Sunday, March 14, 2010

Failed real-estate venture turns investors into accidental landlords

Failed real-estate venture turns investors into accidental landlords

by J. Craig Anderson The Arizona Republic Mar. 11, 2010 12:00 AM

Throughout the 1990s, Phoenix-based Right Place Properties had a solid reputation as a boutique developer and real-estate brokerage.

It bought low-rent apartment buildings - about one a year - and renovated them with funds from a small pool of private investors. The units were then sold as condominiums for a healthy profit.

As property values began to appreciate rapidly in the early 2000s, Right Place developed an aggressive new sales strategy that included mass-marketing its investments through retirement planners, Web sites, seminars and a weekly talk-radio infomercial.

When the housing bubble burst in 2007, Right Place co-founders Rob Porter and Earl Ricker continued to take in millions of dollars from an expanding network of investors. Each investment was marketed as separate and safe, with investors' money earmarked to renovate the units they bought. The investor would receive a set monthly payment and would share in the proceeds when the rehabbed apartment was sold as a condominium.

At the time, the company's marketing materials promised a rock-solid return of about 10 percent.

By 2008, Right Place was buying as many as two apartment buildings every month, even as the real-estate market continued to decline and demand for condominiums plummeted.

Right Place had a growing list of financial commitments totaling in the millions of dollars to more than 1,000 investors, most of whom were middle-class and wealthy retirees, according to a group representing about 700 of them.

That's when the company shut down.

In November 2008, Right Place abruptly ceased all monthly investor payments and laid off the bulk of its sales organization, known as Red Door Group.

Porter and Ricker blamed a sharp decline in the condo market, a disastrous turn so sudden that they hadn't seen it coming a few days earlier, when they had closed on two Houston-area apartment deals.

The company ceased operations in February 2009, leaving behind at least 42 unfinished condo-conversion projects with a combined total of at least 3,500 units. Many of the units were uninhabitable, investors said, and several were in pre-foreclosure because of unpaid property taxes.

Right Place did not refund any of the more than $85 million investors say they prepaid for future renovations and maintenance Right Place never performed, taxes it never paid, and condo-marketing efforts it never initiated.

The company's founders, through their attorney, said their only responsibility to investors was to buy the properties. Nothing in the standard Right Place contract contradicts the founders' claim, Phoenix lawyer John Marcolini said.

However, records show investors paid an average premium of about 50 percent above the properties' market value, which the investors' group said was supposed to cover the cost of services that the company would handle on their behalf.

"This was pitched as a hands-off investment," said Raya Tahan, a Phoenix attorney representing several investor-led property owners' associations. "All the investors had to do was wait for their monthly check to arrive."

Over the past year, investors said, their hands-off investment has become a hands-on nightmare. Investors have been fending off foreclosure efforts stemming from unpaid property taxes, taking care of tenants' needs, performing overdue maintenance and trying to make viable businesses out of the apartment communities they are now responsible for operating.

Two investors have filed lawsuits in U.S. District Court, arguing that the money's disappearance distinguishes this case from the typical failed real-estate investment.

Other investors said they are working closely with FBI agents who began conducting interviews in late 2009.

Early promise

Even with thousands of real-estate investor complaints crowding today's courts, the story of Right Place Properties stands out because of the company's longevity and long-held reputation.

Porter and Ricker started the business in 1991 with the stated purpose of creating a reliable investment opportunity while improving blighted neighborhoods and creating an affordable-housing solution for residents who couldn't afford to buy a single-family home.

Far from being a get-rich-quick scheme, Right Place promised steady but limited returns. Its investors functioned as small, independent lenders in a complex business that purchased apartment buildings on investors' behalf and then leased the units from them for up to five years.

During that time, Right Place would make a set monthly lease payment to each investor, based on the number of units purchased. The company would manage the apartment communities, subletting most of the units to tenants while renovating a few vacant units at a time.

When all of the units had been renovated, it would market and sell them as condominiums. Once an investor's units had been sold, he or she would receive a pre-established profit, and Right Place would keep any additional profits generated from the sales.

Each investor paid a premium of about 50 percent above the property's market value. "Red Door Group delivers to each investor separate title to a discreet (sic) property," one online ad stated. "The company does not pool investor contributions and does not sell securities or investment trusts."

One of the most appealing aspects of the deal, investors said, was that they didn't have to lift a finger except to deposit their rent checks every month. In most cases, investors said, they never even saw the properties in which they were investing. They saw little reason to bother, given the company's perfect track record.

By all accounts, Right Place operated for 17 years without missing a single payment to investors. When it finally did so in November 2008, the company was on the verge of collapse.

Residents of early Right Place projects said they, too, were happy with the company's work.

Elaine Pompender has lived for the past 15 years at Kensington Gardens, a small, gated complex that was one of the company's first condo-conversion properties.

Pompender, 50, rents her two-bedroom home from an investor for about $700 a month. She said it's a nice, affordable community in a great location, near Seventh Street and Camelback Road in Phoenix.

"I love living here," she said.

Wrong turn

Only the former company's leaders know for sure what caused the rapid collapse after so many years of stability.

However, public documents and numerous interviews revealed that the company's problems began around 2002 or 2003, when the principals decided to ramp up the number of properties they sold each year.

During its first decade of business, the company completed only about one project a year, according to Maricopa County property records and interviews with the company's founders at the time.

Then, in 2001, Ricker and Porter hired two new sales executives, Drew Grunwald and Kevin Peck, who by their own accounts had been asked to take the company's sales effort to the next level.

Grunwald and Peck would go on to head Red Door Group, which incorporated in 2004, according to Arizona Corporation Commission records.

By the time Right Place and Red Door ceased investor payments and laid off the bulk of their employees in November 2008, they had been brokering one or two deals a month, in both the Phoenix and Houston areas.

The company's most outspoken critics are those who invested in Right Place during its final year of operation, including two California investors, Charles Neuendorf and Paul Bobrowski, who filed the lawsuits in 2009. Both are still pending.

They contend that Porter, Ricker, Grunwald and Peck continued to reassure investors that the company was in peak financial health right up until its collapse.

Al Blitz, a 70-year-old resident of Plano, Texas, is among those who invested in the months leading up to Right Place's demise.

Like many investors, Blitz leveraged a portion of his investment, using what's known as a 1031 exchange, trading an investment home for which he still owed mortgage payments for a bigger share in one of Right Place's apartment-to-condo deals.

In all, Blitz said he invested $148,000 for two units in MacArthur Park Condominiums, an apartment complex in Houston. He received two monthly rent checks, totaling $1,516, and then the notification that Right Place was out of business.

"Our total retirement income is in jeopardy of being lost because of Right Place Properties' actions," Blitz said. "Adding insult to injury, we found out that the two properties for which we paid $74,000 each are only worth about $30,000 each."

A bitter end

When Right Place stopped making payments to investors in November 2008, Porter and Ricker issued a statement explaining that a sudden turnaround in the real-estate market had made it impossible to continue sales activity, and that the best Right Place could do was to keep managing the apartment properties for investors.

However, Porter and Ricker posted a notice to the Right Place Web site in late February 2009, saying that not enough investors had accepted their management offer to keep the company financially viable. That meant investors would have to manage the properties on their own.

Their attorney, Marcolini, said Wednesday that his clients have done nothing wrong, and that the two lawsuits are unjustified attempts to hold Porter and Ricker responsible for losses created by the worst real-estate crash in decades.

While Porter and Ricker did not grant interviews for this story, Ricker did speak to The Arizona Republic on Nov. 23, 2008, a few days after notifying investors of the company's problems.

At that time, he responded to criticism about the company purchasing two apartment buildings just days earlier.

"It's true that through last week we were continuing to close escrows," he said. "It really didn't sink in until the weekend that continuing operations would put our ability to manage our existing properties in jeopardy."

Moving forward

Boise, Idaho-area resident Chuck Carlson is a Right Place investor who has helped reach out to others over the Internet. Over the past year, he and about 700 others have formed an alliance.

The Phoenix Investors Alliance represents investors who put in an estimated $225 million on 23 apartment buildings. Records show the total cost to buy the buildings was $140 million. The remaining $85 million was for the services that Right Place was supposed to provide, the group said. The alliance has been helping the investors manage their properties.

Carlson, 70, set up a temporary office in his dining room a year ago. Since then, the group has helped form a property-owners association for each property and has hired a professional management company to run day-to-day operations. A few investors have provided loans to fund critical maintenance, Carlson said, and many have volunteered time and shared whatever professional knowledge they possess that the group has needed.

By working together, he said, they just might come out OK in the long run.

"There's a lot of expertise here among these people," Carlson said. "How we could all be so duped, I don't know."

Pompender, the longtime renter at Kensington Gardens, said she also would be paying a price.

"It looks like this will be my last year living here."

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