HomeFed, City Reach Pact in Suit Over Grant Hotel
The city of San Diego and HomeFed Bank have agreed to settle their legal dispute over the city’s $6-million loan on the downtown U.S. Grant Hotel.
The agreement calls for the city to receive $750,000 immediately from Home Fed and $1.25 million five years after an agreement is signed. In exchange, the city will drop its lawsuit against HomeFed and agree not to block the lender’s development plan for a piece of property adjoining the hotel.
The city made the $6-million loan, an Urban Development Action Grant, in 1981 to a group of investors who spent four years and $50 million refurbishing the 283-room downtown landmark. Of the $6-million loan, $4.8 million came from the federal government and $1.2 million from city coffers.
The loan, part of a program by which the federal government made money available to cities to promote urban renewal, became a third mortgage on the Grant behind the $4.8-million first mortgage held by the Drown Foundation and a $28.5-million second mortgage loan from HomeFed.
Almost immediately after its opening in late 1985 however, the Grant ran into financial problems. By late 1987, the owners had defaulted on HomeFed’s second mortgage which then totaled $33 million. HomeFed began foreclosure proceedings, but, two days before the hotel was to be sold at foreclosure in February, 1988, the hotel owners filed for protection under the U.S. Bankruptcy Code.
In the complex bankruptcy proceedings that followed, it became clear that the city’s loan was poorly secured. The hotel was worth only an estimated $35 million at auction, meaning that little or nothing would have been left to pay off the city’s loan after the Drown and HomeFed loans were paid off with the proceeds.
The city sued HomeFed, charging that it made “misrepresentations” to the city that entitled it to a higher loan standing.
HomeFed has plans to erect a 40-story tower and garage complex on the northern part of the property, which it acquired in exchange for advancing funds to the Grant that enabled it to remain in operation through foreclosure.
A spokeswoman for the HomeFed said, however, that the lender is trying to sell its mortgage, the garage property and its operational rights to the hotel.
