Waterfront East development at center of $1.6 million mitigation

by Bob Grawey
Staff writer
Bankers and a new property owner are at odds over a $1.6 million letter of credit, making it one more obstacle for a troubled Otsego development.

The Waterfront East development in Otsego has been rife with problems since the first shovelful of dirt broke ground in October 2005.

Broken promises by the original developer, a putrid economy and stiff competition from more attractive land opportunities have all taken a toll on development in Waterfront East and kept businesses at bay.

When the developer went bankrupt in 2010, it was yet another blow for the fledgling development’s future.

GCI Capital Inc. purchased the undeveloped Waterfront East lots in November 2010 after they had gone into foreclosure. But that has not been as smooth a transition as hoped for.

Otsego City Planner Dan Licht says for some reason the responsibility for the developer’s letter of credit did not get transferred with the property at the time GCI made the purchase.

Consequently, the two banks holding the original $1.6 million letter of credit, Glenwood Bank and Bank of Iowa, retained the developer’s guarantee to complete Waterfront East’s infrastructure.

Letters of credit are routinely required by municipalities, and serve to bind the developer to funding the needed infrastructure to support the project. This guarantees the city or its taxpayers are not liable to cover those costs in case a developer defaults on completing the development for any reason.

Developers then must secure a letter of credit from a financial lender based on their credit worthiness in the amount determined by the city for that project. This covers any infrastructure needs for the development.

If a developer defaults, the bank, by issuing the letter of credit, promises the funds will be there in case the city needs them to complete the infrastructure, which can include roads and utilities.

That is the case with the Waterfront East property. The infrastructure has not been completed by the deadline Otsego set at the start of Waterfront East, so now the city has the right to draw on that letter of credit to finish the work.

GCI has asked Otsego to pull the letter of credit to pay the special infrastructure assessments.

Officials from the two banks, though, have told Otsego it should not draw on that letter of credit since the property is now held by another owner. It should have been GCI’s responsibility to secure its own letter of credit, and bank officials contend that the infrastructure costs for those lots GCI now owns belong to that company as well.

GCI should have sought to attain a letter of credit in its name at the time of the foreclosure purchase. That did not happen and now the two sides are facing mediation to settle the matter.

Retired Hennepin District Court Judge Steven Lange will serve as mediator May 19 as Otsego waits for a resolution to this latest Waterfront East development issue.

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