Levy’s House of Cards Collapses

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.