FBI agents examining a series of real estate deals in the Buffalo region are also looking at the financing of a Syracuse apartment complex involving the same developer.
One of Rochester developer Robert C. Morgan's companies bought the complex, Rugby Square, in a 2012 distress sale. The owner had stopped paying the mortgage, and the lender agreed to write off part of the loan. Morgan and his partner in Rugby Square, Buffalo's Brett Fitzpatrick, formed a limited liability company that borrowed $5.56 million when it bought the complex, according to records in Onondaga County.
Ten months later, Morgan's and Fitzpatrick's LLC took the steps that today have the FBI asking questions.
The LLC reported to a new lender that Rugby Square had, in less than a year, experienced a turnaround. Occupancy and rental income were up, the LLC reported, according to a service that collects data on loans.
On the strength of its figures, the limited liability company in December 2012 obtained a new $9 million mortgage on the complex. Documents from Trepp, the data-collection service, indicate the appraised value had nearly tripled from $4.75 million in early 2012 to $13 million by year's end.
Industry sources say that is remarkable, largely because landlords must wait for leases to expire before raising rents.
“In any given year, you are only turning over a third of your rent roll,” said Joseph Janowski of Buffalo, a mortgage broker and consultant who focuses on multifamily properties. “It’s very difficult to imagine how you could go and create that much of an increase in value in such a short time.”
Two sources with direct knowledge of the FBI inquiry into deals made by Morgan’s companies and other companies in the multifamily housing industry say agents have been examining the financing arrangements for Rugby Square.
Morgan did not respond to a Buffalo News inquiry about this article. But he previously said there is nothing illegal about the way his companies borrow money.
Fitzpatrick, meanwhile, did not respond to a Buffalo News email seeking an interview. An attorney representing him in the federal investigation also did not return a telephone message seeking comment.
Rugby Square’s 212 apartments, built in 1950, sit in one of Syracuse’s better neighborhoods, well-situated between Syracuse University and the downtown business district. But during the Great Recession, its Buffalo-based owners were having trouble paying the latest mortgage that had been taken out on the complex.
“The property was struggling, I do know that, and we had to put extra equity in,” said Gerald Kelly, a Buffalo area investor who had money in Rugby Square.
Kelly and other investors, including Brett Fitzpatrick’s father, the late J. Michael Fitzpatrick, sold the property in February 2012. That’s when Brett Fitzpatrick and Morgan formed the new LLC to buy the complex.
“The idea was Bob Morgan had deeper pockets than we did,” Kelly recalled, “and he could turn it around.”
From his headquarters near Rochester, Morgan's companies have vast holdings that include apartment complexes, self-storage facilities, mobile home parks and mixed-use projects, mostly east of the Mississippi. His companies have been buying and building apartments in Buffalo, too, and they now own, co-own or manage some 3,500 units locally.
Morgan has established himself as a good partner for other developers, because when his companies enter a venture, they almost always bring financing. Pittsburgh developer Steven Mosites, for example, turned to Morgan when he needed a partner – with financing – to help bring new stores and 357 apartments to that city’s Penn Circle neighborhood. Morgan’s contemporaries say they admire his drive.
But his companies also use significant debt in deals. When interviewed last year, Morgan said his companies owe billions. An industry analysis by Real Capital Analytics put it at $2.2 billion.
The manner in which his companies accumulated some of that debt has drawn scrutiny.
Six sources with direct knowledge of the FBI inquiry have previously told The News that agents are examining the way Morgan's companies finance their acquisitions, with a specific eye on the information provided to lenders to justify loans. The mortgages were often sold to investors on the open market as mortgage-backed securities.
Rugby Square’s mortgages, too, were resold to investors along with thousands of others from around the country.
Much of what is known about the Rugby Square transactions comes from documents on file with the Onondaga County Clerk’s Office and from Trepp, a data-collection service based in New York City that helps investors assess their risk.
Mortgage documents show Rugby Square was refinanced a number of times over the decades. By January 2009, Rugby Square was struggling to meet its debt, according to Trepp, which has access to the remittance reports compiled by the companies that service loans.
Expenses were up because of increased utility costs, repairs and maintenance expenses, the owners of Rugby Square told the servicing company, according to Trepp.
By the end of that year, Rugby Square also was reporting a decline in rental income because occupancy was down. The complex continued to struggle and started missing payments in May 2011.
Rugby’s owners suggested modifying its loan, beginning a process that led to an agreement in January 2012 to allow a discounted payoff – a $2.5 million savings – with the entry of a “borrower-related entity” – the new limited liability company formed by Morgan and Fitzpatrick known as Rugby Square LLC.
Mortgage documents show Rugby Square LLC turned to M&T Bank for the money needed to satisfy the existing mortgage. The transaction closed in late February of 2012.
Worth $13 million
During the following months, Rugby Square LLC reported it spent less than $100,000 on capital expenses to improve the property, Trepp’s data shows. But by December of 2012 it reported having an appraisal stating the value of each apartment had nearly tripled.
With revenues up, the value of the Rugby Square complex had gone from around $4.75 million to $13 million, according to the appraisal.
Rugby Square LLC then got a new $9 million loan, which it used to pay off the old mortgage – the one obtained in February of that year from M&T.
Berkadia Commercial Mortgage, which is owned in part by Buffalo News-parent Berkshire Hathaway, provided the new $9 million and announced the news in trade journals: “Senior Vice President Nick Cassino originated a 10-year, $9 million loan” for the ... Rugby Square Apartments at 215 Dorchester Avenue in Syracuse, N.Y.,” the announcement said. “The sponsor, Robert Morgan, used the loan to refinance an existing mortgage on the property.”
Cassino, who works from an office in Shrewsbury, N.J., did not return a telephone message to talk about the Rugby Square deal.
Real estate executives say such turnarounds are unusual but possible.
“I wouldn’t say it’s very typical,” said Steve Kuritz, managing director at Kroll Bond Rating Agency, which rates, among other things, mortgage-backed securities. Kuritz added, "But it’s not entirely unheard-of.”
Manus Clancy, senior managing director of Trepp, said that five years ago, the owners of the Prudential Plaza in Chicago found themselves saddled with $470 million in debt on a complex valued at $317 million in the wake of the real estate crash.
New owners invested $100 million in new leasing initiatives and various physical improvements. They refilled the building, raised its value and refinanced the remaining $410 million in debt with a $415 million loan. That took more than two years to do, Clancy said.
“It’s not something that never happens,” he said of a turnaround similar to Rugby Square's. “Normally, it takes longer.”
While Rugby Square was going through its troubles during the Great Recession, it also sought to lower its property tax bill and challenged its assessment, said David Clifford, the Syracuse tax assessor.
The owners grieved their assessment early in 2011 and, getting no relief, tried again early in 2012.
Midway through 2012, the city settled the dispute with an 8 percent reduction in the property’s assessed value, according to Clifford’s figures.
City officials knew nothing at the time about the Rugby Square rebound that was reportedly underway and would lead to a new $9 million loan by year’s end.
Clifford was surprised when The News told him that an appraisal valued Rugby Square at $13 million, with apartments valued at more than $61,000 each. To him, that sounded high.
As part of the settlement, the city had agreed Rugby Square’s assessment would not change for three years.
“Those three years have gone,” Clifford said. “We can revisit the property if we want.”