Out with the old

he 80-somethings at retirement home Desert Crest face eviction. But that's just business, says the home's owner--which happens to be an agency of the Roman Catholic church.

"We have residents at Desert Crest who have lived there many years and planned to spend the rest of their lives there. We thought, what's going to happen to them?" says Tims. "There's already a significant shortage in that kind of housing and a huge waiting list at most places. A few of the neighbors have parents or close friends in Desert Crest."

Lyle Six is one of those. The retired AlliedSignal engineer lives in the neighborhood; his 97-year-old mother, Daviejean, lives at Desert Crest. Six says he began bringing Desert Crest residents such as Mac McCullough to homeowners-association meetings. He says McCullough educated homeowners who had wrongly assumed that if Desert Crest was bankrupt, it must be a run-down eyesore.

Now, Six is angry that the possibility of saving Desert Crest is not being offered in the bankruptcy proceedings.

"There's nothing before the judge that could possibly be satisfactory to the residents or neighbors," he says. "Guy [Mikkelsen] disappoints me. You always had the impression that he and the church considered Desert Crest to be one of their most important projects. . . . Instead he gets a commercial developer as a partner. Well, what earthly interest does the church have in making that a commercial property?

Six wonders if there isn't another possibility. He suggests a "cram-down"--a court-ordered reduction of the retirement home's debt to equal its current value. "I think the judge would buy it. And that's the only way to save Desert Crest."

Asked to explain why the Foundation for Senior Adult Living wants to sell Desert Crest to apartment-building giant JPI, Guy Mikkelsen told The Business Journal, "If the note holder recovers the property, we believe they'll turn around and sell it to someone who will do the same, exact thing."

In other words, it makes no difference who does the demolishing. Either way, Desert Crest gets the wrecking ball.

But a detailed look at FSAL's bankruptcy pleadings shows that Mikkelsen and the church-affiliated foundations do have incentives for pursuing their deal with JPI--recouping cash for the diocese foundations.

Under the most likely scenario presented in the proposed bankruptcy sale, JPI would settle the foundation's debt with MMT, the note holder. And it would also pay off Desert Crest's unsecured creditors.

Compared to the crushing $5 million debt claimed by MMT, those unsecured amounts are relatively minor. The Home Depot, for example, is owed $1,165, and SRP is owed $7,000. Many creditors are owed less than $1,000.

But one unsecured creditor tops the list. It's the Foundation for Senior Living (FSL), which, of course, controls FSAL. And it's owed $152,000.

Under the conditions of JPI's proposed purchase, the Foundation for Senior Living would get its money. But if MMT is allowed to foreclose on the mortgage, unsecured creditors--including FSL--would probably not see their cash.

Michael King, FSAL's attorney, contends his clients are motivated by another, less selfish reason. JPI, he says, has promised to take care of the needs of Desert Crest's residents, at least for the next year or two.

King and JPI say that the corporation plans to honor the HUD contracts requiring half of Desert Crest's apartments to be low-income housing. JPI envisions building the apartment complex in phases. The first units would go to the 50 subsidized residents, who would no longer find themselves in a retirement center but in a blend of apartment dwellers. Still, JPI's obligation to supply Section 8 housing would run out in 2000.

As for the other 50 nonsubsidized residents of Desert Crest, King says JPI would be as "sensitive" as possible to help them with the transition. King says that MMT, if it were to foreclose on the property, would not have to honor the HUD agreements or treat residents sensitively.

MMT attorney Lance Jurich refused to comment on the case.
Mac McCullough and other Desert Crest residents scoff at the notion that JPI's plans can be characterized as taking care of their needs. Half of them will be kicked out, McCullough says, and the other half will be put into a living situation they can't accept at their age.

"To put them in these apartments, you're going to kill them," he says.
Residents and neighbors want to know why FSAL and its parent FSL appear to have ignored other solutions, including Lyle Six's suggestion that the foundation find a way to save Desert Crest. But residents will have to convince FSAL to put their proposal for saving Desert Crest before the bankruptcy court for the judge to consider.

Bankruptcy attorneys say Six's idea makes sense.
Desert Crest's major problem is that its mortgage is worth more than the property that secures it. FSAL estimates that today Desert Crest is worth about $3.2 million. But it faces $5 million in debt. Under a Chapter 11 restructuring, Judge Baum could accept a plan to reduce Desert Crest's mortgage to its present worth, $3.2 million.

With an infusion of cash, FSAL could also pay off the relatively minor debts to The Home Depot, SRP and dozens of others.

And if FSL, FSAL's parent company and an agency of the Roman Catholic diocese, would forgive its $152,000 claim, FSAL could be in a position to continue running Desert Crest. (Or at least save it for another buyer that would promise to keep it intact.)

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