Morro USA, Scape Face Forced Bankruptcy for San Jose Tower

A downtown San Jose apartment high-rise that opened less than a year ago is staring down involuntary bankruptcy and a looming foreclosure.

Suffolk Construction filed legal paperwork to launch an involuntary Chapter 7 bankruptcy proceeding against the owner of The Fay, a 336-unit residential tower at 10 East Reed Street, the Mercury News reported.

Affiliates of two firms, Morro USA and Scape, developed the 23-story building and defaulted on a $182.5 million construction loan issued in 2021 by a Madison Realty Capital affiliate.

Suffolk, which served as general contractor, claims it’s owed $9.3 million for work already completed at the site. The Boston-based construction firm has separately sued the ownership entity in Santa Clara County Superior Court. The Chapter 7 involuntary bankruptcy could help Suffolk recoup some of the debt it alleges the owner has failed to pay.

Court filings from Suffolk and the lender say the Morro and Scape affiliates haven’t shown up in court and may continue to ghost the proceedings, complicating efforts to claw back unpaid bills.

“Suffolk believes a significant procedural concern is that the owner has not appeared, and it seems unlikely that it will,” Suffolk Construction and the Madison Realty affiliate said in the documents.

The loan went into default in July, roughly seven months after the residential building opened. City officials hoped it would be a fresh spark for a downtown still struggling to revive foot traffic after the pandemic. Instead, The Fay is another distressed asset in a market where office vacancies have drained daytime activity from San Jose’s core and softened investor appetite for development.

Madison Realty moved to foreclose on the property last month; the building could hit the auction block by the end of this year. If the bankruptcy moves forward, a court-appointed trustee could liquidate the ownership entity and sell the building, setting up a potential opportunity for a buyer to swoop in on a discount.

— Chris Malone Méndez