The company trying to redevelop Radio Square in Santa Barbara has said it likely will have to walk away from the project after facing a foreclosure on the property for allegedly failing to repay a $5.3 million loan.

The foreclosure could signal a setback for a spot that has proved difficult to redevelop despite a lucrative location on West Carrillo Street just blocks from Santa Barbara’s State Street retail district. A dry cleaning plant that once occupied the site left it with contaminated soil that must be removed at a high cost to potential developers.

Laguna Hills-based DBN Development had purchased Radio Square in 2006 and gained approval for its redevelopment plans last year. The project’s lender, South Dakota-based Bankfirst, filed a lawsuit in Santa Barbara County Superior Court on June 2 alleging the developer hadn’t repaid its loans and seeking to take control of the property.

Steven Delson, DBN’s president, said his company has been unable to reach a deal with Bankfirst for more time to repay and has struggled to find financing to move forward with construction at Radio Square.

“We’ve tried to appeal to logic and mercy and combinations thereof, but to date we’ve been unsuccessful,” Delson told the Business Times. Asked about DBN’s next move with the project, Delson replied: “Lotto tickets.”

Bankfirst officials did not return Business Times requests for comment. Roger Coven, the Los Angeles attorney representing Bankfirst, said the bank aims to take back the property but couldn’t predict when it might change hands.

“We have filed a motion for the appointment of a receiver, which simply means that there’d be somebody there to take care of the property,” Coven said. “Beyond that, I don’t think any decisions have been made on timing.”

The foreclosure also action dims the hopes of Santa Barbara city officials for a more vibrant Radio Square, which currently has several vacant storefronts.

“We would like to see a property owner come in and decisively deal with the property, either re-leasing the property and fixing things up to at least get us back to where we were with it, or redeveloping the site,” said Paul Casey, director of community development with the city. “Our main interest is to see an active owner with the financial ability to do something with it.”

DBN intended to rearrange Radio Square’s commercial space to include housing. Its plans called for 32 units, five of which would be designated as affordable units, and 16,000 square feet of commercial space. Building heights were capped at 40 feet.

Perhaps most important, a planned underground parking garage called for the removal and proper disposal of the contaminated soil beneath the site. The project gained approval last spring, and at the time DBN said it hoped to break ground in late 2008.

“We were able to get a project approved but have been struggling because of the economy to secure the money that we need to move to the construction phase,” Delson said. “We were moving in that direction with the termination of leases.”

But without any way to predict when credit might loosen to let DBN finish the construction plans and start work, Delson has gone back to the square’s tenants to extend their leases. Other than that, DBN has quit work on the project, Delson said.

“With [Bankfirst’s] attitude, it hasn’t been prudent for us to put additional money into the project if we’re just going to have to walk away from it,” Delson said.

Delson admitted DBN didn’t pay its property tax bill for Radio Square. “We stopped paying a lot of things when [Bankfirst] told us they weren’t going to extend the loan,” Delson said.

Crews are working on a building in the square that used to house a Carrows restaurant, but those are improvements are being made for a Santa Barbara church group that is leasing the property and aren’t part of redevelopment plans, Delson said.

DBN’s entitlements and plan approvals go with the property, so it’s possible that another developer could come in and take over the project. But even under the best case scenario, the foreclosure will set back any redevelopment efforts.

“To get to a building permit from where we are today – to complete the plans, process the plans and bid the project out – for us it would be about a year to a construction start,” Delson said. “If it was somebody else that came along, they would have more work to duplicate. I guess the bank is just hoping there’s somebody [in Santa Barbara] that will have the $5.3 million in cash sitting around and give it to them for the loan.”

Just how much of a setback the foreclosure will be for Radio Square is “hard to say because we’re kind of in uncharted waters with regard to the downturn in the housing market and also the state wide economy,” said Santa Barbara’s Casey. “What might have been past practices of usual case scenarios are very hard to predict in this climate.”

In spring 2008, DBN broke ground on another project in Santa Barbara, the redevelopment of an industrial building on Yanonali Street in the city’s so-called “Funk Zone” into six condominiums and a commercial pace. The planned three-story building would include residences of 800 square feet each and a 1,400-square-foot commercial space.

But construction has stopped on the project, prompting complaints from neighbors and concerns from city officials. “In the old days, you’d rarely see a project stop in the middle of construction,” Casey said. “But these aren’t the old days any more.”

Delson, the developer, wouldn’t go into to details about the financial status of the project on Yanonali Street but was more upbeat about its prospects than he was about Radio Square.

“We’re working through some issues with our lender on that project as well, but we think it’s going to have a happier conclusion,” Delson said.

Delson said he was confident someone would try to pick up where DBN left off with Radio Square. “It’s too good of a piece of property, it’s too good of a location, and the plans that we have there fit too well with the city’s long-term objectives,” Delson said.

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