Big debt burdens downtown Modesto office facility [The Modesto Bee, Calif.]

Dec. 28--MODESTO -- A downtown Modesto landmark -- the one-time J.C. Penney's store that became the City Mall office complex -- is set to be sold in a foreclosure auction next week.

There's nearly $2.2 million in unpaid loans, penalties and interest owed on the three-story building, which anchors the southeast corner of 11th and J streets.

"We're 50 percent vacant, and we can't make our payments. We've been fighting (this foreclosure) for a year," said Michael A. deRuosi of Modesto, who is the managing partner for City Mall LP. "If you can't get new tenants, you can't get new tenants. That's it."

DeRuosi, 69, and his investors bought the vacant building in 1979, a couple of years after Penney's moved to Vintage Faire Mall. They paid $229,000 for the 61,443- square-foot store.

That building cost its initial investors $1 million to open in 1948, according to historian Colleen Stanley Bare's book "Modesto Then and Now."

But deRuosi revealed something most people don't know: Groucho Marx, two of his brothers and his lawyer were the building's original owners, and they leased it to Penney's for

30 years. DeRuosi and his partners bought it from them.

It was a good investment for a while. For many years, the Internal Revenue Serv- ice and the Stanislaus County public defender's office and traffic court filled most of the building's 45,000 square feet of rentable space. But they've all moved out.

Modesto's Chamber of Commerce has been there nearly three decades, but other businesses have come and gone. DeRuosi said two sizable mortgage companies had been leasing there, but "they left owing us lots of money" when the real estate market collapsed a few years ago.

In 2007, when things still were leasing well, deRuosi and his partners refinanced the building, taking out an interest-only $1.85 million loan from Union Bank. He said City Mall was about 80 percent leased then, but tenants have been dwindling since.

A diverse mix of businesses is listed on the building's directory at 948 11th St., including attorneys, counseling agencies, job training programs, hair salons, massage therapists, notaries and other legal document services.

Union Bank sold City Mall's delinquent debt last year for $1.2 million to a Texas investment group, which is using the name ICV Modesto LLC. DeRuosi said the group wanted City Mall to acquire new financing, but it was unable to find it.

Instead, City Mall LP filed for Chapter 11 bankruptcy protection, and has been working its way through that procedure. This month the Bankruptcy Court gave the Texas investors permission to foreclose on the building.

The auction is scheduled for noon Jan. 3 in front of the Stanislaus County Courthouse, which is just around the corner from City Mall.

DeRuosi said he's trying to find private financing to buy back the building, which he said banks have appraised at about $2 million. His insurance company has estimated it would cost $9 million to replace the structure.

The masonry building was designed to last, and it is sturdy enough to add a fourth floor onto its existing frame.

"It's in pretty good condition," deRuosi said, but he figures it needs a new roof, lobby carpet and ground-floor windows.

Bee staff writer J.N. Sbranti can be reached at jsbranti@modbee.com or (209) 578-2196.

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