Logging at the site of the proposed Frognal Estates subdivision in the Picnic Point area south of Mukilteo in 2018. (Noah Haglund / The Herald)

Logging at the site of the proposed Frognal Estates subdivision in the Picnic Point area south of Mukilteo in 2018. (Noah Haglund / The Herald)

Bankruptcy complicates disputed Frognal Estates development

The developer says the filing is a temporary setback that won’t block 112 planned homes near Picnic Point.

PICNIC POINT — Backers of the controversial Frognal Estates development filed for Chapter 11 bankruptcy Thursday in hopes of reviving the 15-year project’s faltering financials.

Frognal Holdings LLC, which owns the 22-acre property near Picnic Point Road, owes $11.3 million to more than a dozen creditors, according to a petition the company’s attorneys filed in U.S. Bankruptcy Court in Seattle.

Once forested and now covered with stumps, the site was approved for a 112-home subdivision over the objections of neighbors, who argued the development would create landslide risks on steep and environmentally sensitive land.

Developer John Lakhani insisted in a Friday text message that the project will still go forward as planned.

Foreclosure loomed for Frognal. The property was to be auctioned from the steps of the Snohomish County Courthouse on Friday. However, that auction was postponed to Aug. 28.

Lakhani, president and CEO of Everett-based Integral Northwest, has acknowledged hangups in the financing plan and said he’s working to fix them. The developer got a loan to buy the property and planned to get a second one to finance construction and pay off the first loan, he previously explained. Due to delays in permitting and other issues, though, Integral Northwest couldn’t repay the first loan when it initially anticipated it would, he has said.

“Chapter 11 became necessary, but we expect to be out of Chapter 11 before the end of the year,” he said in the Friday text message. “Nothing has otherwise changed in our development plans for the property.”

Chapter 11 of the U.S. Bankruptcy Code allows a company to continue to run while formulating a restructuring plan to pay creditors. Sometimes the plan works and the company becomes profitable again; other times, it liquidates.

The property, valued at about $30 million, accounts for the vast majority of the company’s nearly $31 million in assets, according to the bankruptcy petition.

The development’s turbulent history began in 2005, when the first permit application was submitted under the name Horseman’s Trail.

The developer won a series of court battles for the project, although it still must address drainage and slope stability on steep terrain south of Mukilteo.

“We’re still fighting it,” said Christa Howser, who was at the courthouse on Friday morning when the announcement was made that the foreclosure auction would be postponed. She and her husband, who live in Lynnwood and frequently visit Picnic Point, have been speaking out against the plan for years.

The project’s opponents have lambasted county leaders for allowing logging at the site just north of Picnic Point Elementary School before the developer obtained all the permits it needed.

Residents have also called on the county to buy the vacant land, restore it and turn it into a park.

“That was the best of all possible worlds,” Howser said.

An independent geotechnical engineer and county staff are monitoring the site for erosion and stability, county Planning and Permitting Supervisor Ryan Countryman has said. The developer has also posted bonds to ensure that monitoring continues and that erosion control measures are maintained, according to Countryman.

The county has issued construction permits for the project that don’t expire until summer 2022, and they could be extended, Countryman has said.

The developer is awaiting approval of the project’s sewer plans from the Alderwood Water and Wastewater District, said John McClellan, the district’s engineering and development director. The district wants to see designs for an off-site sewer line that will last in an area highly susceptible to erosion.

An engineer for the district recently reviewed the latest drafts and made comments that the developer will now have to address, McClellan said.

“There’s things we want them to include and clarify in the plans,” he said, adding that those plans “are close to being in a state where they could be approved.”

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