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Why federal investigators are focusing on 'rent rolls' from Robert Morgan's firms

FBI agents investigating the borrowing practices of Robert C. Morgan's real-estate companies are scrutinizing their "rent rolls" — data the firms gave lenders to qualify for multimillion-dollar mortgages, two sources with direct knowledge of the matter tell The Buffalo News.

The News reported in September that the FBI and the U.S. Attorney's Office in Buffalo are examining the purchases of apartment complexes by Morgan's Rochester-area companies and other firms investing in residential real estate. A grand jury is involved, and subpoenas have been issued for, among other things, rent rolls, the two sources said.

Rent rolls are an apartment complex's list of tenants, their rents and related information. Dennis Penman of the Ciminelli Real Estate Corp., calls them the "primary indication" of a property's income potential.

A higher rent roll usually means a project  can qualify for a higher mortgage, Penman and other industry sources told The News. But rent rolls, according to several sources in the industry, are not commonly verified in their entirety by a third party, even lenders. The borrower is on the hook for their accuracy.

In a report on mortgage fraud issued at the start of this decade, the U.S. Justice Department highlighted rent rolls as one area agents might want to examine in any mortgage-fraud investigation. The report noted that some perpetrators were falsifying occupancy rates on their rent rolls to borrow larger amounts of money.

No one has told The News that Morgan's companies inflated their rent rolls as they financed large apartment complexes. Earlier this year, Morgan said during an interview that his companies do nothing illegal when obtaining loans.

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

Behind the scrutiny of Buffalo's newest real estate mogul

But rent rolls have been part of several recent real-estate fraud cases:

  • New York City landlord Steven Croman, who began a one-year prison sentence weeks ago for grand larceny, tax fraud and falsifying business records, inflated rent rolls to refinance his apartment buildings, Attorney General Eric T. Schneiderman said.
  • Landlord Maximus A. Yaney, who was sentenced in 2015 to 18 months in a federal prison, submitted fraudulent rent rolls to finance his purchases of apartment complexes in college towns, according to federal prosecutors in the Southern District of Illinois.
  • In New Brighton, Pa., real estate investor Michael Staaf was sentenced to 10 years in prison in 2012 for a real-estate fraud scheme. Staaf, prosecutors said, would inflate the value of his properties by selling between entities he controlled at elevated prices. According to prosecutors, he would obtain his loans with fraudulent documents, rent rolls among them.

Five industry sources — developers and brokers — told The News that the owner of a large apartment complex can legitimately raise its value significantly with small increases in rents. A $50-a-month increase on a cluster of 800 units generates $400,000 a year more in income. Using a 6 to 8 percent rate of return, that would raise the value of the complex by $6 million. While raising the rents across all 800 units would take years, the sources said that in a refinancing the higher value could legitimately lead to added loans of as much as $4.8 million.

Large banks and lenders rarely audit and confirm an entire rent roll for big apartment complexes because there are simply too many leases to check, said Raymond Potter, a Rochester native and former bank credit executive who now owns a mortgage brokerage firm in New York City. He said lenders generally examine a small sample of leases and rely on the borrower's certification that the entire roll is accurate.

For larger lenders, it's not worth their staff time or resources to check every lease, especially if they haven't experienced wrongdoing in the past, said Joseph Janowski, a Buffalo-based broker and consultant in the financing of commercial real estate.

"The most a lender is going to do is a sampling of leases, no different than the government or an auditor doing a random sample," said Janowski, who focuses on multifamily housing. "Everybody's trying to make as much money as possible with as little cost as possible. To put somebody on the loan strictly to identify lies is probably going to be an expense you're never going to recover."

The weakness is well-known in the industry, he said, but it's unlikely that most banks will change course and confirm a full rent roll that lists dozens or hundreds of tenants.

"Could you imagine reading every page of every lease for 624 units?" Janowski asked. "You are going in with the assumption that everything is right. You're trusting that people are going to be honest."

Of course, there are exceptions among lenders. Some smaller or local banks take extra precautions as a matter of course, and others changed their policies in recent years to be more stringent with rent rolls.

"We don't just spot-check them. We go through them all," said one local banker, who asked to remain unidentified so as not to be drawn into the Morgan matter. "That's how we verify our value."

The News, after analyzing several real estate transactions involving Morgan's companies, reported in September that they had borrowed more than they paid for some properties in the Buffalo and Rochester areas.

To explain the deals, Morgan said his companies sometimes show a lower sale price on real estate documents accessible to the general public, so that municipal tax assessors do not see the full sale price and raise the property tax assessment. Morgan also said his companies will rapidly improve the apartment complexes they buy, so they can raise rents, draw in more income and qualify for larger loans as they refinance the acquisitions soon after.

However, some local developers, brokers and bankers say they have rarely seen an apartment buyer increase the value of a property in Western New York as quickly as Morgan seems to do, especially with fully leased buildings. Typically, no more than 30 percent of tenants locally will turn over in a given year, said Penman, the executive vice president at Ciminelli Real Estate.

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