner and gave it new life,” said city manager Steve Arbo, who was acting as assistant city administrator at the time.
Arbo said the Hartley Block redevelopment created new economic activity through 11,000 square feet of retail, a new restaurant and dining opportunity, provided a cultural amenity (the original restaurant’s bar area started as a jazz club), created 18 condos, expanded parking and created office space. The project also restored the exterior of the building, bringing back its original brick façade.
“The city considered this project as an excellent opportunity to move ahead with the goals of the Downtown Master Plan,” Arbo said.
And since the city was trying to encourage redevelopment – which is usually more expensive than new, or green field development – the city helped subsidize the Hartely project with tax-increment financing.
But this TIF wasn’t like the Summit Fair and SummitWoods TIFs, where a bond is issued and the developer gets the money up front, then pays it back over a 20- to 23-year period through sales tax. For the Hartley TIF, according to the contract, the project was built first and then based on the provisions of the TIF contract, once the project was completed, the city would issue the $2.5 million to Pycior.
The original TIF agreement was with Froehlich Pycior Companies and in 2008, the agreement was transferred to Hartley Appliance Inc., Arbo said.
Since the project has yet to be completed, no city funds have been paid toward the project.
Game changer
It was after Pycior told Mike Yaffee, a Rialto representative in New York, about the $2.5 million TIF, that Pycior said he first heard the company’s representatives use the word “partnership.”
So even after Pycior’s offer was rejected, he still flew back to Lee’s Summit hopeful.
“I was thinking that if Rialto could help me finish the property, then there should be no reason the city wouldn’t want to work with us both to complete what was intended by the TIF – to make a great project,” Pycior said. “I was thinking, ‘OK, let’s put this agreement on paper.’”
But nothing ever ended up on paper, even though Pycior said he made repeated attempts.
Then, on Dec. 4, 2010, Pycior received an email from Rialto telling him to begin remitting the property rent payments to them.
“The conversation changed completely,” Pycior said.
He said they had never mentioned remitting rent money before.
“I was keeping the property impeccably maintained and they knew that. I think that’s why there was never any mention of rent money before,” Pycior said. “Not until that day in December. And I knew at that point they had no interest in working out a deal.”
In January, Rialto began the foreclosure process on both the Darron and Hartley properties and on March 7 and March 11 they were sold on the Jackson County Courthouse steps to the highest bidder – which happened to be Rialto, the only bidder present.
Hartley’s Block was sold at 2 p.m. March 7 for $2.675 million. And the Darron property, the property that Pycior bought from his uncle in 2007, was sold at 2 p.m. March 11 for $1.125 million.
“I guess I was just babysitting the property for them,” Pycior said.
What’s next?
Whatever happens next with the property and tenants – Bill Carr of Lewis, Rice & Fingersh, LC, the local attorney representing Rialto in this matter, referred the Journal to Rialto representative Pablo Connill who did not return repeated phone calls as of press time – the city is doing everything it can to protect the TIF and the taxpayers’ dollars.
“That’s why this scenario is interesting. Kurt no longer owns the property,” Arbo said.
He said the TIF contract clearly outlines that the agreement can only be transferred to another party with the consent of the city council.
And since Pycior is no longer the property owner and the project has not been completed per the TIF agreement, “the city staff has taken preliminary steps to begin the process of determining whether or not the TIF agreement is in default. Then we have a right to terminate the agreement,” Arbo said.
Arbo said the money generated from the TIF would go back in the city’s coffers toward projects that would normally financed with sales tax funds.
“As far as the city’s concerned, we’re not out any money and the taxpayers aren’t out any money,” he said.

There are 13 businesses in downtown Lee’s Summit that do not have a current lease.

That’s because in March, the properties the businesses are located in went in foreclosure, and “CML,” a subsidiary of Rialto Capital Advisors, a New York company, purchased the Hartley’s Block at Third and Douglas and the Darron property just across Third Street on the opposite corner of the intersection.

Those properties were formerly owned by Pycior+Company, a development company owned by Lee’s Summit native, Kurt Pycior.

Pycior put his heart into the prominent downtown Lee’s Summit properties, redeveloping them into vibrant mixed-use spaces that house restaurants, bars, boutiques and office space.

But following the onset of the financial crisis in 2008, Pycior’s lender, Columbian Bank closed. The Federal Deposit Insurance Corporation came in, and later sold Pycior’s loan to Rialto.

And now, those properties belong to Rialto.

But for the occupants of those properties – especially the business owners – there are still a lot of questions.

Ryan Schnabel, owner of Maggie’s Authentic Mexican Restaurant at 100 S.E. Third St., and Becky Freetly-Graber, president of candid marketing and communication, located at 229 S.E. Douglas, said they have yet to see a lease from Rialto.

“We still don’t have a lease. That really bothers me a lot,” Schnabel said. “I feel insecure about putting a lot of money in the place.”

Schnabel said he’s spoken to Rialto representative, Pablo Connill, a few times by phone, but mostly he’s only available by email. But still, Schnabel said the New York company has not given him any indication of when a new lease will be available. Freetly-Graber said the same thing.

The Journal has made several calls to Connill, but he has yet to return them.

“As of now, we are operating on the terms of our old lease and taking it month by month,” she said.

While the tenants who spoke with the Journal were aware of the financial issues surrounding the property, they didn’t seem to know how bad the situation was until the first letter arrived.

Schnabel said he remembers vividly the day he realized how big of a problem it actually was.

“It was the day of the huge blizzard,” Schnabel said. “All the tenants got a huge packet from the Rialto attorney.”

That letter, dated Jan. 31, from Lewis, Rice and Fingersch, L.C., the Kansas City law firm representing Rialto, saying that the loan now held by Rialto was in default by Pycior.

“The Lender hereby demands that you remit all your future rent payments to Lender, including the rent payment due for February 2011,” the Jan. 31 letter addressed to candid, stated.

After that letter came out, Pycior said he tried to meet with each tenant personally to explain the situation. “I asked them to pay me one month’s rent so I could pay the utilities,” Pycior said.

Some of the tenants did and some didn’t.

“It made sense,” Schnabel said. “But it was a tricky situation for us. We had a lease with Kurt, but then there was this letter telling us there was no longer a lease. We had two people telling us to pay them. Who do we believe?”

“We were basically in the middle of two camps fighting over money and it wasn’t our fault.”

Freetly-Graber said candid continued to pay rent to Pycior until they received that letter.

“That was how we formerly knew who the ownership group was,” Freetly-Graber said. “It was clear at that time who should be receiving rent.”

Candid and the rest of the tenants received a second letter from the law firm dated March 16, saying that the New York company was the successful bidder at the foreclosure sale March 11.

But even though Rialto has asked the tenants to pay them rent, most of them haven’t heard much else from the company. And that puts some strain on the businesses.

Prior to the change in ownership, Schnabel had big plans for Maggie’s. Because his neighbors Greg Olinger of Olinger Insurance and Julia Hampton, CPA are slated to move to 16 S.E. Third St. later this year, Schnabel had planned to expand Maggie’s into that space.

He said his plans included knocking down the wall between the two spaces, building a bar and putting in extra seating.

“This issue puts our plans completely on hold,” he said. “I can’t move forward. I’m basically at a standstill.

“Now I have to wait. I hope to get a lease and I hope the new owner will allow me to do all that.”

And for Denise Sapp, owner of Maxwell’s Grill and Bar and Platinum Jacks, the bar behind the restaurant, Rialto’s ownership was led to her breaking point.

“It was basically our final straw,” Sapp said of Rialto’s purchase of the property.

Sapp said there were a lot of issues when she and her husband, Kelly – who is currently serving in Afghanistan – took over the restaurant from the previous owners, and they had to fight their way back. But when Rialto took over, they indicated that they were going to raise the lease on the 8,000 square foot restaurant and bar.

“We were starting to see the light at the end of the tunnel, but then this happened, and it was the final straw,” Sapp said.

Sapp said she and Kelly crunched the numbers over and over again, but they just weren’t going to be able to make it work.

“We just couldn’t afford to stay.”

Maxwell’s will close Saturday.

As for candid, well their just ready to get on with business.

“We hope to find a mutually agreed upon lease and we are hoping for a local property manager,” Freetly-Graber said. “Someone who understands why these buildings are important.”

Ultimately, candid would like to continue to operate out of their space at 229 S.E. Douglas.

“Our goal is to stay here. We don’t want to leave. We care about this building. We’ve put a lot of blood, sweat, tears and money into this building,” Freetly-Graber said. “Leaving is not ideal, but at the same time, we have to protect our business.”

Schnabel agrees, saying, “I chose downtown for a reason, I chose this spot for a reason. I’m not going anywhere,” Schnabel said. “Maggie’s is pretty popular and I can’t afford to open anywhere else. We’ve found our spot in downtown Lee’s Summit and we don’t want to go anywhere.”

Tenants of the property on both sides of Third Street include Maxwell’s, Maggie’s Authentic Mexican Foods, Poppy’s Ice Cream, The Sports Scene, Health.Fit.Style, Tridosha Aveda Salon, Xpression’s Boutique, Gregory Olinger’s Farmer’s Insurance, Sei Bella Salon, Scrapbook Boutique, The Law Offices of Christopher F. Arbuckle, The Herron Family Trust and candid marketing and communications.

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