The old Bagel Factory on South University Avenue.

Lon Horwedel | AnnArbor.com

The owners of the former Bagel Factory are preparing to repair the restaurant space as they put it on the market for lease, a sign that a planned student high-rise along South University faces more hurdles.

The 601 Forest redevelopment project- a 14-story high-rise approved by the city for the corner of South University and South Forest - already was stalled due to litigation between the development team.

Now one of the key properties in the assemblage is going back onto the market.

“The space is available for rent,” said Marsha Schneyer, co-owner of the former Bagel Factor property with her husband, Sherwin Schneyer.

Schneyer said there’s still a purchase agreement with developer Ron Hughes, but attorneys are amending the contract. She would not discuss further details.

Neither Hughes nor his former partner, Dan Ketelaar, returned calls seeking comment.

The lawsuit was filed in February by Ketelaar, who said that Hughes didn’t pay his development fee and failed to get financing.

Documents in the court record contain responses by Hughes saying that Ketelaar did not properly supervise professionals associated with the project, resulting in two site plans. The first, called “University Village,” asked the city to approve 26 stories.

Court records show that Washtenaw County Circuit Court Judge Timothy Connors signed a stipulated order of dismissal following an Oct. 2 hearing. The document was filed Oct. 6, and also indicates that each side will pay their respective costs and attorney fees.

The partnership split as the recession seized the financial markets, putting the project into question from a financial perspective.

Sources said Hughes remains committed to the project and is seeking financing.

But in the meantime, the Schneyers are moving ahead to clean up the former Bagel Factory, which has been empty for several years.

A lease to Barry Bagels owner Barry Greenblatt has expired, Schneyer said, and crews have been in the nearly 9,000-square-foot building removing the bagel-making equipment.

“Next we have to pull a permit and start tearing down walls,” Schneyer said.

Interest is already percolating among potential tenants, she said, as restaurants and bars have sought information. The asking lease rate was not available.

But local appraiser Jay Alcock says the corner is “some of the best real estate in Michigan.”

“In very limited retail corridors around the University of Michigan campus, if you have a quality development, you can get the highest rent in the state,” Alcock said.

That would be $30-$60 along South University, according to estimates.

Unclear is how much the 601 Forest team is willing to pay for the property and for an option to hold it off the market.

City assessors estimate the market value at $1.668 million.

Meanwhile, Schneyer said, “(the building) needs a lot of work from being closed up.”

“It’s just a good corner,” she said. “Everyone tells me it’s one of the best spots in Ann Arbor.” Paula Gardner is Business Director for AnnArbor.com. Email her, call her at (734) 623-2586 or follow her on Twitter. Sign up for the weekly Business Review email here.