Rochester developer Robert C. Morgan's problems in Buffalo just got worse.
The special loan servicer handling the $27.8 million commercial mortgage on the Raintree Island Apartments in the City of Tonawanda this week declared the loan in default.
The firm cited "false or misleading" financial statements, claims or other documents that Morgan's company provided to justify the original loan, according to a letter obtained by The Buffalo News. Federal indictments last May charged four people with fraud related to mortgages on apartment properties owned by Morgan businesses.
In the letter, the attorney for Midland Loan Services — which acts as trustee for the investors who hold the debt — notified Morgan and his company that their right to "collect, use and enjoy the rents, issues and profits" from apartment leases "is hereby revoked and terminated." And he directed that such money must now be sent directly to Midland and not mixed in with other Morgan funds.
Loan documents typically contain clauses allowing lenders to put a borrower into default in situations where false information is provided as the foundation for underwriting.
Morgan did not respond to a request for comment.
The default notice is the latest sign of trouble for Morgan, an investor and developer who has built a multifamily real estate empire over the last two decades through aggressive buying and selling of properties from his suburban Rochester base. He owns and operates more than 36,000 apartments in 14 states through his Morgan Communities and Morgan Management. His techniques and rapid growth drew the attention of the FBI and U.S. Attorney's Office in Buffalo, which have been investigating Morgan businesses for more than two years.
Last May, the FBI raided Morgan's Pittsford offices under a search warrant, and his son and nephew were indicted weeks later on bank and wire fraud charges, along with two Buffalo mortgage brokers, Frank Giacobbe and Patrick Ogiony. All four pleaded not guilty initially. But Morgan's nephew, Kevin, changed his plea to guilty late last year and is now cooperating with authorities.
The default notice also comes after Midland hired a consultant to review the operating statements for the 504-unit apartment property, according to commercial mortgage research firm Trepp. That came right after Midland took over the loan servicing two months ago from the previous firm because "imminent default" was expected.
That's because SteepRock Capital — a "mezzanine" or bridge lender that provided Morgan with extra loans on Raintree and two other apartment complexes in suburban Syracuse — sought to foreclose on all three properties after an auditor determined SteepRock had also received false information from Morgan.
SteepRock, in court documents, called the loans "toxic" because of the criminal case and accused Morgan's companies of providing "completely inaccurate" information contradicted by internal financial records. It said the independent audit of financial statements showed the Morgan companies "consistently overstated revenues and operating income" for the three properties.
And its attorneys alleged that the Morgan companies "outright lied" to the lender about key financial metrics for each of the three properties to convince SteepRock to make loans that it otherwise would not have.
SteepRock loaned $7.7 million on the three properties and is now seeking $13.65 million from Morgan, including penalty fees and interest. Morgan is fighting the foreclosure in state court, with a hearing scheduled for Feb. 22.
Besides Raintree, the other two properties are Brookwood on the Green Apartments in Clay and Rivers Pointe Phase II in Liverpool, both of which were cited as at risk by Trepp last July.
Meanwhile, Kevin's father, Herbert, is suing Robert Morgan, his brother, for allegedly withholding proceeds owed to him from the sale of four properties in Texas last year. Herbert Morgan says word of the closings was kept from him, but when he learned of the $19.25 million sale he repeatedly asked his brother for the $4.8 million he is due. He alleges that he never received his share and accused his brother of diverting funds.
Robert Morgan, in an affidavit filed last month, says that's not the way their arrangement worked. Robert Morgan says he often included his brother, nephew and a niece as owners of projects "under circumstances where they contributed no equity and I assumed all risks." Through that arrangement, he said, his brother, Herbert, owned minority interests in 87 properties with 22,533 apartments, valued at over $70 million.
"I did so as acts of generosity toward my brother and his children, and they each acquired enormous wealth as a result," Robert Morgan said in the affidavit. "I designated and treated them as co-owners even though I was the only source of capital invested."
He said it was not unusual for Morgan Management to sell one or more properties to support other properties and development with working capital from the proceeds. And he said that all family members had agreed to do so with the four Texas properties, using specific accounts that had long been used for future capital needs.
"Through this lawsuit, Herb Morgan seeks to reverse years of standard operating procedure in the management of the portfolio properties, after having accepted the enormous economic benefits of such portfolio management practices for decades," Robert Morgan wrote.
In a more recent filing, Herbert said the family discussed the creation of a legal "war chest" in 2017 to help fight the pending government investigations, possibly using proceeds from the Texas sale. But that fund was never formed, he said, and the discussions didn't authorize his brother "to sell the Texas property and use my share of the proceeds as he sought fit."