Bank files foreclosure suit on Lake Zurich's premier downtown project

LaSalle Bank has filed for foreclosure on Lake Zurich's premier downtown redevelopment project for 39 townhouses being built by the village's former master developer, McCaffery Interests Inc., of Chicago.

McCaffery has defaulted on interest payments to LaSalle since January on the roughly $9.2 million loan taken out for the stalled Somerset townhomes project that's only half complete. If McCaffery can't make the loan payments, the bank takes ownership of the unsold townhouses.

LaSalle, now a part of Bank of America, is trying to recoup roughly $7.1 million from the developer. The lawsuit, filed in Lake County circuit court on Sept. 2, names Lake Zurich as co-defendant.

The land, along East Lakeview Place, that the village sold to McCaffery for $2 million as the site for the townhouse project was used as collateral for the bank loan.

The village stopped making payments to McCaffery after July 2007 in a dispute over what it owes toward the townhouse development. It then fired the developer in December, citing an impasse on costs for a second downtown condominium project, which McCaffery backed out of building.

Months of negotiations between the two haven't resolved the primary dispute over what's owed and by whom.

"There's no bad guys here," said Dan McCaffery, president of McCaffery Interests. "What's happened is almost a perfect storm. You have a situation where the village is overextended, and the project needs more money. You have a situation where homes aren't selling because no homes are selling. Obviously, that causes a squeeze on bank loans."

McCaffery has until Oct. 9 to respond to the foreclosure action.

"It would be a silly thing to go to court on," he said. "We haven't cheated anybody. The village isn't cheating anybody, and the bank is not being cheated. This is just a very difficult situation."

Calls made to LaSalle Bank and its parent company Bank of America were not returned late Friday.

Village Administrator Bob Vitas said Friday the foreclosure suit leaves a black mark on the village's image, but was not wholly unexpected under the current housing market crisis.

"In an economy that has stalled, and the foreclosure market grows every minute of every day, it's really not uncommon," he said.

With the lawsuit, Vitas explained, the village would be on the hook for whatever is outlined in the redevelopment agreement with McCaffery. He said the village separately owes McCaffery roughly $2.7 million.

Both parties have been negotiating for several months on profit-sharing and bearing the losses in property tax revenue from the townhouse development. That revenue is captured in a special fund established for downtown redevelopment, which has since dried up, Vitas said.

For McCaffery, one of the biggest sticking points has been giving up exclusive rights to undertake seven phases of downtown redevelopment on properties along Main Street from Old Rand Road west to Lake Street.

Vitas said the lawsuit should not affect the village's new deal with Barrington-based developer David Smith's Equity Services Group. The village hired Smith in May to revise its downtown redevelopment master plan.

Smith also now has exclusive rights to negotiate on any downtown site he chooses to redevelop for 18 months, if the village adopts his revised plan.

"It has not deterred Mr. Smith and his investment group at this point in time," Vitas said. "He is fully aware of what's going on. He was fully engaged with discussions with both McCaffery and the bank."

Vitas said the village will hire an attorney to protect its interests, but also keep negotiating with McCaffery and the bank. The village board is expected to discuss the lawsuit Monday night in closed session.