Real Estate Alert
Limited Partners Seek to Salvage Ailing Funds Workout firms are unwinding two value-added funds after they nearly collapsed and sponsor Laurus Corp. relinquished control. Garrison Investment and Miramar Capital were hired by the funds’ backers to salvage as much of their roughly $150 million aggregate investment as possible by stabilizing and selling the remaining holdings: a half-dozen hotels and five office properties. The plan is to roll out individual listings over the next 12 months. One property — an office/retail complex in Scottsdale, Ariz. — already is on the market.
The recovery operation was launched last year after investors discovered that Laurus’ “funds and projects were collapsing” and that the Los Angeles investment manager was “unable to pay employees, make rent or run their real estate projects,” according to a lawsuit filed in Los Angeles Superior Court. It’s an unusual story to emerge amid a long-running bull market for real estate that has seen property values and revenues steadily climb. Sources familiar with Laurus said it had overpaid for properties, taken on too much leverage and struggled to execute its ambitious value-added strategy.
Laurus was founded in 1999 by Jean Paul Szita and Andres Szita, brothers who previously worked at Tassio Italy, a clothing company founded by their grandfather. Laurus entered the commingled-fund universe in 2012 via an affiliate called Ethika Investments. The affiliate raised $131 million of equity for a high-yield vehicle, called Ethika Diversified Opportunity Real Estate Fund, that would buy and upgrade underperforming office, hotel and multi-family properties. The vehicle was backed by wealthy individuals and family offices, such as the El-Mann family, which founded Mexico’s largest real estate investment trust, according to people familiar with the matter. Laurus later sought to raise $250 million of equity for a follow-up fund, but evidently lined up only $18.7 million, according to Real Estate Alert’s Deal Database.
Ethika reported some $530 million of assets under management in an SEC filing at yearend 2017. But by last May, investors had discovered that Laurus was strapped for cash, and, with the firm’s cooperation, appointed a chief restructuring officer to review its finances and assets. That officer was a consultant from Province, a financial advisory firm in Henderson, Nev., whose specialties include forensic accounting and dispute resolution.
According to the lawsuit, filed in October by one investor, the consultant found that “many of Laurus’ real estate projects were in disrepair, threatening their immediate operability, with insufficient capital to finance necessary maintenance. Other properties were already or soon to be in foreclosing proceedings.” The consultant concluded some $35 million would be needed to prevent the projects from “collapsing immediately,” according to the suit.
Although the lawsuit alleged fraud, multiple sources said the review by Province didn’t find evidence of theft, but rather examples of poor management. In their response to the suit, the Szita brothers denied “generally and specifically each and every allegation contained in the complaint.” Negotiations to settle the case are ongoing. Requests for comment from lawyers on both sides weren’t answered.
The Szita brothers cooperated with the review and shortly afterward, at the behest of investors, agreed to relinquish control of the firm and the management of the funds. Investors formed a committee and, in September, appointed Garrison and Miramar to step in. They were retained to provide better management and more transparency while recovering value, said sources familiar with the handoff. Investors wanted an orderly process of dispositions, rather than a “fire sale.” One or both of those firms also provided some “rescue” capital to stabilize the portfolio.
New York-based Garrison was formed in 2007 by former Fortress Investment executives Steve Stuart and Joseph Tansey. The firm operates hedge funds and real estate vehicles, and has expertise with distressed-debt situations. Miramar, of Santa Monica, Calif., was founded in 2017 by Paul Fuhrman and Jae Yi, former senior acquisition staffers at Colony Capital of Los Angeles, and Perry Hariri, who previously led his own shop.
By the time Garrison and Miramar were hired, Laurus was losing control of at least two properties — including what had been its biggest investment, the 248,000-square-foot Promenade at Howard Hughes retail/entertainment property in Los Angeles. Laurus had acquired it in 2015 for $111 million and planned a $30 million renovation. A Torchlight Investors fund, which held a preferred equity stake in the property, sued last year to take over the project, contending that Laurus had failed to pay construction bills and put the project at risk of defaulting on a $91 million mortgage. It’s unclear if Laurus still has an interest in the property.
In September, the 296-room Marriott San Antonio Northwest, which Laurus purchased for an unknown amount in June 2014, was taken in foreclosure by lender LaSalle Mortgage Real Estate Investors of Beverly Hills. Laurus had spent some $16 million on renovations before defaulting on a $21.3 million loan, according to published reports.
Meanwhile, three of the fund’s hotels were well along in the sales process. In October, the 478-room Warner Center Marriott in Woodland Hills, Calif., was purchased by Southwest Value Partners of San Diego for $122 million. Laurus had acquired the hotel in 2014 for $89.8 million, and spent another $10 million on renovations. JLL brokered the sale. In December, a Laurus joint venture sold the 347-room Hilton Kansas City Airport to LCP Group of White Plains, N.Y., and Blue Vista Capital of Chicago for $39.6 million, also via JLL. It’s unclear how much Laurus and its partner, Lowe Enterprises of Los Angeles acting on behalf of Ohio Public Employees, had paid for that property.
In January, U.K.-based London & Regional paid $48.7 million for the 281-room Pullman Miami Airport hotel in Florida in a deal brokered by HFF. Laurus had acquired the hotel, then branded a Sofitel, in 2012 for $22 million. It spent considerable time and capital renovating the property and switching to the Pullman flag, operated by AccorHotels of Paris. The project had run into trouble when the South Florida hotel market struggled in 2016-2017 amid a wave of construction and concerns about the Zika virus that dampened tourism. Pros familiar with the property said Laurus didn’t lose money on the sale, but also didn’t reach its intended return. “It wasn’t a great deal,” a source said. “I just don’t think they . . . executed business plans as they originally planned.” To what extent Laurus’ backers will recover their investments remains unclear. But favorable market conditions should help Garrison and Miramar in their efforts.
The Arizona property currently up for sale is the 94,000-sf Canyon Village, a high-end office and retail complex with parking. It’s part of DC Ranch, a mixed-use development in Scottsdale. Laurus paid $19 million for the property in 2015. Cushman & Wakefield has the listing. The estimated value couldn’t be learned. Remaining holdings include the 285-room Hotel Talisa in Vail, Colo. Laurus bought it for $89.5 million in 2015, when it operated as the luxury Vail Cascade Resort & Spa. Laurus then spent $60 million upgrading and renovating the property. There’s also the 460-room DoubleTree by Hilton Hotel Pittsburgh-Green Tree, which Laurus acquired for $40.3 million in 2015 with plans to inject $7 million into renovations.