Vernon Martin
Senior Member
- Joined
- Jun 8, 2005
- Professional Status
- Certified General Appraiser
- State
- California
Tricks used by syndicators can often deceive or influence appraisers into enabling a fraudulent scheme.
A syndicator is one who sells whole investments (such as real estate or loans) in the form of shares or other fractional interests. The syndicators are paid fees by finding and organizing investors into a “syndicate” in the form of a limited partnership. The fees are usually proportional to the monetary amount of the investment, giving syndicators the incentive to overpay or over-lend without keeping equity in the investment. This is not a profession that attracts saints.
In the previous thread entitled “Talk about Commercial Appraisal Liability!” we saw how Credit Suisse (CS) had tricked Cushman & Wakefield into enabling a fraudulent loan syndication scheme (as described by the Bankruptcy Court judge) in which loans were sold in pieces to hedge fund managers and other investors while CS earned tens of millions of dollars in fees. All 14 syndicated loans defaulted. To maximize the loan amounts, CS instructed Cushman to use an unorthodox “Total net value” (TNV) methodology that inflated appraised values. Yellowstone Club was a good example, having been appraised by Cushman for $420 million according to USPAP and then re-appraised for $1.165 Billion using TNV methodology.
A more common syndication scheme involves the syndicator organizing limited partners or TIC (tenant-in-common) investors to acquire a major property, such as a mall. The syndicator, who may or may not serve as a general partner in the syndicate, usually shares few of the risks of the venture by taking huge upfront fees and minimizing his own equity in the investment. He may have already bought the property through another business entity and sold it to the syndicate at a profit. Through another company which he owns he may receive substantial fees for management services. The syndicator uses his superior knowledge to take unfair advantage of the investors. The “acquisition price” is typically above market value.
In a Texas syndication I saw in 2008, the syndicators purchased a piece of land from themselves, on behalf of the investors, at a $20 million profit after a one year holding period, in a market with a growing inventory of large land parcels for sale at much lower prices. In addition to the $20 million profit, the syndicator earned fees of about $3,300,000 in selling commissions, $500,000 in wholesaling fees, $800,000 in placement fees, $600,000 in reimbursement of offering costs, $350,000 in underwriting fees, and $5,200,000 in reimbursement of offering and organization expense fees. This represents over a $30 million profit on a property that probably lost value since its purchase as the demand for residential land waned.
Syndicators are thus able to acquire real estate with other people’s money and charge those people again and again for the right to take their money. One Internet course on real estate syndication (syndicationsuccess.com) teaches 17 different ways to extract fees from investors. Not to be outdone, NYU will offer a course this spring entitled Real Estate Investment Syndication: Acquiring and Managing Real Estate Using Other People’s Money, also promising to teach “maximizing opportunities to generate revenue.”
Although I had seen such syndications schemes in the 1980s when I was working in Texas, I thought they had gone out of business, as each syndicate enriched its syndicator/general partner at the expense of its financially unsophisticated limited partners, such as doctors, dentists and airline pilots. “Syndication” became a dirty word in the real estate business.
Alas, investor memories are short, and in 2002 the Internal Revenue Service expanded the investment types for 1031 exchangers to include tenant-in-common (TIC) interests in real estate syndicates. Syndications started proliferating again to satisfy this need.
Unscrupulous syndicators can avoid SEC scrutiny by conducting “private placements” with 35 or less “accredited” (supposedly sophisticated) investors. An accredited investor self-certifies that he has at least $1 million in net worth or an annual income of at least $300,000. In the early 1980s, when these thresholds were established, an accredited investor was meant to be in the top 1% of Americans in terms of wealth. Today, this category covers about the top 7%, and many accredited investors are ordinary professionals, such as engineers, geologists, or school principals, who are not financially sophisticated.
Private syndications are typically validated with a lengthy “Private Placement Memorandum” (PPM), which rarely gets read but actually discloses outrageous conflicts of interest in the fine print. These documents are designed to be unreadable with their dense prose, which, if correctly translated, say “You can lose all your money in this investment.”
Being a Certified Fraud Examiner and a commercial appraiser, I was contacted two years ago by the lead investor of one such PPM syndicate, composed of 20 senior citizens who lost all of their $13 million investment in the Park 100 Industrial Building in Indianapolis.
The syndicator was a man named Ed Okun, who is currently a member of the exclusive “Century Club”, a nickname for prisoners serving sentences of 100 years or more, prisoners such as Bernard Madoff.
Ed Okun is symbolic of the type of operator the syndication industry attracts. His first wife described him as a con man who (30 years ago) stole $150,000 from his father-in-law and raided his own family’s trust fund to buy a 53-foot yacht, Rolls-Royce, Aston Martin and Mercedes before fleeing to the United States to escape a civil judgment. Prior to his arrest in the U.S. for embezzlement, he drew unfavorable attention to himself with a small dinner party in the Bahamas that cost more than $56,000, a fact eagerly disclosed to law enforcement by his second wife after he dumped her to marry a Brazilian call girl.
As a syndicator, Mr. Okun claimed expertise in “identifying, acquiring and turning around distressed commercial real estate”. Okun, doing business as Investment Properties of America (IpofA), managed several such syndicates.
The Park 100 Industrial Building is an aging behemoth, a 459,000 square foot warehouse built in 1959, about the size of eight football fields. Unbeknownst to the syndicate or the appraisers, Okun already owned this building, for which he paid $3,300,000. As the manager of the syndicate, he then used his claimed investment expertise to have the investors pay him $12,650,000 for the building, earning him a 283% profit.
To justify such a high purchase price, he had to show that he was adding value, which he did by securing a tenant to pay almost $1 million per year in rent in addition to all operating expenses. The investors later found out that the tenant was a shill for Mr. Okun. The lease document between Okun and the tenant promised a $1 million incentive to be paid to the tenant “upon successful syndication of the property”. The tenant occupied the property for about a year, but did not pay rent.
Accidentally enabling the scam was a real estate appraisal firm which appraised the warehouse for $12,650,000 (the stated acquisition price) based on comparisons to smaller, 21st century warehouses. The firm was Cushman & Wakefield. The investors wanted to sue Cushman, but the privity issue prevented them. Cushman did the appraisal for the lender and did not know about the investors, who read the courtesy copy provided to Mr. Okun.
The warehouse was foreclosed on and has traded since then, but since Indiana is a non-disclosure state (good states in which to commit real estate fraud), the subsequent prices are not known. The local tax assessor has assessed its market value to be $4,125,400. Texas is also a non-disclosure state. Hmm.
These types of syndicates are not confined to the United States, either. I have observed Canadian syndicators misbehaving in Arizona and Costa Rica, for example, overpaying for bulk sales of vacant condos or mountain land.
A word to the wise, then, the price a syndicate pays for a given property is probably above market value. An appraiser who automatically “hits the purchase price” could find himself in trouble.
The SCI bankruptcy
On March 23rd, I attended a bankruptcy court hearing in Los Angeles for creditors of SCI, a major sponsor of TIC private placement syndications, with more than $2 billion in properties under management. Afterwards I joined some disappointed investors at a nearby Starbucks and heard what the bankruptcy meant to them.
These three investors were not fat cats; they had retired from careers in engineering or geology and thought they were just purchasing some security for their retirement. A retired geologist in this 70s lost over $200,000, almost lost his home, and now finds himself needing to go back to work. These seniors had invested in the SCI Capital Group Mezzanine Fund, which did not invest in real estate but invested in unsecured loans to SCI and its affiliates, despite promises in the PPM that the loans would be secured. Unsecured creditors typically stand last in line in getting paid back after a bankruptcy.
SCI already had first mortgages from Wells Fargo and First Citizens on most of its properties, but needed “mezzanine”, or second mortgage financing. To obtain such financing, a commercial property owner or investor normally pays several points in loan fees and a double digit annual interest rate. What was different about the SCI Mezzanine Fund, though, was that SCI borrowed from these investors at a 10% interest rate, but rather than paying the lending investors origination fees, SCI charged them ten and a half points for the privilege of lending them money. Imagine your bank paying you 10.5% of your loan amount just for borrowing their money! The investors also had to pay management fees to SCI.
Some of the loans were also made to syndicates organized by SCI, and the sales histories of the selected properties indicated a pattern of self-dealing by SCI at the expense of syndicate investors. While their stated purpose was to find outstanding investment opportunities for their investors, in most cases they were reselling, at a profit, properties they had already acquired. SCI made a seven-figure profit on each property they sold to their syndicates, such as the following:
The Austin City Lights Apartments were acquired by SCI for $46 million and sold to the syndicate investors for $49,116,500 plus acquisition fees, making the total acquisition price to the syndicate of $50,863,996, an immediate profit of $4,863,996 to SCI, not counting deferred acquisition fees of $1.227.912 to SCI when the property is eventually sold. The ultimate profit to SCI will therefore be over $6 million.
The Erwin Square office building in Durham, North Carolina, was acquired by SCI for $35,500,000 but acquired by syndicate investors for $39,990,000, an immediate $4,490,000 profit, not including the deferred acquisition fee of $950,000.
The immediate profit to SCI on the Western Ridge Apartments in Houston was $3,399,935. The Keystone at Alamo Heights apartments in San Antonio netted SCI an immediate profit of $3,089,360. The Mandalay at the Lakes apartments in Las Colinas, Texas, netted them an immediate profit of $3,776,332.
With every transaction designed to bring a seven-figure profit to SCI, it makes one wonder how the company can declare bankruptcy, unless it is being done with same sleight of hand that they used to trick their syndicated investors.
SCI founder and CEO Marc Paul represented SCI in the bankruptcy court hearing for creditors and, with a sad face, expressed profound sorrow for the investors’ losses, claiming to also be a victim and having to file for personal bankruptcy protection, too. However, the court documents indicate the bankruptcy filing to be not his own but of The Marc Paul and Renee Paul Family Limited Partnership.
In other words, Mr. Paul is “pulling a Trump”. (In the public feud between Rosie O’Donnell and Donald Trump, Trump bragged that he has never declared personal bankruptcy, but there are many Trump limited partnerships that have.) Los Angeles County real estate records indicate Mr. Paul owns properties in Los Angeles County, including a 4000 square foot home in Beverly Hills, which he owns personally in his and his wife’s names and not the name of the Paul Family Limited Partnership. He seems to have done much better for himself than his investors.
The most amazing part about these stories of self-dealing, investor abuse and destroyed retirement plans is that no one can refer to a law that has actually been broken. Is it illegal for a syndicator to tout his investment acumen to potential investors and then sell them his own properties, at a profit? Unethical, yes, but illegal, who knows? If such behavior by syndicators is fraud, no one seems to be prosecuting it; the FBI’s annual report to Congress, for instance, does not even mention syndication fraud. Real estate attorneys won’t touch civil cases against syndicators; securities lawyers will, but most lack sophistication in real estate matters.
Many real estate professionals I talk to don’t see a need for change, with their sympathies seemingly in the camp of the syndicators rather than the upper middle class professionals who get cheated out of secure retirements. “How else are syndicators supposed to make money for the service they provide?” they ask, which seems as absurd as justifying the “protection services” offered by Al Capone, as syndicate investors are paying to get screwed.
Oh, and the only client who ever cheated me out of a fee was a syndicator. He was supposed to wire me $10,000 before I released my report, and I saw the money appear in my bank account. Little did I know that he did not wire the money but instead sent someone to deposit a bad check at my bank’s branch in Sacramento. He has since been legally dealt with, and "the matter has been resolved to the mutual satisfaction of both parties."
A syndicator is one who sells whole investments (such as real estate or loans) in the form of shares or other fractional interests. The syndicators are paid fees by finding and organizing investors into a “syndicate” in the form of a limited partnership. The fees are usually proportional to the monetary amount of the investment, giving syndicators the incentive to overpay or over-lend without keeping equity in the investment. This is not a profession that attracts saints.
In the previous thread entitled “Talk about Commercial Appraisal Liability!” we saw how Credit Suisse (CS) had tricked Cushman & Wakefield into enabling a fraudulent loan syndication scheme (as described by the Bankruptcy Court judge) in which loans were sold in pieces to hedge fund managers and other investors while CS earned tens of millions of dollars in fees. All 14 syndicated loans defaulted. To maximize the loan amounts, CS instructed Cushman to use an unorthodox “Total net value” (TNV) methodology that inflated appraised values. Yellowstone Club was a good example, having been appraised by Cushman for $420 million according to USPAP and then re-appraised for $1.165 Billion using TNV methodology.
A more common syndication scheme involves the syndicator organizing limited partners or TIC (tenant-in-common) investors to acquire a major property, such as a mall. The syndicator, who may or may not serve as a general partner in the syndicate, usually shares few of the risks of the venture by taking huge upfront fees and minimizing his own equity in the investment. He may have already bought the property through another business entity and sold it to the syndicate at a profit. Through another company which he owns he may receive substantial fees for management services. The syndicator uses his superior knowledge to take unfair advantage of the investors. The “acquisition price” is typically above market value.
In a Texas syndication I saw in 2008, the syndicators purchased a piece of land from themselves, on behalf of the investors, at a $20 million profit after a one year holding period, in a market with a growing inventory of large land parcels for sale at much lower prices. In addition to the $20 million profit, the syndicator earned fees of about $3,300,000 in selling commissions, $500,000 in wholesaling fees, $800,000 in placement fees, $600,000 in reimbursement of offering costs, $350,000 in underwriting fees, and $5,200,000 in reimbursement of offering and organization expense fees. This represents over a $30 million profit on a property that probably lost value since its purchase as the demand for residential land waned.
Syndicators are thus able to acquire real estate with other people’s money and charge those people again and again for the right to take their money. One Internet course on real estate syndication (syndicationsuccess.com) teaches 17 different ways to extract fees from investors. Not to be outdone, NYU will offer a course this spring entitled Real Estate Investment Syndication: Acquiring and Managing Real Estate Using Other People’s Money, also promising to teach “maximizing opportunities to generate revenue.”
Although I had seen such syndications schemes in the 1980s when I was working in Texas, I thought they had gone out of business, as each syndicate enriched its syndicator/general partner at the expense of its financially unsophisticated limited partners, such as doctors, dentists and airline pilots. “Syndication” became a dirty word in the real estate business.
Alas, investor memories are short, and in 2002 the Internal Revenue Service expanded the investment types for 1031 exchangers to include tenant-in-common (TIC) interests in real estate syndicates. Syndications started proliferating again to satisfy this need.
Unscrupulous syndicators can avoid SEC scrutiny by conducting “private placements” with 35 or less “accredited” (supposedly sophisticated) investors. An accredited investor self-certifies that he has at least $1 million in net worth or an annual income of at least $300,000. In the early 1980s, when these thresholds were established, an accredited investor was meant to be in the top 1% of Americans in terms of wealth. Today, this category covers about the top 7%, and many accredited investors are ordinary professionals, such as engineers, geologists, or school principals, who are not financially sophisticated.
Private syndications are typically validated with a lengthy “Private Placement Memorandum” (PPM), which rarely gets read but actually discloses outrageous conflicts of interest in the fine print. These documents are designed to be unreadable with their dense prose, which, if correctly translated, say “You can lose all your money in this investment.”
Being a Certified Fraud Examiner and a commercial appraiser, I was contacted two years ago by the lead investor of one such PPM syndicate, composed of 20 senior citizens who lost all of their $13 million investment in the Park 100 Industrial Building in Indianapolis.
The syndicator was a man named Ed Okun, who is currently a member of the exclusive “Century Club”, a nickname for prisoners serving sentences of 100 years or more, prisoners such as Bernard Madoff.
Ed Okun is symbolic of the type of operator the syndication industry attracts. His first wife described him as a con man who (30 years ago) stole $150,000 from his father-in-law and raided his own family’s trust fund to buy a 53-foot yacht, Rolls-Royce, Aston Martin and Mercedes before fleeing to the United States to escape a civil judgment. Prior to his arrest in the U.S. for embezzlement, he drew unfavorable attention to himself with a small dinner party in the Bahamas that cost more than $56,000, a fact eagerly disclosed to law enforcement by his second wife after he dumped her to marry a Brazilian call girl.
As a syndicator, Mr. Okun claimed expertise in “identifying, acquiring and turning around distressed commercial real estate”. Okun, doing business as Investment Properties of America (IpofA), managed several such syndicates.
The Park 100 Industrial Building is an aging behemoth, a 459,000 square foot warehouse built in 1959, about the size of eight football fields. Unbeknownst to the syndicate or the appraisers, Okun already owned this building, for which he paid $3,300,000. As the manager of the syndicate, he then used his claimed investment expertise to have the investors pay him $12,650,000 for the building, earning him a 283% profit.
To justify such a high purchase price, he had to show that he was adding value, which he did by securing a tenant to pay almost $1 million per year in rent in addition to all operating expenses. The investors later found out that the tenant was a shill for Mr. Okun. The lease document between Okun and the tenant promised a $1 million incentive to be paid to the tenant “upon successful syndication of the property”. The tenant occupied the property for about a year, but did not pay rent.
Accidentally enabling the scam was a real estate appraisal firm which appraised the warehouse for $12,650,000 (the stated acquisition price) based on comparisons to smaller, 21st century warehouses. The firm was Cushman & Wakefield. The investors wanted to sue Cushman, but the privity issue prevented them. Cushman did the appraisal for the lender and did not know about the investors, who read the courtesy copy provided to Mr. Okun.
The warehouse was foreclosed on and has traded since then, but since Indiana is a non-disclosure state (good states in which to commit real estate fraud), the subsequent prices are not known. The local tax assessor has assessed its market value to be $4,125,400. Texas is also a non-disclosure state. Hmm.
These types of syndicates are not confined to the United States, either. I have observed Canadian syndicators misbehaving in Arizona and Costa Rica, for example, overpaying for bulk sales of vacant condos or mountain land.
A word to the wise, then, the price a syndicate pays for a given property is probably above market value. An appraiser who automatically “hits the purchase price” could find himself in trouble.
The SCI bankruptcy
On March 23rd, I attended a bankruptcy court hearing in Los Angeles for creditors of SCI, a major sponsor of TIC private placement syndications, with more than $2 billion in properties under management. Afterwards I joined some disappointed investors at a nearby Starbucks and heard what the bankruptcy meant to them.
These three investors were not fat cats; they had retired from careers in engineering or geology and thought they were just purchasing some security for their retirement. A retired geologist in this 70s lost over $200,000, almost lost his home, and now finds himself needing to go back to work. These seniors had invested in the SCI Capital Group Mezzanine Fund, which did not invest in real estate but invested in unsecured loans to SCI and its affiliates, despite promises in the PPM that the loans would be secured. Unsecured creditors typically stand last in line in getting paid back after a bankruptcy.
SCI already had first mortgages from Wells Fargo and First Citizens on most of its properties, but needed “mezzanine”, or second mortgage financing. To obtain such financing, a commercial property owner or investor normally pays several points in loan fees and a double digit annual interest rate. What was different about the SCI Mezzanine Fund, though, was that SCI borrowed from these investors at a 10% interest rate, but rather than paying the lending investors origination fees, SCI charged them ten and a half points for the privilege of lending them money. Imagine your bank paying you 10.5% of your loan amount just for borrowing their money! The investors also had to pay management fees to SCI.
Some of the loans were also made to syndicates organized by SCI, and the sales histories of the selected properties indicated a pattern of self-dealing by SCI at the expense of syndicate investors. While their stated purpose was to find outstanding investment opportunities for their investors, in most cases they were reselling, at a profit, properties they had already acquired. SCI made a seven-figure profit on each property they sold to their syndicates, such as the following:
The Austin City Lights Apartments were acquired by SCI for $46 million and sold to the syndicate investors for $49,116,500 plus acquisition fees, making the total acquisition price to the syndicate of $50,863,996, an immediate profit of $4,863,996 to SCI, not counting deferred acquisition fees of $1.227.912 to SCI when the property is eventually sold. The ultimate profit to SCI will therefore be over $6 million.
The Erwin Square office building in Durham, North Carolina, was acquired by SCI for $35,500,000 but acquired by syndicate investors for $39,990,000, an immediate $4,490,000 profit, not including the deferred acquisition fee of $950,000.
The immediate profit to SCI on the Western Ridge Apartments in Houston was $3,399,935. The Keystone at Alamo Heights apartments in San Antonio netted SCI an immediate profit of $3,089,360. The Mandalay at the Lakes apartments in Las Colinas, Texas, netted them an immediate profit of $3,776,332.
With every transaction designed to bring a seven-figure profit to SCI, it makes one wonder how the company can declare bankruptcy, unless it is being done with same sleight of hand that they used to trick their syndicated investors.
SCI founder and CEO Marc Paul represented SCI in the bankruptcy court hearing for creditors and, with a sad face, expressed profound sorrow for the investors’ losses, claiming to also be a victim and having to file for personal bankruptcy protection, too. However, the court documents indicate the bankruptcy filing to be not his own but of The Marc Paul and Renee Paul Family Limited Partnership.
In other words, Mr. Paul is “pulling a Trump”. (In the public feud between Rosie O’Donnell and Donald Trump, Trump bragged that he has never declared personal bankruptcy, but there are many Trump limited partnerships that have.) Los Angeles County real estate records indicate Mr. Paul owns properties in Los Angeles County, including a 4000 square foot home in Beverly Hills, which he owns personally in his and his wife’s names and not the name of the Paul Family Limited Partnership. He seems to have done much better for himself than his investors.
The most amazing part about these stories of self-dealing, investor abuse and destroyed retirement plans is that no one can refer to a law that has actually been broken. Is it illegal for a syndicator to tout his investment acumen to potential investors and then sell them his own properties, at a profit? Unethical, yes, but illegal, who knows? If such behavior by syndicators is fraud, no one seems to be prosecuting it; the FBI’s annual report to Congress, for instance, does not even mention syndication fraud. Real estate attorneys won’t touch civil cases against syndicators; securities lawyers will, but most lack sophistication in real estate matters.
Many real estate professionals I talk to don’t see a need for change, with their sympathies seemingly in the camp of the syndicators rather than the upper middle class professionals who get cheated out of secure retirements. “How else are syndicators supposed to make money for the service they provide?” they ask, which seems as absurd as justifying the “protection services” offered by Al Capone, as syndicate investors are paying to get screwed.
Oh, and the only client who ever cheated me out of a fee was a syndicator. He was supposed to wire me $10,000 before I released my report, and I saw the money appear in my bank account. Little did I know that he did not wire the money but instead sent someone to deposit a bad check at my bank’s branch in Sacramento. He has since been legally dealt with, and "the matter has been resolved to the mutual satisfaction of both parties."
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