1.4Msf real estate portfolio in Marin, Sonoma counties Ponzi scheme sold for $436M

Two San Francisco real estate investors just completed the purchase of the largest portfolio of North Bay commercial real estate in 16 years, moving the unwinding of a Novato-based investment company’s Ponzi scheme into a new chapter.

Hamilton Zanze Real Estate Investments and affiliated firm Graham Street Realty together with New York-based Davidson Kempner Capital Management on Wednesday closed escrow on 60 of upward of 70 properties (PDF property list) that were the backbone of the late Ken Casey’s companies Professional Financial Investors and Professional Investors Security Fund.

The deal price for the more than 1.4 million square feet of commercial and multifamily space in Marin and Sonoma counties was $436.5 million. That includes 935 residential units and about 680,000 square feet of commercial space.

The transaction netted roughly $140 million to the bankruptcy estate, after many of the banks that had senior equity positions on the properties had been paid in full, said Ori Katz, one of the attorneys representing the debtors, in a bankruptcy court virtual hearing Thursday morning.

‘Big, nasty, complicated transaction’

It’s out of the trust account for the estates of the Casey companies that repayment claims to investors who lost money in the fraud would be paid. A handful of sales of real estate not in the portfolio are pending, with escrow closure dates anticipated in January and February, Katz told Judge Hannah Blumenstiel.

“That was a big, nasty, complicated transaction that presented a lot of unique problems,” Katz said about the portfolio deal.

Among the complications were negotiations with lenders for reductions in prepayment penalties, also called premiums, for the financing the companies secured for the properties and for waivers of 4% default interest over a year and a half of the case, attorneys involved told the judge. Those two actions are expected to have added $4.08 million to the proceeds going to the estate.

Also, members of the Official Committee of Unsecured Creditors and other investors worked to get all 1,000-plus junior liens on the properties, including liens held by noninvestors in Casey’s companies, to consent to letting the real estate transactions go through.

Of the 1,500 investment accounts involved and about 1,300 individual investors, 330 were contacted to negotiate roughly $37 million estimated to be subject to a “clawback,” creditors attorney John Fiero of Pachulski Stang Ziehl & Jones told the judge.

Common in bankruptcy proceedings with Ponzi organizations, the trustee’s goal in such an action is to limit claims by “net winners,” or investors who got out in interest and other disbursements more than they put in.

About 120 of the investors contacted about clawback accepted adjusted claims that lowered their payout by $8.7 million, netting $4.2 million for the estate, Fiero said. Clawback liabilities for 20 investors totaling $2 million were written off because of deaths or hardships for next of kin, he said.

$50 million in capital improvements planned

As the Business Journal reported, Hamilton Zanze emerged as the lead bidder on the portfolio in August, and the deal was approved by a bankruptcy court judge in San Francisco in September.

Casey’s companies had been forced into Chapter 11 reorganization in mid-2020 after private and Securities & Exchange Commission audits following his death that May detected the skimming of $330 million dollars from about 1,300 investors.

“We look forward to investing over $50 million of capital into these properties, which are located in our own communities,” said Ashlee Cabeal, chief financial officer of Hamilton Zanze, in the Thursday announcement of the completion of the purchase. Many of its employees and executives live in Marin County.

Over half those planned capital investments in the properties will be targeted to the apartment properties, including miscellaneous site and building improvements, select unit upgrades, water-efficiency and energy-savings projects and property technology enhancements throughout, according to Kurt Houtkooper, president and chief investment officer.

Six of the 20 commercial buildings will receive the bulk of those renovations “to improve their fit for today’s commercial tenants,” Houtkooper said.

The portfolio buyers picked Mission Rock Residential to manage the multifamily assets and Paramount Property Company to oversee the commercial office buildings.

The multifamily properties had an occupancy rate of 89.6% as of Wednesday, while the commercial properties had an occupancy rate of roughly 70% at that time, according to Houtkooper.

Other real estate to the sold

A handful of other real estate properties weren’t included in the portfolio sale:

  • 1732 Lincoln Ave., San Rafael, a 19-unit apartment building.
  • 300 Entrada Drive, Novato, a nearly 13,000-square-foot commercial building.
  • The American Building, 1099 D St., San Rafael, a nearly 27,000-square-foot office building.
  • 4th Street Business Center, 930 Irwin St., San Rafael, a 12,100-square-foot office building.

The first one sold was 1732 Lincoln. On June 7, Over the Fence LLC, a San Rafael-based investor overseen by Patrick McNeill, for $5.175 million, netting the estate $596,249 after other lienholders were paid, according to court and state records.

The other three properties are expected to be sold in January and February resulting in millions of more dollars in sale proceeds for the estate, Katz told the judge.

San Rafael-based Yireh Estates LLC in late November was approved in court to buy 300 Entrada for $2.3 million, netting the estate $400,000, according to court documents.

The real estate venture is owned by Jennifer Sharpe, co-CEO with Matthew Sharpe of Dry Kings, a Bay Area disaster and tragedy restoration contractor, per public records. The court filing said the property is intended to be used as a Dry Kings location, and city records show that the Novato zoning administrator approved the use in August.

The 300 Entrada sale is set to close escrow Jan. 7, 2022, according to Katz.

The American Building is in escrow with an undisclosed buyer, and that deal is set for an early January court hearing, he said.

The 4th Street Business Center property is undergoing due diligence, which is expected to be concluded by mid-January, with a target closing of the deal in February, Katz told the court.

Jeff Quackenbush covers wine, construction and real estate. Before the Business Journal, he wrote for Bay City News Service in San Francisco. He has a degree from Walla Walla University. Reach him at [email protected] or 707-521-4256.