An innovative apartment complex in downtown Salt Lake City has been secretly marketed for an early sale, its lead developer contends — with the prospect of bringing a bare-bones price at a time when key sectors in commercial real estate continue to sag.
Officials with Clearwater Homes are suing a series of investment partners in hopes of blocking attempts to sell PaperBox Lofts, a 195-unit project just south of the Delta Center on 300 West, which features a share of rent-subsidized dwellings and a vending-machine-like automated parking system.
The pedestrian-friendly complex at 160 S. 300 West next to The Gateway was backed at its inception by the city’s Community Reinvestment Agency and first opened in June 2023, along with a pocket park, clubhouse, gaming center and communal outdoor kitchen.
The move to sell PaperBox now, Clearwater contends in a lawsuit filed Sept. 2 in 3rd District Court, violates portions of an operating agreement requiring that overseeing partners manage PaperBox with “sound business judgment...[and] in good faith and with loyalty to the company.”
“Such sale would erode the value of Clearwater’s interest to $0, or even possibly force Clearwater to bring money to the closing table at a loss,” the lawsuit contends — and would “be catastrophic for Clearwater,” which puts its stake in the project at a book value of between $3.5 million to $4 million.
The partners being sued, meanwhile, say in court documents they have every right to move on any sale as majority stakeholders.
A judge rejected Clearwater’s quest for a temporary restraining order against the sale on Wednesday, but the underlying lawsuit is still pending.
Reached by The Salt Lake Tribune, representatives for both sides declined to comment.
Their legal clash gives some rare glimpses into the world of buying and selling large developments in Utah, one of 12 primarily Western states in the U.S. where commercial real estate sales prices are otherwise not public record nor subject to disclosure by law.
‘Oversupply’ of SLC apartments
(Francisco Kjolseth | The Salt Lake Tribune) Paperbox Lofts in 2023. The apartment complex's developer filed a lawsuit last month against investors to prevent a "premature" sale of the property.
Clearwater’s lawsuit and petitions for a temporary restraining order and preliminary injunction against the sales effort target investment partners PEG OZII GP, LLC; PEG Opportunity Zone Impact Investors; Kolbox, LLC.; Residual Ventures Opportunity Zone, LLC; and PEG SLC 375 South, LLC.
Clearwater Homes has moved in court to halt what it contends has been a “clandestine” marketing campaign toward offloading PaperBox Lofts, which it says comes “at a uniquely bad time,” when Utah’s capital has an oversupply of between 3,000 and 6,000 apartments and the high-profile property is likely to sell on the cheap.
Micah Peters, CEO for Clearwater Homes, asserts in court documents that the marketing and a listing agreement for the property were launched covertly sometime in June, with at least three leading real estate brokers asked to sign to nondisclosure pacts, allegedly to keep it all from becoming public.
“Prior to this,” the lawsuit states, “no notice of any meeting of the Paperbox members was provided to Clearwater, no meeting was held, and no vote was held.” Peters and Clearwater would still “be ignorant of the clandestine actions,” it continues, “... if it were not for Mr. Peters’ market contacts.”
Between the city’s apartment glut, high interest rates and depressed market values, the homebuilding firm based in Salt Lake City is asserting a proposed $50 million sales price would barely cover what it cost to build PaperBox.
That sales price would translate to about $265,550 per apartment, the suit says.
Similar apartment projects nearby have sold for far richer sums, it asserts, including the 183-unit Milagro Apartments at 241 W. 200 South, at $539,000 per dwelling; and Harvest at Marmalade, 550 N. 300 West, with 252 units, fetching a sales price of $460,000 per apartment.
Pointing to how investment sales in apartment complexes are now seeing a downturn, the lawsuit cites the late-summer sale of the 254-unit Karve on Broadway, at 325 E. 300 South, which it says sold for $340,000 per dwelling.
Sale part of larger strategy, Clearwater says
(Francisco Kjolseth | The Salt Lake Tribune) Paperbox Lofts in 2023. The apartment complex's developer filed a lawsuit last month against investors to prevent a "premature" sale of the property.
The lawsuit contends that putting the three-building PaperBox project on the market now risks disqualifying the developer and investors from special tax breaks available on projects within federal Opportunity Zones, one of which spans the site and much of that neck of downtown.
For Clearwater and other investors to take full advantage of those substantial capital gains tax breaks, the lawsuit notes, they’d be required to hold the property for at least 10 years before any sale.
Clearwater says in its filings that the partners’ motivation for selling PaperBox is part of a larger pattern of selling other apartment projects in other opportunity zones to raise money to pay off unrelated obligations.
That includes, the lawsuit asserts, recent sales of the 239-unit 702 Apartments at 702 S. Main in Salt Lake City and Views on 20th, a 148-unit complex at 283 Park Blvd. in Ogden. The selling spate, the suit contents, extends to projects in other states.
The sales strategy, the suit says, amounts to “using Clearwater’s equity position in the PaperBox project as collateral or as an insurance policy for their other financial responsibilities.”
“There is no other reason,” Clearwater contends, “for the project to be sold at this time.”
Restraining order blocked
(Francisco Kjolseth | The Salt Lake Tribune) Paperbox Lofts in 2023. The apartment complex's developer filed a lawsuit last month against investors to prevent a "premature" sale of the property.
For their part, the investment partners, whose firms are variously registered in Utah, Delaware and Wyoming, have countered in court filings that they are acting within their rights to move on a sale, given that they have majority stakes in the entity that holds and manages the property.
PEG OZ II alone has a 61.42% interest in PaperBox, court documents show, and between it and the four other investment partners, defined as Class A members, that interest in the project is at 90%, whereas Clearwater, a Class B member, has 10%.
They dispute that their actions violated any portion the operating agreement between the partners, saying that Clearwater’s stake as a Class B member denies the firm “the right to obstruct any such sale.”
“If a majority member determines that it is in its best interest to have Paperbox sell the property, a property sale is entirely consistent with the implied covenant of good faith and fair dealing,” their lawyers say in court briefs.
3rd District Court Judge Mark Kouris rejected the restraining order and injunction petitions, saying Clearwater had not proved the move to sell would cause it “irreparable harm.”
Reached by The Tribune, Peters, Clearwater Homes CEO, declined to comment on the lawsuit, citing a policy of not speaking on pending litigation.
An attorney for the investment partners, Chris Hogle with the Salt Lake City firm of Holland & Hart, said Friday he was not authorized to comment in the case on behalf of his clients.
Records at the Salt Lake County Assessor’s Office, meanwhile, indicate the project had not changed hands as of Friday and remained held by Paperbox Developers, LLC, which is managed by PEG OZ II, doing business primarily out of Utah County.
According to county records, the land and buildings at the PaperBox site have a total assessed value of $57.3 million.
Note to readers • This story is available to Salt Lake Tribune subscribers only. Thank you for supporting local journalism.