Brenneke in Control of Avalon Hotel, Restaurant

PORTLAND-An entity controlled by Portland developer Paul Brenneke is now the 91% owner of the Avalon Hotel & Spa and adjacent Rivers Restaurant as part of a settlement with his former partners, who removed him as the general partner of joint entity that owns assets and ultimately took the company into Ch. 11 bankruptcy as a defensive maneuver. The settlement, of which GlobeSt.com has received confirmation from both sides, all but ends a long and acrimonious relationship between Brenneke and the former majority owners, an affiliated group of LPs whose general partners were Pacific Western Realty & Development and Pacific Mortgage and Investment Company, both based in the San Francisco Bay Area.In addition to Brenneke’s former partners turning over their 67% ownership, the settlement includes two (as yet) undisclosed cash payments to Brenneke by his former partners. One of those payments has already been paid and the other will be paid after the bankruptcy court signs off on Brenneke’s former partners being released from any future liability with regard to the property, says Roger Royse, general counsel for Brenneke’s former partners, who spoke with GlobeSt.com Friday afternoon. Both sides have agreed to the indemnification, but the bankruptcy attorney still must sign off on the deal. The court date for that event is scheduled for June 30.Brenneke tells GlobeSt.com his entity, Avalon Hotel Developer LLC, will soon be 100% of Avalon Hotel Partners LLC, the entity that owns the hotel and restaurant. The owner of the remainder, an entity related to the former property manager, Waterford Hotels and Inns Inc., is reportedly signing over its interest as part of the same settlement. Waterford Hotels president Bruce Hraba was not immediately available for comment Friday afternoon.The new property manager, which Brenneke put in place several days ago, is Grand Heritage Hotels and Resorts, the company that recently acquired the Governor Hotel and adjoining Princeton Building in Downtown Portland and relocated its headquarters to the property from Maryland. The next step, says Brenneke, is to file a reorganization plan with the court, emerge from the bankruptcy he didn’t initiate and resume payment to creditors Corus Bank (primary lender) and Dynamic Finance Corp. (secondary lender). The two are owed approximately $8.2 million and $2.8 million, respectively. Paul Brenneke thought the issue of the hotel’s ownership was settled in September 2003 following a Multnomah County Circuit Court decision that put the property up for auction between the two parties. Brenneke’s $10.6-million bid eclipsed his former partners’ offer by $100,000, according to both parties. His former partners trumped that victory, at least temporarily, by taking the company into Ch. 11 bankruptcy a few hours before they had been court ordered to hand Brenneke the deed to the hotel and restaurant property, according to both parties’ description of events to GlobeSt.com. Royse says his clients felt the bankruptcy filing was “the appropriate and required course of action to protect the interest of the members and creditors of the entity.” Brenneke was unsuccessful in having the bankruptcy dismissed a month later.The dispute began in earnest in January 2003 after Brenneke’s former partners voted to remove him as managing member of Avalon Hotel Partners. In June 2003, Chicago-based Corus Bank initiated foreclosure proceedings against Avalon Hotel Partners, saying the partnership had failed to make several hundred thousand in loan payments since July 2002. When his former partners missed the second mortgage payment, says Brenneke, who was the guarantor on all debt associated with the property, he told the investors he wanted out of the partnership, which should have initiated an internal buy-sell provision in their partnership agreement. Multnomah County Circuit Court ultimately upheld the provision and ordered the aforementioned auction.This is not unfamiliar territory for Brenneke or his former partners. Brenneke collaborated with some of the same Pacific Western investors to develop another luxury hotel, this one on property they acquired at Second Avenue and Pine Street in Downtown Seattle. At the same time the investors removed Brenneke as managing partner Avalon Hotel Partners, they did so regarding Seattle project entity as well. Just like in Portland (save for the bankruptcy filing), loan payments weren’t made, foreclosure proceedings began and lawsuits ensued. In the eventual out-of-court settlement, Brenneke cut a deal to buy out the other partners and was granted full ownership of the property. In order to afford to buy it out of foreclosure, however, he agreed to sell it temporarily to University Village developers Stuart Sloan and Matt Griffin for $9.62 million. As part of the sale agreement, Brenneke kept an option to purchase the property back from the duo by January 2004 for what they paid plus interest and ultimately made it happen by partnering with the Seattle-based Benaroya Cos., which provided equity to repurchase the property rights for $10.3 million. The investment banking firm RM Watson Co. of Seattle also holds stake in the investment partnership. Brenneke is now in the process of talking with the Benaroyas moving forward with the entitled hotel development. As approved, the 21-story project includes an ultra-luxury hotel, penthouse and pied-a-terre condominiums, and 100,000-sf fitness club and spa.