IKON Hotel Deal At Risk of Default

The City of Milwaukee could end up the owner of the former Milwaukee Mall as a proposed hotel redevelopment has not proceeded.

The Haywood Group is at risk of defaulting on a $4 million loan that was to be used to develop the IKON Hotel in the former Sears department store. The Comptroller labeled the loan a “significant risk” when it was introduced in 2019 and the city has since given Haywood a one-year deferral on repayment.

City officials are expected to tour the building, 2100 W. North Ave., and meet with developer Kalan Haywood in the coming weeks, said Department of City Development project manager Lori Lutzka. The building sits on a six-acre property at the busy intersection of W. North Ave. and W. Fond du Lac Ave.

The project calls for the three-story, 211,298-square-foot building, constructed in 1928, to hold an 82-room hotel on its upper floors. An addition would be built to house a conference center along W. North Ave. Multiple tenants were considered for the first floor and future buildings were contemplated as part of a larger One MKE Plaza project.

“He has not secured his financing to move that project forward,” said Lutzka to the Zoning, Neighborhoods & Development Committee on Monday afternoon.

The city created a tax incremental financing (TIF) district to provide Haywood with $4 million to complete pre-development work on what was expected to be a $36 million project. The loan is secured by a mortgage on the property. If things went according to plan, the loan and a second $5 million loan would be repaid by 2047 with increased property tax revenue on the development.

But less than a year after the challenging project was introduced, the COVID-19 pandemic took hold.

In 2021, the Redevelopment Authority of the City of Milwaukee extended the interest-free period on the 20-year loan by one year. Lutzka said the first payment is due Sep. 1. “We could look at foreclosure. There are different scenarios. We just haven’t gotten there yet,” said Lutzka when asked about what would happen if things don’t move forward.

As of 2021, Haywood Group had drawn $3.6 million on the loan. The second loan is not at risk and is only to be provided if other financing sources are secured. A DCD representative said in 2021 that without the project moving forward it is “unlikely” that payments on the first loan would be made.

Approximately $1.7 million of the pre-development loan was used to repay a Milwaukee Economic Development Corporation loan used for the building’s acquisition, approximately $1 million went to contractor JCP Construction for demolition and abatement, $380,000 went for architectural services and historic preservation tax credit preparation, $290,000 for operating costs including electricity and $200,000 for property taxes. Engberg Anderson Architects is leading the project’s design.

The $4 million loan was given to Haywood with a 4.5% interest rate. An initial payment period is to be interest-only.

“The building is walkable. Before you couldn’t walk without to take a swim,” said Haywood of the internal conditions in August 2021 when the city reviewed the loan modification. He also described ductwork filled with bird excrement on the upper levels, which have been vacant since Sears closed in 1981. An affiliate of Haywood Group purchased the building in 2018.

He claimed the building was not properly sealed from the outdoors and protected, but a review of the facade in the following weeks showed several openings were the result of broken or missing windows.

In 2019, Common Council members and other city officials had a lengthy public debate about whether to finance the project, which is located in a historically disinvested portion of the city.

Then-Comptroller Martin Matson said his analysis of the project as a “significant risk” was limited to the hotel industry, and not to the moral considerations of correcting generational disinvestment. Then-City Development Commissioner Rocky Marcoux said the project was at the “gateway to the Northwest Side” and would be a catalytic project. The commissioner said the city subsidy would show private investors that the city was confident in the project.

Coucnil members who voted for the deal spoke of the need to take more risks investing in low-income areas. Area Alderman Russell W. Stamper, II was among those who touted the deal, and even wagered the media that it would open in 2020. “I understand the opposition, but it’s time for us to make a significant difference in the city of Milwaukee with this development, with this opportunity,” he told his colleagues.

But four of the 15 members ultimately voted against the proposal.

“I don’t think I want to have our taxpayers be in the hotel business,” said Alderman Michael Murphy describing what he said was a worst-case scenario. However, at this point there isn’t even a hotel for taxpayers to run.

The city could again modify the loan to grant Haywood more time to attempt to salvage the deal.

The developer in 2021 expressed optimism that progress was being made. “We have been putting together a deal that we knew would be difficult from the start,” said Haywood. “Then COVID turned the world upside down.”

Another issue that arose was a sexual assault investigation of Haywood. which became public in 2019 after information leaked by the police department raised questions on how the investigation was conducted, and whether there was a conflict of interest for the Haywood Group’s then-attorney and then-Fire & Police Commission president Steven M. DeVougas, who appeared on Haywood’s behalf during questioning by police.

In January, the Milwaukee County District Attorney’s Office said it wouldn’t charge Haywood, though it believed the female accuser. A representative said investigators had not obtained other evidence to advance the case.

A representative of the Haywood Group did not respond to a request for comment by the time of publication.

In the event of a default the city would need to use overperforming TIF districts or other revenue sources to repay the debt associated with the TIF district created to issue the loan.

Lutzka said the city’s portfolio of approximately 60 tax incremental financing districts is “very healthy.” Only the Century City and IKON districts are notable underperformers with  financing gaps.

Haywood is part of the development team pursuing the City Place Two affordable apartment development. That project recently secured state funding to close a funding gap. Haywood successfully completed the 51-unit City Place Apartments in 2018, the same year he won three MANDI awards from LISC Milwaukee. The developer previously created the Ingram Place Apartments and the redevelopment of the historic Germania Building from office space to apartments.

Renderings

Pre-Demolition Interior Photos

2019 Exterior Photos