Group seeks return of $3M for development

A group of bondholders is threatening to sue the city of Brainerd; the Brainerd Housing and Redevelopment Authority, its board and executive director; and the estate of the late James H. Bedard, a Brainerd appraiser, among others, seeking the return of $3.3 million for the Brainerd Oaks Development.

The paperwork, received by the city from the Davis Brown Law Firm of Des Moines, last Monday, is scheduled to be a topic of discussion on the Brainerd City Council agenda for Tuesday's board meeting but no action is necessary from the council.

According to the law firm's certified letter, the firm has been retained to represent Hardin County Savings Bank, Walworth State Bank, Eitzen State Bank, Northern National Bank, Kindred State Bank and First National Bank, which purchased all of the $3.3 million in taxable revenue bonds issued by the Brainerd HRA in late 2003 for the real estate project. The letter contends that the bondholders were misled, the collateral was overvalued in the appraisal, that there was a failure to disclose material information and that proper due diligence would have revealed that the Grand Oaks project wasn't economically viable from the start.

They also accuse the Brainerd HRA of negligence in not applying to the county for preferential real estate tax treatment that the law firm stated the HRA had the ability to do under Minnesota law.

The law firm's letter said the bondholders are seeking the return of their $3.3 million with 5 percent interest from the date of purchase less the payments made to them and a tender of the bonds. The principal balance on or about May 4, 2007, was $2,739,997.62, according to the letter.

Brainerd City Attorney Tom Fitzpatrick said the city has referred the issue to the city's insurance carrier so they could be on notice if a lawsuit is filed, but he said he's not sure if the bondholders have a viable claim against the city. He said it was a Brainerd HRA project and bond sale, not the city's.

According to the letter, the bondholders believe they, as prospective investors, were misled into purchasing the bonds based on collateral that was overvalued by Bedard's appraisal by at least $1 million and there was a failure to properly disclose and analyze the negative impact a $1.085 million special assessment would have on the sale of lots.

The original appraisal determined the estimated average base site value was worth $36,500, which took into account the improvements of streets, utilities, sidewalks, plantings, along with bonding and tax increment financing. However, the letter further states that the cash flow schedule provided reflected the price of a lot was $30,854, yet each lot was appraised at a value of $43,386. This price also failed to add on the $11,262 cost per lot for buyers based on a special assessment for sewer, water, storm and road improvement costs, which would increase the cost from the buyer's prospective to $54,648 per lot with this special assessment.

The law firm also states that the feasibility study, which Bedard prepared, reported that an average of 14 home sales a year was "a very achievable plan," was "clearly flawed and failed to properly analyze and disclose economic facts." The letter states that from a buyer's perspective, a lot costing between $42,116 to $54,648 was an "unrealistically high price for moderate-income buyers in Brainerd and materially impacted the feasibility of lot sales."

According to the law firm, the Brainerd HRA has failed to make any payments for real estate taxes or special assessments that were levied against the property as was represented in the mortgage for the bonds.

The five-page letter also states that on or about April 12, 2007, appraiser William R. Ludenia prepared another appraisal of the property for the city of Brainerd. This appraisal discounted the value of the 83 remaining lots in the subdivision to $530,000, a decrease of $2.9 million for what the 83 lots were valued in 2003. So the collateral for this bond decreased in value by 82 percent in less than 3 1/2 years.

While the Brainerd HRA notified its bondholders that it did not have the ability to repay the bond obligation due to a "significant downturn" in the market, the law firm disputed this claim in the letter, and said they believe the failure to sell 93 lots and a model home was due to the fact that lots were priced excessively and out of reach of moderate-income buyers in Brainerd.

The letter states that if the matter is not resolved in the next 30 days, the bondholders intend to file suit against the Brainerd HRA; Dougherty and Co., LLC, Minneapolis; Estate of Bedard; James H. Bedard Inc. and other defendants; including the individual commissioners who served on the HRA's board at the time of issuance - James Alderman, Margaret Tiplady, Ernest Wozniak, Fred Melgard and Alona Miller, along with Doug Grout, HRA executive director. The letter also states that the city of Brainerd also will be sued because the law firm believes the city is legally obligated under the scope of applicable security laws for the acts of the HRA.

JODIE TWEED may be reached at jodie.tweed@brainerddispatch.com or 855-5858.