Palo Alto-based property manager Page Mill Properties committed securities fraud, misled its investors and engaged in an illegal and "morally offensive" plan to gentrify a portion of East Palo Alto, a group of Page Mill's investors is alleging in a lawsuit against the beleaguered real-estate company.
Page Mill, which until recently was the largest landlord in East Palo Alto, has been facing a storm of criticism since 2007 from East Palo Alto's tenants, tenant advocates and city officials, many of whom accused the company of engaging in a "predatory equity" scheme and of flouting the city's rent-control ordinance. But as court documents make clear, the company has also been fighting a legal war with its own investors, who committed to investing $30 million to a now-crumbling fund and are accusing Page Mill of withholding crucial information and misleading them about its East Palo Alto portfolio.
The conflict between Page Mill and 19 of its investors -- including more than a dozen experienced real-estate developers -- reached a boiling point last October, a month after the company lost its East Palo Alto holdings to foreclosure. On Oct. 12, frustrated investors voted to oust Page Mill CEO David Taran from his position as the manager of the Page Mill Properties Access Fund, a real estate fund that Taran set up to finance the East Palo Alto portfolio.
In the Oct. 12 "written consent," the investors wrote that they have "lost all faith in Access Fund Manager's ability to manage the Company, and legitimately fear that Access Fund Manager, if allowed to continue as managing member and manager of the company, will continue to pursue its own improper self-interests, thus causing both the company and its members further and irreparable harm." The investors also voted to appoint Alpine Road Management, LLC, as the fund's new manager.
Two days later, Page Mill officials advised the investors that they considered the request for a management change "void." The two sides are now looking for an arbitrator to help them settle the dispute, said attorney Steven Morger, who is representing the investors.
According to Morger's complaint, Page Mill began soliciting the investors' participation in May 2007, when it provided them with a "private placement memorandum" explaining the company's investment strategy. The document, according to the complaint, was "based on a slickly crafted pitch that combined (Bernard) Madoff-like airs of exclusivity with projections of 'consistent and superior risk adjusted returns.'"
The 68-page document describes the East Palo Alto portfolio as an area "poised for growth and gentrification." The plan calls for engaging East Palo Alto in a public-private partnership, developing condominiums, fixing up the infrastructure and "further developing community-oriented retail and service business."
But as the complaint states, Page Mill also failed to mention a few key tidbits about its East Palo Alto portfolio. For one thing, the portfolio was losing about $1.5 million a month at the time Page Mill approached the investors and was a "literal black hole of operating losses." The company also didn't disclose to its investors that its new East Palo Alto holdings are subject to the city's rent-control ordinance -- a detail that severely complicated Page Mill's plans to raise rents and achieve an internal rate of return of 20 percent.
The company's plan for a private-public partnership with East Palo Alto also didn't go as planned. Instead, Page Mill became entangled in about a dozen lawsuits with the city, many of them centering on the rent-control ordinance. The company successfully challenged the city's attempt to revise the ordinance last year, forcing the city to delay the vote until this June. Page Mill also petitioned San Mateo County to remove the Woodlawn Park neighborhood from East Palo Alto's jurisdiction.
One investor, Paul Magliocco, wrote in a declaration that Page Mill materially misrepresented and fraudulently concealed material fact, "falsely portraying the Fund as an ongoing success with bright future prospects." Magliocco, who has been affiliated with the angel investor network Keiretsu Forum, wrote that he would never have invested in the fund had he known about the "scheme to evade rent control laws."
"From a purely economic perspective, it rendered the investment far too risky," Magliocco wrote in the Dec. 7 declaration. "At least as importantly, I find the scheme morally offensive.
"This investment was sold to me and my fellow investor members as socially conscious and community beneficial. That was a cynical lie.
"Page Mill's scheme was exploitative and damaging to the East Palo Alto community fabric, forcing many residents out of their homes with huge (probably illegal) rent increases. Had I known the truth, I would have wanted absolutely no part in it."
The investors are also claiming that Page Mill had failed to inform them of the $50 million loan payment the company was scheduled to make to Wachovia by Aug. 1, 2009. Page Mill failed to repay the loan and, as a result, lost control of its 1,812 units to a court-appointed receiver in September.
The company's default apparently surprised the investors, who were repeatedly assured that everything was going according to the plan. In November 2008, Taran had made a presentation at an investors' meeting at the HP Pavilion in San Jose in which he was reportedly "upbeat about the (East Palo Alto) portfolio's performance and prospects." At that meeting, Taran projected a $1.5 million operating profit "six months forward," according to the complaint.
By the third quarter of 2009, it became clear to everyone that the fund was doomed. The missed loan payment and the subsequent foreclosure wiped out Page Mill's then-$12 million fund and angered the investors. On Aug. 13, more than a week after Page Mill defaulted on the loan, the investors were "first warned that there might be a problem," the complaint states. Less than a month later, the San Mateo County Superior Court appointed a receiver, Wald Realty Advisors, to oversee the properties.
Beside Magliocco, the list of plaintiffs also includes 14 Crow Canyon Corporation, Dennis A. Chantland, Diablo Capital Venture Fund, Randy Haykin, John Quandt, John Adams, Shane Albers, Colin Wiel Investments, Dina Partners, Kevin Grauman, John Hammergren, James Levine, Neal Mitchell, David Pottruck, William Powar, John Staples, Kenneth Stevens and Vertical Venture Capital.
While the investors have attributed the fund's collapse to Page Mill's fraudulent conduct, Page Mill has characterized their complaints as an attempt to skirt a contractual obligation. Under the agreed-upon terms, City National Bank fronted all the money for the fund with the understanding that it could later call on the investors to repay it.
Early last October, when it was clear that the investment was tanking, the bank asked the investors for $14.8 million in repayments. The investors declined to pay and are now suing the bank, claiming that it was complicit in luring them into Page Mill's scheme.
Page Mill's attorney, Christine Morgan, characterized the plaintiffs as a "self-described group of elite, sophisticated, well-educated and wealthy professionals" who should've known what they were getting into.
Albers, for example, serves as chairman and CEO of Investment Mortgage Holdings, a company that manages more than $700 million in real estate investments, Morgan wrote. Vertical Venture, meanwhile, reportedly has more than 15 years of experience as a real-estate developer and investors.
Their latest challenge to Page Mill is basically about the plaintiff's "attempt to avoid honoring their obligation to pay for a group of investments that might fail," Morgan wrote. Page Mill initiated arbitration proceedings against three of the plaintiffs.
The three plaintiffs, Albers, Grauman and Vertical Venture, were ordered by the courts to pay a total of $2.8 million, Morgan wrote.
Taran also disputed the investors' argument that the company misled them into making a risky investment and failed to disclose its financial obligations. The $50 million loan from Wachovia was used to refinance a much larger loan from Greenwich Capital Financial Products, Taran wrote -- a loan of which the investors knew, or should have known. Without the Wachovia loan, the Greenwich loan would have matured in December 2009 and would have required the company to pay Greenwich about $125 million, he said.
The agreed-upon strategy was "to leverage a leveraged investment," Morgan wrote.
"However, as do all leveraged real-estate investments, Access Fund had risks, and Plaintiffs were thoroughly advised of them," Morgan wrote. "It should come as no surprise to this sophisticated group, particularly given the real-estate market meltdown and credit crisis, that the Fund could, and did, lose money."