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Saturday, May 25, 2024 | Back issues
Courthouse News Service Courthouse News Service

Foreign investors beat challenge to their priority in stalled, $1.8 billion downtown LA project

The ruling is the first substantive one in a tangle of claims over the massive project that ran out of money four years ago.

LOS ANGELES (CN) — A group of foreign investors who through the EB-5 immigrant visa program poured about $140 million in a now-stalled mega development in downtown LA beat an attempt by unpaid contractors on the project to get priority over their senior claim.

California Superior Court Judge William Highberger at a hearing Wednesday agreed with the investors that construction on the Oceanwide Plaza project hadn't started yet on July 20, 2015 when they recorded the deed of trust for their loan. The contractors, led by Lendlease Construction, failed to persuade him that the excavation and shoring that had been done before that date wasn't generic site improvement but was part of the construction, which would give them lien priority.

The massive unfinished, three-tower project, valued at about $1.8 billion, occupies a city block across from the Crypto.com Arena in a part of downtown LA that has seen a boom in high-end residential projects in the past 20 years, fueled in part by overseas capital. The developer, China-based Oceanwide Holdings, planned the project to include a five-star Park Hyatt hotel in a 49-story tower and 500 condominiums in the two adjacent towers.

Oceanwide ran out of money, however, in 2019 and hasn't been able to line up new financing to complete the work. Since then, dozens of contractors have filed mechanic liens on the project, to the tune of about $200 million in total, for unpaid work.

One particular issue that has gotten the contractors worked up is that LA Downtown Investment, the entity that solicited construction funding from Chinese EB-5 investors, recorded a deed of trust for $325 million on the project in 2015 even though they were only able to raise $138 million.

The ruling on Wednesday on whether the contractors could jump ahead of the foreign investors in line to get paid was the first substantive decision in the drawn-out fight over who is entitled to what should the development be put in foreclosure.

The judge allowed the contractors to immediately appeal his ruling given the large amount of money at stake and the importance of this issue to the ultimate resolution of the case.

According to the Highberger's tentative decision, which he finalized at the hearing, California law is unique in that it allows a secured creditor a window to filing a deed trust on a project between site improvement and construction if these are done under separate contracts. However, the Highberger judge said, there was barely any case law that defines the boundary between site improvement and construction and he decided that work on a development's foundation should be considered the start of construction.

"This is fundamentally an interpretation of an ambiguous statutory language and driven by a policy judgment by this court that project-specific site improvements are just as worthy of of qualifying under §8454 as 'generic' site improvements," according to the judge's tentative decision, referring to the state law.

Lendlease's attorney, John Hanover, disagreed and argued that the huge hole that was excavated and shored up for the project under a 2014 contract with Oceanwide was so specific for the planned development that it should be considered part of the construction process and, as such, entitle the contractors to lien priority over the lenders.

"This decision would create more ambiguity than it resolves," Hanover told the judge.

Eric Rowen, an attorney for the LA Downtown Investment, retorted that there are enough examples of sites that have been excavated with a specific construction project in mind, and when that project doesn't materialize, the excavated sites were repurposed for a different one.

Rowen also pointed out that at the time the master contract between Lendlease, the lead contractor on the development, and Oceanwide were finalized in 2016, it specified that the foreign investors group had priority over the contractors.

"Everybody knew they were junior," Rowen said. "Everybody understood they were subordinated."

The ultimate goal of the contractors is to force a foreclosure sale of the development as soon as possible, Hanover told the judge, but he added that that can't be done until there has been trial, scheduled for August, to determine who is entitled to what. Although Oceanwide has paid off some contractors that filed suit, the largest claims remain unpaid.

John Foust, a lawyer for Oceanwide who sat with the LA Downtown Investment attorneys, pooh-poohed the idea that a foreclosure sale was in everybody's best interest given the soft real-estate market.

"If there was a buyer out there waiting to make a purchase, we wouldn't be here," Foust told the judge. "Not everyone is anxious to put the project into foreclosure."

Meanwhile, LA Downtown Investment is facing a separate trial in May in a lawsuit brought by Chinese investors who were denied a green card through the EB-5 program because the project has been halted and who haven't been paid back.

Follow @edpettersson
Categories / Business, Financial, Regional

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