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Behind the scrutiny of Robert Morgan, Buffalo's newest real estate mogul

Robert C. Morgan has a stake in 4 of every 10 new apartments going up around Buffalo, but the way his companies finance their purchases is drawing scrutiny.

He owns, co-owns or manages 3,500 local apartments, 8 percent of the stock found in the Buffalo region's apartment complexes.

Of the new apartment units going up in or around Buffalo, he has a stake in four of every 10. On the drawing board are 1,000 more.

It's proof that Robert C. Morgan likes Buffalo.

"I think the downtown is on fire," Morgan said when interviewed this spring at his corporate headquarters near Rochester, where he steers a real estate empire of 36,000 units spread across 14 states. "I can't believe how great it is. I wish our city was like that."

But the way Morgan's companies finance their purchases is drawing scrutiny. The News reported a week ago that FBI agents have issued subpoenas to gather information about the way Morgan's companies finance their acquisitions locally and elsewhere, according to five sources with direct knowledge of the investigation.

There is no suggestion Morgan's companies might default, or that lenders are out some money. But the agents want to know more about the figures Morgan's companies provide in order to justify mortgages that were then resold on the open market through Fannie Mae and Freddie Mac, according to one source who has seen one of the subpoenas. Two sources said a grand jury and an assistant U.S. attorney are involved in the probe.

The investigation could also extend to other players in the local real estate industry as well, two of the sources said.

When interviewed about Morgan in recent months, local mortgage brokers, developers and even rival landlords said they admire his drive. But some also worried about the amount of debt taken on. They fear that should financial issues arise, the values on multifamily projects would drop if his companies' holdings hit the market at discounted prices.

Some local players also wonder how Morgan's companies are able to borrow so much. Lenders typically insist buyers use their own money for at least 20 percent, and the loan covers the remaining 80 percent. In some purchases The News examined, Morgan's companies appeared to borrow more on properties than they paid to buy them.

“It makes me very, very, very incredulous as to how these things get done,” said Joseph Janowski, a longstanding local broker and consultant in the financing of commercial real estate, especially multifamily housing. Janowski tracks apartment building transactions in the region. “I don’t know how you pull it off."

In interviews this spring and summer, Morgan said his company's properties are succeeding, and the transactions are proper and not misleading.

"I borrow money the same way everyone else does in the U.S.," Morgan said. "There's no hidden secrets. There's no story to tell."

Neither Morgan nor his attorney have responded to questions from The News since late July. He did not respond to questions in recent weeks about the FBI investigation or details of his transactions.

Morgan said in earlier interviews that when financing a deal, his companies sometimes borrow enough to both buy and renovate the units. These “value-added” loans, as the industry calls them, are one reason why his companies appear to borrow more on some properties than they cost, he said.

Morgan also said the deals are sometimes arranged to state a lower sale price on publicly available real estate documents. If tax assessors are not given the full sale price, property taxes “don’t go through the roof,” he said.

It's done, Morgan said, “to avoid showing full price so the assessor doesn’t bang us for the full value of the property, because that would drive the taxes up, way up, and it would also drive the rent way up.”


Listen to Robert Morgan explain the transactions in an interview with Buffalo News reporters.

Click here to read a transcript of Morgan's interview.


He says many landlords do the same thing.

But Joseph H. Emminger — who is supervisor of the Town of Tonawanda, where Morgan's companies own apartments, and is president of a real estate appraisal service based in Buffalo — called the methods used by Morgan’s companies to lessen the tax burden “not regular practice.”

The deals done by Morgan's companies were described to Mindy H. Stern, who practices law in New York City and serves as chairwoman of the New York State Bar Association’s Real Property Law section, though Morgan wasn't named. If those types of special arrangements are done only to pay less taxes, she said, “that is something that the tax authorities would question.”

Five transactions

Mark Mulville / Buffalo News

Morgan's company bought Orchard Park's Green Lake Apartments in September 2013. Morgan told The News the company paid $10.2 million, but the deed reflects a price of $1 and a transfer-tax disclosure notice shows a sales price of $5.1 million. The loan amount would exceed 100 percent of the value if the purchase price was $5.1 million, as reflected on public documents. The loan, however, would fall within accepted guidelines if the purchase price was $10.2 million, as Morgan said.

Mark Mulville / Buffalo News

Morgan's company purchased Park Place Apartments in Buffalo in August 2007. According to loan documents filed on the day of the purchase and amended a year later, his company financed the $1.07 million purchase with a $1.5 million loan, as part of a much larger loan covering a total of three properties. Neither Morgan nor his attorney responded to questions about the transaction.

John Hickey / Buffalo News

In late April 2014, companies controlled by Robert Morgan and partner Matthew Cherry of Glendale Development bought three suburban Buffalo apartment complexes for a total of $41 million in a transaction that involved three separate deals on the same day, including:

By the end of the year, after a series of financings, the debt on the three properties was $45.7 million.

First, the Williamstowne debt was consolidated into a $23.5 million loan on the same day as the purchase. That's exactly equal to the purchase price.

Also on the day of the purchase, a combined $17.5 million was borrowed on Villages at Fairways and Garden Village, for a total debt on all three properties of $41 million. The $17.5 million loan on the two properties was later broken apart into two separate loans, but the dollar amount remained the same.

In November 2014, more money was borrowed on Williamstowne, now totaling $26.9 million, and on Garden Village, now totaling $16.94 million.

Together, with the remaining $1.82 million loan on Fairways, that yields total debt on all three properties of $45.7 million, compared with the $41 million recorded price just seven months earlier.

A lawyer for Morgan said the companies actually took over management of the properties a year before the sale was completed and then fixed up the units, raised rents and used the improved operating results to justify a larger loan amount based on the increased value. Using the 80 percent loan-to-value ratio that is the Fannie Mae standard as the maximum for such loans, that would yield a total valuation in November 2014 of $57.1 million – an increase of 40 percent in less than a year.

John Hickey / Buffalo News

In 2013, companies controlled by Morgan and his partner, Matthew Cherry, bought the Raintree Island and Paradise Lane complexes, both in the Town of Tonawanda. In publicly filed documents, the purchase price for each was listed as $1. But Morgan did not dispute what industry sources told The News: Raintree and Paradise cost $41 million in all.

Records show that after the Morgan companies' purchase, the debt on the two properties totaled $42.5 million, more than the typical 80 percent of the purchase price.

The records don't show the individual purchase price of the properties, but Mercury, the Morgan attorney, said Paradise Lane was purchased by assuming a nearly $12 million outstanding mortgage.

That would make the Raintree purchase price $29 million. County records show the Morgan companies borrowed $27.8 million initially, as well as $2.7 million in a mezzanine loan. That put the total debt Raintree debt at $30.5 million.

Mark Mulville / Buffalo News

Morgan's company bought Maplewood Estates Apartments in Hamburg in 2006. It assumed prior debt of $4.66 million, took out a new loan of $8.64 million and consolidated them into a single loan of $13.6 million. These loans were from the seller. Morgan's company borrowed another $800,000 from M&T Bank on the same day. Neither Morgan nor his attorney responded to questions about the transaction.

A life-changing bullet

Morgan, 60, says he’s probably more aggressive than other property investors because of what happened on Jan. 17, 1991.

He was 33. He had just bought a house in a Rochester suburb for his family of four. He was renting out a couple of houses he owned and then bought about a half-dozen small shopping centers, he said. His best income, though, came from his family’s seafood store. He worked behind the counter, until that January morning.

“I can’t remember what I did yesterday sometimes,” Morgan said. “But I can remember 1991, that day, like it was yesterday.”

About 15 customers were waiting their turn. Morgan was at the cash register. In an instant, a gun was at his back.

The robber didn’t demand money. Had he done so, “I would have carried the register out to his car,” Morgan said.

Instead, the man simply pulled the trigger.

The round blew through one side of Morgan’s lower torso and out the other, damaging his liver, a kidney, his spinal cord.

Morgan went down. Stunned and feeling like his insides were on fire, he looked up at the barrel of a .357 revolver. Only then did the robber, a felon on parole for armed robbery, demand money from the register. But he ran off with nothing.

Rochester police caught up with the gunman as he staged another robbery hours later. He is serving a state prison sentence of 25 to 50 years for assault, armed robbery and attempted murder.

Upon seeing Morgan on a hospital stretcher, his father asked a doctor: Why are his legs like that?

Morgan’s legs, no longer under the command of impulses sent through his spine, lay at awkward angles. The doctor told his wife he didn’t know if Morgan would make it.

Morgan had multiple operations and years of rehabilitation. Throbbing pain continues today and sometimes requires new hospital stays.

His legs are paralyzed. He frequently uses his arms to shift himself as he seeks a comfortable position. He drives a vehicle equipped with a lift that places his wheelchair behind the steering wheel.

The shooting changed Morgan’s outlook on life and his assumptions about how he would support himself.

He quickly realized he would no longer spend his work days on his feet at the store.

“I’m laying in a hospital bed, looking up at the ceiling and thinking, what am I going to do to make a living?”

After being paralyzed during a shooting at his family's seafood store, Robert Morgan decided to "reinvent" himself as a real estate investor on a large scale. (Mark Mulville/Buffalo News)

Bouncing back

His experience as a small-scale landlord told him residential real estate was the answer. He enjoyed the business and intended to pursue it later in life anyway. He went in at full speed.

“I had to reinvent myself,” he explained. “I wanted to prove to myself and maybe the rest of the world that I could be successful.”

In 1992, family members mortgaged their homes to enable his purchase of two mobile home parks, with 180 units, in Binghamton. The niche was dominated by mom-and-pop companies charging rents that, to Morgan, were a hodgepodge. He raised prices to generate more income, repaid his family within a year, refinanced the properties and bought more mobile home parks, ultimately owning 10,000 lots. He also expanded to recreational vehicle parks, buying some 5,000 spaces.

In August 2005, he sold some 3,000 mobile home units for $70 million, giving him the capital to change course.

Morgan's company started buying apartment complexes, first around Rochester. In 2006, it partnered with other buyers to purchase 4,500 apartments from Syracuse to Buffalo in a single deal. He expanded to other states, focusing on cities that, like Rochester, lacked wild boom or bust cycles. He looked for  “class B” or “class C” complexes where he could redo kitchens and bathrooms, enhance other amenities, and raise monthly rents by $100 or $150. Higher rents made the property worth more.

“That’s how you create value,” he said. “When you do that in large multiples that I have, it starts adding up.”

He has had hiccups. In 2009, a Morgan company defaulted on the $59 million loan that financed the purchase of a dozen RV parks spread through eight states, according to Trepp, a research firm offering data to commercial real estate investors and financiers. In 2013, a Florida bank foreclosed on his “Morgan Yacht Club,” a 44-slip marina in DelRay Beach, according to court records on file in Palm Beach County, Fla. Morgan in recent weeks has not responded to attempts to ask him about the defaults.

Despite the defaults, the Morgan expansion continued. Today, Morgan Communities employs 1,500, and Morgan's companies control more than 180 properties that include apartment complexes, commercial buildings and strip plazas. He separately owns self-storage facilities with partner Robert Moser, a Morgan executive, under the name Prime Storage.

 

His friends and acquaintances agree: Morgan, a son of Holocaust survivors, proved he could be successful.

“A lot of men would have just given up on life. You’re in a hospital, you’re crippled, your whole life is changed. It didn’t dent him one iota,” said Andrew Costanza. He met Morgan in 2006 as they negotiated one of Morgan’s first apartment purchases, from the Costanza family in Rochester.

“It may have inspired him to do things he might not otherwise have done if he hadn’t been wounded," Costanza said.

But Costanza said he has heard it before: Morgan’s deals close with a high “loan-to-value ratio.”

“My father was a banker. We were always conservative,” he said.

“Bob is much more aggressive.”

A transaction

In a typical sale of an apartment complex, a buyer borrows no more than 80 percent of the purchase price. It’s a benchmark lenders use to make sure buyers have skin in the game. Sometimes lenders want to see even more investment and won’t finance more than 75 percent of the value.

Deeds showing the property transfer are filed in the county clerk’s office. Mortgage documents are filed there, too. Anyone can look them up.

For the owners of rental properties, the key is to have more rent money coming in than money going out to repay the loan, maintain the property and pay the taxes.

“It’s all about cash flow,” one landlord told The News.

The best basis for setting a loan amount is the sale price, not an appraiser's calculation or a projection of the future revenue, lenders interviewed by The News said.

Said one banker: "The best indicator of true value is the purchase price."

The Clover purchase

In 2014, Morgan's companies bought three apartment complexes from companies controlled by Michael Joseph, one of the area’s largest and best-known operators and head of Clover Management.

The three were Tonawanda’s Villages at Fairways, near the Brighton Golf Course on Colvin Boulevard; Cheektowaga’s Garden Village Apartments, near French Road; and Cheektowaga’s Williamstowne Village Senior Apartments, near the William Street exit from the Thruway.

Morgan's companies sometimes team with others, and in this deal they partnered with a limited liability company controlled by Matthew Cherry of Glendale Development. Records filed with the Erie County Clerk’s Office show Morgan and Cherry's companies paid $41 million for the complexes with a total of 875 units.

In a conventional deal, the buyers would have been able to borrow as much as $32.8 million — 80 percent of the purchase price.

Yet, in this deal, their companies borrowed $41 million, and nearly $5 million soon after, from Long Island’s Arbor Commercial Mortgage, for a total debt of $45.7 million, according to records filed with the County Clerk's Office. 

Behind one deal

In late April 2014, companies controlled by Robert Morgan and partner Matthew Cherry of Glendale Development bought three Buffalo-area apartment complexes for a total of $41 million in a transaction that involved three separate deals on the same day, including:

By the end of the year, after a series of financings, the debt on the three properties was $45.7 million.

First, the Williamstowne debt was consolidated into a $23.5 million loan on the same day as the purchase. That's exactly equal to the purchase price.

Also on the day of the purchase, a combined $17.5 million was borrowed on Villages at Fairways and Garden Village, for a total debt on all three properties of $41 million. The $17.5 million loan on the two properties was later broken apart into two separate loans, but the dollar amount remained the same.

In November 2014, more money was borrowed on Williamstowne, now totaling $26.9 million, and on Garden Village, now totaling $16.94 million.

Together, with the remaining $1.82 million loan on Fairways, that yields total debt on all three properties of $45.7 million, compared with the $41 million recorded price just seven months earlier.

A lawyer for Morgan said the companies actually took over management of the properties a year before the sale was completed and then fixed up the units, raised rents and used the improved operating results to justify a larger loan amount based on the increased value.

Using the 80 percent loan-to-value ratio that is standard as the maximum for such loans, that would yield a total valuation in November 2014 of $57.1 million – an increase of 40 percent in less than a year.

Arbor Commercial sold the loans to Freddie Mac, one of the nation's two mortgage guarantors. Both Freddie Mac and Fannie Mae, the other guarantor, say they do not buy loans that exceed 80 percent of the value of a property.

A Freddie Mac spokesman would not comment on individual borrowers or loans but told The News in the spring: “We’ve only closed loans that meet our standards.”

Christopher Spina, who has since taken over the role as director of public relations for Freddie Mac, said the agency still has no comment.

The explanation

Asked about the Clover loan, Morgan referred The News to a veteran real estate lawyer he works with, Albert M. Mercury of the Phillips Lytle firm. Mercury's explanation of the deal – later confirmed by Joseph, the head of Clover Management –  described these steps:

While a deed shows the properties changed hands in April 2014, Mercury said the transaction actually began in June 2013 when Morgan bought 25 percent of each of three partnerships that owned the complexes and took over management of the apartments. Morgan's companies improved the apartments and raised rents, and as agreed, he bought the remaining 75 percent within a year, Mercury said. The sale was then recorded in the County Clerk’s Office under the $41 million price agreed to in 2013, Mercury said.

But by then, the properties were worth more, Mercury said, because of the improvements and higher income. When Morgan's companies went for loans, they did so as a refinancing, not a new purchase, according to documents filed with the Securities and Exchange Commission when the loan was sold to investors as part of a package on Wall Street.

As a refinancing, Morgan's companies could borrow based not on the purchase price but on an appraiser’s new calculation of value. And appraisers can set a value based on, among other things, the sales price, comparable sales, rent rolls and net income.

Because the complexes were worth more, the venture did not finance more than 80 percent, Mercury said.

The loan amount of $45.7 million indicates that the three complexes had a value of at least $57 million by 2014, The News calculated. That's a nearly 40 percent increase in less than a year.

The lender, Arbor, would not comment. But it had full access to all the information, said Cherry, the partner in the purchase.

“Our lenders have complete transparency into all aspects of the Glendale Development deals they are participating in,” Cherry said.

Goodwill and LLCs

Morgan says that what looks like an over-financed deal can sometimes be explained by the steps he takes to "avoid showing full price."

New York courts have held that assessors may not reassess a property “on the spot” based on a purchase price because doing so treats new buyers unfairly compared with owners who have held their real estate for years. But Morgan said it still happens and can result in protracted litigation to lower the assessment for property taxes.

So his companies take precautions to minimize that risk. In one method, the buyer gives the seller some of the money under the label of a “goodwill” payment, or for a non-competition agreement, Morgan said. Those payments are not included on publicly available real estate documents.

“If you buy something for $10 million and record it at $7 or $8 [million] — and the property is assessed at $8 million — at least the taxes aren’t going to go from $8 million to $10 [million] right away,” he said.

Morgan said plenty of landlords do the same thing and for the same reason. But five people interviewed by The News about this practice found it unusual for a property transaction.

Among them was Mindy Stern, the New York City lawyer who heads the state Bar Association's Real Property Law section. She said goodwill payments are more common when a business with a recognizable brand or identity is sold, not when the sole asset being purchased is real estate.

She said: "If someone says 'I'm allocating some portion of the purchase price to something other than the real property, solely to keep the property taxes low,' that is something that would trigger investigation by the tax authorities."

Dennis Penman is executive vice president of Ciminelli Real Estate Corp.

“Goodwill is certainly usually not part of a real estate transaction,” Penman said. “It’s something I’ve never done and I’m not aware of. But it’s a free market.”

Morgan referred to a second method in which a limited liability company is used to transfer the property. According to real estate professionals, it works like this: An owner transfers the property to a newly formed limited liability company that he or she owns. That transfer can be properly recorded as a $1 transaction because it isn't an arms-length sale between independent entities. Then, the eventual buyer purchases the newly formed entity and whatever assets it holds. Transfer taxes on the true purchase amount still must be paid, but the sale price isn't public – or easily accessible to assessors.

Other buyers use the same legal mechanism, Morgan said.

In 2013, companies controlled by Morgan and a partner, Matthew Cherry, bought the Raintree Island and Paradise Lane complexes, both in the Town of Tonawanda. In publicly filed documents, the purchase price for each was listed as $1. But Morgan did not dispute what industry sources told The News: Raintree and Paradise cost $41 million in all.

Records show that after the Morgan companies' purchase, the debt on the two properties totaled $42.5 million, more than the typical 80 percent of the purchase price.

The records don't show the individual purchase price of the properties, but Mercury, the Morgan attorney, said Paradise Lane was purchased by assuming a nearly $12 million outstanding mortgage.

That would make the Raintree purchase price $29 million. County records show the Morgan companies borrowed $27.8 million initially, as well as $2.7 million in a mezzanine loan. That put the total Raintree debt at $30.5 million.

The new landscape

People who have done business with Morgan respect him.

“If he says something, you can rely on it. That’s a big thing for me,” Tops Friendly Markets CEO Frank Curci said of Morgan when interviewed weeks before news broke of the FBI investigation. “If we shake on a deal, we have a deal.”

Morgan's companies are the landlord for 25 Tops Friendly Markets, a relationship that began seven years ago when Morgan drew the chain to his retail center in the Rochester suburb of Spencerport. Tops and Morgan now plan several new supermarkets, including two in Western New York.

Pittsburgh developer Steven Mosites turned to Morgan when he needed a partner in bringing new stores and 357 apartments to that city's Penn Circle neighborhood.

“He comes to the table without the ego of the other guys, who will want to take control of your project,” Mosites said in an interview this summer, before news of the investigation became public.  "He has a very intuitive way about evaluating a project and evaluating people he wants to work with. Within the first 15 to 20 minutes of meeting him, he was ready to shake hands and say we are going to make a deal here.”

Commercial mortgage broker Gary Coscia, the founder and president of Amherst-based Largo Capital, worked on transactions for Morgan's companies in the past. But Coscia, who has decades of experience in his field, said he doesn’t understand some of the Morgan deals.

“The whole thing is a mystery to me,” said Coscia (pronounced KASH-ah). “We do a lot of financing. And most of the Western New York borrowers are conservative. That’s been the beauty of Buffalo. This is the first person to come into our market in a substantial way. And he is changing the landscape.”

Coscia called Morgan the dominant real estate borrower from Syracuse to Buffalo, and he predicted the Buffalo region’s multifamily market would suffer if Morgan's companies had financial problems and part of their holdings had to be sold. The value of apartment complexes could fall as thousands of units flooded the market, Coscia said.

Emminger, the Town of Tonawanda supervisor, also is concerned.

“If the values aren’t there and the loan amounts that they’re putting on are inflated, somebody gets hurt in the end,” he said. “That’s why checks and balances are in place.”

Morgan agrees his companies owe billions of dollars — $2.2 billion, according to the Trepp research service. But his business is still expanding. His firm has about 3,000 high-end units in the pipeline from upstate New York to Minnesota to Florida. It’s building a hotel on Transit Road near the Thruway. It drove the $60 million redevelopment of Rochester’s former Midtown Plaza.

Over a recent two-year span, Morgan's companies acquired 86 properties, mostly east of the Mississippi, a Trepp report says. That’s an average of one purchase every 8.5 days. On a single day in January 2016, Morgan's companies closed on six Buffalo-area properties containing almost 500 units.

Kevin Morgan is Robert Morgan’s nephew and a company vice president.

“When someone is thinking about selling,” he said, “their first phone call is to Bob Morgan.”

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