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Brother sues brother as Morgan real estate empire shows stress

Robert C. Morgan's brother is suing him. Two of his company's loans are in danger of imminent default. And the developer faces a new hurdle if he wants to borrow money again.

Strain is showing at Morgan Management, the Pittsford-based real estate empire with two executives facing federal fraud charges.

Morgan Management in recent weeks sold four apartment complexes in Texas, triggering a lawsuit against Robert C. Morgan by his brother, Herbert Morgan, a principal at Morgan Management. Herbert Morgan says word of the closings was kept from him, but when he learned of the sale he repeatedly asked his brother for the $4.8 million he is due. He alleges he never received his share.

"The closings were concealed from Herbert Morgan," the lawsuit says, "so that defendant Robert C. Morgan, individually and as manager of the other defendants, could take control of the proceeds."

Robert Morgan did not respond to emails seeking comment for this story. Lawyers for Morgan have yet to file their response to the lawsuit.

Joseph E. Zdarsky, the Buffalo-based attorney representing Herbert Morgan, declined to comment, and said his client would not comment either.

Meanwhile, more than $45 million in debt on two Morgan Management holdings in Central New York is in danger of "imminent default," according to a prominent industry research firm, which cited the federal investigation in its warning to investors.

And national mortgage finance company Fannie Mae – one of the two government-sponsored entities that help fund the housing market by purchasing mortgages from lenders – will not package Morgan project loans for sale to investors, according to a July 17 bulletin. That means Morgan wouldn't be able to refinance any of his loans using Fannie Mae, at least "while the judicial process proceeds with respect to matters raised in the indictment."

Federal prosecutors have not accused Robert Morgan of wrongdoing. But his son and nephew were named in a May indictment alleging mortgage fraud.

Morgan property investigation

The indictment says they provided lenders with rent rolls suggesting that certain apartment complexes generated more income than they did. The indictment says the executives, working with two mortgage brokers, provided lenders with altered leases, and they agreed to make vacant units look occupied by having radios blaring and shoes positioned outside apartment doors when bank inspectors arrived.

Kevin Morgan, Herbert's son, and Todd Morgan, Robert's son, have been suspended from their executive positions with the company. The indictment also names two principals of a Buffalo-based mortgage brokerage, Frank Giacobbe of Amherst and Patrick Ogiony of Buffalo, as being part of the conspiracy.

"There is much to be examined," U.S. Attorney James P. Kennedy Jr. said when the indictments were announced in May.

At the time, Kennedy said the investigation was in its early stages.

"Everybody is in play that may have been engaged in fraudulent conduct," he said.

The CNY properties

Robert Morgan built his real estate empire over the past 25 years. His companies now own or manage some 36,000 units in 14 states. That includes 3,500 in the Buffalo area, where he has become a significant player. He also is a partner on the $150 million redevelopment of the former Millard Fillmore Gates Circle Hospital site into a mixed-use community, including some 500 residential units.

The two Syracuse-area properties under stress are in the suburb of Liverpool. They are the Rivers Pointe Apartments and Brookwood on the Green, which contain a combined 548 units. As of July 1 they had outstanding loans of $29.66 million and $15.33 million, respectively, according to Trepp, which collects data on residential real estate for investors and potential investors.

Both loans were originated in 2014 and were packaged and sold to investors on the open market as regulated securities.

Both loans were transferred to "special servicing" in late June, according to bulletins issued this month by Trepp. A "special servicer" handles the administration and collection of troubled loans.

Neither loan is more than one month late in payments, and it is not certain either will go into default. But the trading alert from Trepp noted that the properties' "debt service coverage ratio" — which measures the borrower's ability to make monthly payments on a loan — had fallen below industry standards and the requirements of the loan agreement. Meanwhile, occupancy also dropped.

Rivers Pointe was built in 2014 and is currently 85 percent occupied, down from 100 percent initially, according to Trepp. Brookwood was built in 1965 and is 92 percent occupied, according to Trepp.

Trepp noted that the loans had been on the servicer "watchlist" since November 2017, when the federal investigation was underway but had not yet produced criminal charges. In its own commentary to the investment community, the servicer cited the federal mortgage fraud indictments and said it is "monitoring" the performance of the loans and "evaluating origination documents for inaccuracies."

Conference scheduled

Outwardly, little has happened in the criminal case against the four defendants. A scheduling order indicates it could extend well into 2019.

Lawyers are to gather at 10:30 a.m. Aug. 6 for a status conference with Magistrate H. Kenneth Schroeder Jr.

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