In the hushed chambers of Santa Barbara’s U.S. Bankruptcy Court, developer Bill Levy’s intricately crafted houseof cards came crashing quietly down late Thursday morning, leaving a small army of investors and creditors holding an empty bag on $90 million worth of promises. Levy was not present in the courtroom, but his longtime business partner Roy Millender was as Bankruptcy Judge Robin Riblet presided over the final demolition of their dream to build an upscale “village” of timeshare condos on the lower two blocks of State Street, variously known as “Entrada de Santa Barbara,” “Levytown,” and most recently, “Ritz-Carlton.”
With Levy and Millender facing imminent default proceedings — having repeatedly failed to repay Mountain Funding the $42 million they owed — Riblet opened the floor for potential buyers to submit cash bids. None did. In-lieu of such a bid, Mountain Funding submitted its $42 million I.O.U. as the next best thing, and walked off with the project and its permits.
Levy’s long running saga with City Hall, his investors, his creditors, and his banker has been the stuff of Santa Barbara urban legend, but in recent years, it’s become more of a slow-motion train crash. Levy’s chronic inability to obtain the financing needed to build the project — for which he spent so much time, ingenuity, and political capital at City Hall and the California Coastal Commission — became apparent in the past few years, as he was forced to seek three extensions on his permits. According to documents filed in Bankruptcy Court, Levy and Millender obtained construction funding from the Fremont Bank in Northern California. But that the bank failed to make good its loan. At that point, Levy and Millender found themselves with little choice but to apply to Mountain Funding, which specializes in high risk, high cost loans to developers in distress.
What put Levy and Millender so far behind the eight-ball will remain a subject of intense speculation and litigation for years to come. Part of the problem stemmed from rapidly escalating construction costs. Part of it is attributable to a short-sighted political strategy in which Levy sought to avoid the time-consuming examination of a full-environmental review by “pre-mitigating” the impacts of his proposed project. Although City Hall went along with this proposal, activists with Citizens Planning Association did not, and sued. Although they won only a partial victory in court, the ensuing delays were enough to set the project on its heels.
The rest of the problem seems to have stemmed from Levy’s rocky relations with a former business partner, Richard Berti, who waged a seven-year legal battle to force Levy to provide a full accounting of the partnership’s books. A court-ordered audit revealed that Levy had spent $11 million of his investors funds without first obtaining the necessary permission. Part of that figure included $60,000-a-month management fees to which his critics insist he was not entitled.
While rumors persist that Levy and Millender are not really out of the picture, the $140 million question remains, “What now?”
It’s likely that Mountain Funding will seek to sell its title to the property. But efforts thus far to find a willing-qualified buyer have produced nothing. Some in the development community claim that the construction costs associated with the development — in the neighborhood of $140 million — are so high that the project cannot pay for itself. To make the project work, they claim Mountain Funding will have to sell at a steep discount and City Hall will need to allow more rooms to be built than have been permitted thus far.
In the meantime, the development site remains a slow-moving construction pit on one side of State Street and the Californian Hotel on the other. And the Californian remains the biggest and most conspicuous building in town that has yet to be earthquake-proofed. City Hall gave Levy a pass, assuming that he would fix the hotel once he developed his property. But that was more than 10 years ago. Given that it’s built of un-reinforced masonry, the abandoned hotel could pose a serious risk.
The other multi-million dollar question remains what happens to all the investors and creditors who cumulatively sunk $90 million into the State Street project. Mountain Funding is not legally obligated to give them one red cent, so presumably they will have to sue Levy and Millender if they hope to get any of their money back.