If Randy Ghezzi had it to do all over again, he would have paid the capital gains tax on the sale of some inheritance property, instead of investing the money in a Las Vegas office building through a 1031 exchange.
Ghezzi now has about $550,000 tied up in the medical office building at 2716 N. Tenaya Way, near Mountainview Medical Center, that's facing foreclosure.
"I would have personally walked the check to the IRS office," said the investor, who works for the city of Pocatello, Idaho.
Ghezzi, 50, is one of 34 investors suing Wells Fargo Bank and its special servicer, LNR Partners, to stop the foreclosure. In documents filed in Clark County District Court, they allege fraud, conspiracy to secure an inflated appraisal and unlawful foreclosure. They're seeking more than $30 million to cover their investment, attorney's fees and lost profits.
In one regard, the lawsuit is no different than countless others spawned by the Las Vegas real estate bust, recession and overhyped expectations.
But in this case, the 34 relatively small investors may lose everything even though they've never missed a loan payment, and are in no danger of doing so. The building generates about $440,000 in monthly rental income, more than enough to cover the their interest-only loan payment of $235,000 per month, attorneys for the investors said.
Problems arose when the $50.7 million loan came due in full last August. The investors were unable to refinance because the property, appraised at $74 million when they bought it, now is valued at about $44 million.
'IT WAS LIKE A SURE THING'
Ghezzi's headache started in 2006, when he needed a roll-over investment to avoid paying taxes on proceeds from the sale of property he had inherited. That's commonly done through a 1031 exchange under federal tax law.
Through a securities broker, Ghezzi was directed to Triple Net Properties, a sponsor that identifies 1031 exchange properties and arranges tenant-in-common investments such as the Tenaya Way office building.
As a tenant-in-common owner, Ghezzi could pool his money with others and buy commercial property he might not otherwise be able to afford.
The 34 investors put their money - about $800,000, on average - into a $27 million pool, and financed the balance of the purchase with a five-year loan from Wachovia Bank. They say they were told by Triple Net Properties that they would receive a return of 7 percent to 8 percent, and the building would be sold at a profit before the Wachovia loan came due.
The deal was solid, in part because of a good-as-gold tenant in the form of United HealthCare Services, which occupies the whole building. In 2006, it had 10 years remaining on its 15-year lease. The money came in like clockwork even as the Las Vegas real estate market collapsed. United HealthCare Services faithfully paid its rent, and the owners faithfully made their mortgage payments.
"They said you're buying part of an office building with a 15-year lease. It was like a sure thing," said Brady Smith, 80, an investor from Fairview, Ore.
But last August Wells Fargo, which had acquired Wachovia in 2008, sent notice that the $50.7 million balance of the mortgage was due. With no potential buyers in sight, Ghezzi and the other investors asked the bank to refinance the loan, pushing out the maturity date.
All they wanted, Ghezzi said, was breathing room.
"The building would start paying us again and we would see the light at the end of the tunnel, and it's not a train," he said. "That would give the economy time to turn around and our building becomes worth not as much as we paid for it, but somewhere there's going to be an upside. We're not looking for anyone to feel sorry for us. We're looking to be treated fairly."
Trouble is, the building now appraises at $44 million - far less than the mortgage balance.
BLOCKING INVESTORS' OUT
While banks don't like to make loans for more than the value of a property, in this case Wells Fargo did offer the investors an out: It would consider refinancing if the investors could get United HealthCare Services to extend its lease past 2016, said Bart Larsen, an attorney representing the investors in their lawsuit.
Daymark Realty Advisors, which managed the property for the investors, had approached United HealthCare Services well in advance of the loan maturity date, Larsen said.
Initial talks were positive, Larsen wrote in court papers. United HealthCare Services seemed agreeable to extending the lease in return for a reduction in base rental rate but then broke off communication in mid-August.
By that time, Wells Fargo had turned the loan over to LNR Partners, a special servicing company based in Miami Beach, Fla. Companies like LNR specialize in managing troubled commercial real estate loans. They collect a fee or commission, plus a portion of the interest payment and a percentage when the property is liquidated.
According to the Mortgage Bankers Association, LNR was the nation's leading loan servicer in 2011, handling 14,616 loans totaling more than $192 billion.
Larsen contends LNR told United HealthCare to stop negotiating with Daymark, and it would handle lease negotiations during foreclosure proceedings.
In their lawsuit, investors accuse LNR of "wrongful conduct in interfering with the owners' existing and prospective contractual relationship with (United HealthCare Services) by promising a more favorable modification of the lease after foreclosure."
Representatives of LNR and United HealthCare Services declined comment.
"You've got a property that's got plenty of cash flow. It's just a situation where LNR wants to foreclose because they stand to make more money," Larsen said. "We are fighting to protect the rights of individuals who deserve a chance to secure their investment."
On July 6, Clark County District Court Judge Jerry Weise issued a temporary restraining order blocking the scheduled foreclosure sale, though he ordered the investors to post a $100,000 bond while the case is adjudicated.
"It appears to me there are contradicting affidavits as to who said what to whom," Weise said in his ruling. "I'm not in a position to determine who is right and who is wrong."
A hearing on a preliminary injunction to stop the foreclosure and on a motion to appoint a receiver is scheduled for Monday.
A LOOK AT SPECIAL SERVICERS
So-called special servicing companies - firms that restructure troubled commercial real-estate loans - have come under fire from investors and analysts who say the firms cut bad deals and often fail to disclose conflicts of interest.
In an interview with the Review-Journal, Larsen noted that LNR Partners is a unit of LNR Property LLC, a major investment firm that buys and sells commercial properties.
Armand Nicholi, chief financial officer of San Diego-based Breakwater Equity Partners, said there's an incentive for special servicers to foreclose on properties.
Nicolai's firm specializes in workouts on loans for distressed commercial properties and was hired by the Tenaya investors to fight the foreclosure.
Nicolai said special servicers are in a position to let a property go to foreclosure and then buy it at a huge discount.
The investors allege LNR wants to end up owning the Tenaya building, though they have not presented any evidence to support that contention.
"We have observed in some instances where the special servicer is extremely reluctant to enter negotiations, so they can foreclose on a property and buy it through an affiliated entity," Nicolai said. "That's not straight shooting, not in our minds. The same sort of shenanigans seem to happen time and again. The owners of a property cannot get the lending institution to give them a fair shake toward a workout or program beneficial to both sides."
Nicolai cited investment firms including Fortress Investment Group, Cerberus Capital Management and Vornado Realty Trust that have bought companies acting as special servicers on troubled commercial mortgages.
The Wall Street Journal reported that one such special servicer, C-III Asset Management, purchased an apartment complex in North Carolina.
Special servicing concerns are not limited to the above three special servicers. In a case before the New York State Supreme Court, four investors including Angelo Gordon & Co. are seeking to preclude Galante Holdings from purchasing the JW Marriott in Las Vegas at a loss of about $65 million, or 43 percent of the original first mortgage loan.
When loans go bad, these middlemen have a front-row seat when the assets are sold at auction, said David Bax, a financial planner in Las Vegas.
"Ordinarily, there is no real money to be made from owning a special servicer," Bax said. "However, these private equity players are looking for proprietary deal flow, in other words, access or insight into distressed deals that others will not necessarily see."
Negotiating a lease extension is part of the "nuances" in refinancing the Tenaya property, and various players involved have upset that process, Nicolai said.
"Hopefully, through the court, we can bring parties to the table and work out something for everyone," Nicolai said.
Ghezzi, meanwhile, isn't so sure there ever was a good deal. He said the investment was represented as a three-year turnaround with the potential of big returns, but not much warning of the downside.
"These are things an uneducated buyer - and I'm one - need to know how they really work," he said. "We're receiving an education right now on how tenant-in-common works, and right now, I wouldn't buy into another one."
Contact reporter Hubble Smith at email@example.com or 702-383-0491.