Two hotshot developers in the coolest part of the city aren't so hot anymore...
Some 200 people squeezed under a tent at the future site of Ibiza, the $45 million Short North condo development. The crowd included neighborhood leaders, city officials and prospective buyers. Curious folks from Gallery Hop also filtered in to learn more about the coolest project in Columbus's coolest neighborhood.
The massive proposal-"an avatar of urban living," a marketing brochure proclaimed-included an 11-story tower, a parking garage (a first for the Short North), a rooftop pool and an unusual mix of units, from affordable one-bedroom flats to a $1.5 million penthouse. Since it was announced 17 months earlier, Ibiza had generated lots of excitement, and the launch party on this evening in April 2008 pumped the hype even more. Andrea Cambern, the Channel 10 anchor, served as emcee.
Then-Gov. Ted Strickland cut a ribbon to mark the start of construction and posed for photos with guests as they sipped cocktails and snacked on shrimp. "It was a community event," says Ken Baublitz, a Florida resident who attended the party.
Anyone who signed up for a unit was entered in a drawing to win a Smart car. Baublitz took home the prize, but he probably wasn't the big winner of the evening. That honor jointly went to Ray Brown and Rajesh Lahoti, the Ibiza co-developers and longtime business partners who cemented their place at the top of the Short North aristocracy with the launch of their most ambitious project yet.
In the late 1980s, Brown and Lahoti met at Worthington High School, where Lahoti was a student and Brown a young police officer assigned to the school. A few years later, they became friends after both came out as gay and launched their first business, Union Station Video Cafe, a groundbreaking nightspot in the Short North. They soon added to their portfolio two more popular Short North gay bars-Havana and Axis-and picked up a couple of business partners, Michael Council, a well-connected antique quilt dealer, and Wilbur Ischie, an attorney from the Cleveland area.
With Council and Ischie providing them with more capital, Lahoti, the idea man, and Brown, the nuts-and-bolts manager, expanded the Union Station concept to Cincinnati and Cleveland. They also made their mark in real estate with the Dakota, a $10 million project built in 2007 that revealed the Short North's untapped market for new upscale condos. (The 44 units sold out in 18 months.) The pair, along with Ischie and Council, lived in luxury brownstones across from Goodale Park they developed themselves and reinvigorated their original bar, now called Union Cafe, by moving it to fancier digs a few blocks north on High Street. By 2008, they were the kings of the Short North, and Ibiza, the biggest residential project ever proposed for the neighborhood, would be their jewel in the crown. "It seemed very real; it seemed very legit," says Maria Unterbrink, who put down $7,500 to reserve a $150,000 space.
Unterbrink attended the launch party with her parents, who own a farm in northwest Ohio. "I have a feeling they were excited to see their baby kind of make it in the big city," says Unterbrink, a creative project manager at Paul Werth Associates. With its amenities and location, her condo at Ibiza was to be her dream home. "I was really excited to own my first place and to live in the fun part of town," she says.
She enjoyed herself at the party, but the developers did throw a curveball at her that night: They changed the move-in date from the summer of 2009 to the fall of that year. "My ears perked up because I had been given different information," she says.
It wouldn't be the last time they surprised her.
Today, the party is over for Ibiza. Nearly four years since Strickland cut the ribbon, the site is still vacant...
Keep reading this article in the digital edition.Gone is the Ibiza sign, which turned into a community mural as financial woes and litigation mired the project. A for-lease sign also hangs in the window of the former offices of Arms Properties, the developer of the proposal, a block north on High Street.
Lawyers now are picking over the corpse of Ibiza. Facing a slew of lawsuits filed by depositors, Apex Realty Enterprises (a company the developers formed to build Ibiza) filed for chapter 11 bankruptcy protection in April 2011. Judge John Hoffman Jr. is expected to approve the sale of the company's only significant asset (Ibiza's proposed site at Hubbard Avenue and North High Street) this spring to a new entity, E.W. High Street, a joint venture between Elford Development and Wagenbrenner Development.
If the $4.7 million sale is approved, depositors-55 are listed in bankruptcy filings-will receive a guaranteed $2,600 apiece, no matter how much money they contributed. And they would divide what's left after those holding secured claims (lender Finance Fund and the Franklin County treasurer, who's owed back taxes) get their shares. Meanwhile, buyers continue to pursue fraud claims in Franklin County Common Pleas Court. A lawsuit involving 14 depositors is scheduled to
go to trial before Judge Richard Frye on May 21.
Ibiza was a victim of the Great Recession. Aside from location, real estate is all about timing, and Ibiza's was awful. The project took flight just as banks tightened their lending practices and property values plummeted. "It went from you couldn't do anything wrong by developing condos to you couldn't do anything right," says Jeff Coopersmith, managing partner for Core Properties, a Columbus development company that rejected partnering with the Ibiza developers to turn the project into apartments in 2011.
Bad luck, however, isn't the only explanation. Apex collected nearly $1.2 million in downpayments for condos that were never built, and all the money is gone. In their lawsuits, depositors accuse Apex of all kinds of wrongdoing: hiding the company's financing problems, pumping up sales figures with straw buyers and using deposit money for personal expenses and unrelated businesses, among other things. (The developers denied the claims in court records.)
What's more, the Apex principals-Brown, Lahoti, Council and Ischie-are the target of an Ohio Division of Securities probe. State investigators have alleged the group misled eight investors who chipped in nearly $1.9 million in 2007, failing to register the sale of the investment units (about $250,000 each) with the state and funneling investment funds into their own pockets. (Brown, Lahoti and the other principals declined to be interviewed for this story.) In the most striking allegation, the state accuses the Apex principals of lying to investors about the sale of some $68.7 million worth of condos in 2006 (none actually had been sold).
The collapse of Ibiza has been devastating for the developers, their once-sterling reputations sullied as embarrassing details have emerged. When the project began to disintegrate in January 2010, Council wrote an e-mail to Brown about how they should respond to a depositor's inquiry. "Yes! We need a standard reply," Council said in the e-mail, which was included as an exhibit in a civil lawsuit. "We need to talk to Tom Allen [an attorney] or someone as now we are going to start lying." (Council claimed in a deposition he wanted to avoid lying, not make misleading statements.)
The bankruptcy case involves just Apex-the company behind Ibiza-but financial woes have spilled over into sister businesses. Entities tied to the nightlife arm (Union Cafe, Havana, Axis and Union & Bounce, a Cleveland bar and dance club) are in default on about $1.3 million in loans owed to JPMorgan Chase, according to Franklin County Common Pleas court documents. Several smaller properties owned by the developers were listed for sale in early April on the website of the commercial real estate broker Capitol Equities, while the developers recently sold a valuable piece of property near Axis. Mark Wood of the Wood Companies confirmed he and another developer, Mike Schiff, bought the 1.1 acre parking lot. (Wood declined to reveal how much he paid for the land.)
In the coming months, Ohio securities commissioner Andrea Seidt is to rule on whether the Apex principals violated any laws. Tim Miller, who's representing the Apex principals in the Ohio securities case, acknowledges his clients failed to file the proper paperwork with the state. But he denies the other allegations. He says they had every right to withdraw funds according to the offering memorandum that investors were given and pumped in "hundreds of thousands of dollars" into the project as it struggled to get going. He also says the Ibiza developers didn't mislead investors about condo sales. An appendix to the offering memorandum forecasts future sales, he says, rather than listing current ones, as the state alleges. "I don't know why this is being pursued," Miller says.
The state won't slap the Apex principals with a fine or force them to repay investors (a hearing was to occur in late April), but they still would face tough circumstances if they get stung in their administrative case. With a black mark from the state on their records, they not only would lose the ability to seek public investors for future deals, but the Apex principals also might struggle to get financing for any of their businesses, Miller says. "These allegations are against them personally," he says.
Tim O'Neill and Mark McGuire, steadfast champions of Ibiza since putting down a deposit, began to wonder if the project was in trouble around February 2009. Construction seemed stalled. Since the developers bought the property for $4.7 million in March 2007, they'd accomplished a few minor tasks-demolishing an old building, relocating underground utilities-but progress had stopped at the end of 2008. "We hear a little negative gossip regarding Ibiza every now and then and would LOVE to hear something positive," McGuire wrote in an e-mail to Ibiza sales representative Kim Mills. "Write back with some good news! Any good news. Tell us you bought new shoes, even."
In response to McGuire's e-mail, Mills was hopeful. "As far as news, I don't have anything major to report, but we are aiming to be digging in March," she wrote. Five months later, however, Mills revealed to the couple and other depositors the big factor slowing down the project: financing had fallen through. The project's main lender, Huntington Bank, had pulled funding in December 2008, said Brown in a deposition. "Obviously, what happened caught the entire nation off guard," Mills wrote in the July 2009 e-mail. "We continue to stand by our project and know we will move forward on constructing the best building in the Short North."
McGuire and O'Neill were getting skeptical, but they figured they could ride out the process. If the project fell through, they'd just get back their $16,500 deposit and start over. In January 2010, the developers announced in an e-mail that they were turning Ibiza into apartments, a switch they believed would make it easier to obtain financing. After Huntington dropped out, the Apex principals approached several banks, union pension funds and private equity firms. Nothing panned out, even as the private equity sources charged them significant fees just to consider the project. "We went down a lot of avenues with a lot of different various lenders and ended up in dead ends for no reason after spending tens of thousands of dollars," Brown said in the deposition. However, many lenders said they would be more likely to back the development if it was converted to apartments.
Apex said they'd work with buyers to refund their deposits (54 percent of the project had been pre-sold, according to an advertisement that ran in the April 2009 issue of Columbus Monthly). And in an odd request, the developers asked buyers to let them know how much they had deposited. "We signed a contract; we have a copy of it," O'Neill says. "You would think they had a copy of that, yes?"
The next month, O'Neill and his partner met with Council and Brown. During the meeting, the two Apex principals dropped a bombshell: All the deposit money was gone. They said it was used during "construction," which, according to sales agreements signed by depositors and included in court filings, was acceptable. O'Neill was furious. "I want you to acknowledge that you've wronged us and take a little responsibility," he told Council and Brown.
"Go ahead and sue us," Council said, according to O'Neill and McGuire. "We don't have any money."
Five months later, the couple took Council up on that offer. Apex tried to salvage the project by partnering with Columbus developer Core Properties in 2010. In June of that year, Apex's attorney, Scot Dewhirst, wrote a letter to depositors about the potential deal: Buyers needed to sign an agreement dropping any legal claims against Apex to ensure the project would move forward. "Unfortunately, if the depositors do not sign the releases or if there are pending lawsuits, the new joint venture agreement and all investments to date will be in jeopardy," Dewhirst wrote. Instead of signing the agreement, McGuire and O'Neill, feeling strong-armed, called an attorney, Brian Laliberte, who filed a lawsuit on their behalf a few weeks later.
Core dropped out of the project in March 2011, while Apex filed for bankruptcy the next month. "The way the economics developed and all the entanglements, it became clear that we should just back away and just focus on other things," Coopersmith says.
Baublitz, the Florida depositor who won the car at the launch party, blames the buyers who refused to sign the agreement for the collapse of the deal. "There are several people who are more angry than smart," he says. A real estate agent and developer in Fort Lauderdale, Baublitz says the Ibiza folks behaved more honorably than many other developers did during the Great Recession. Most developers in Florida who saw their projects go belly up sought protection in bankruptcy court right away, Baublitz says, while the Ibiza principals tried to work out a deal to get everyone's deposits back first. "Although I know it's been a very long, hard road, I still believe the principals at Ibiza have tried incredibly hard to get deposits refunded back to the people who have put them down," Baublitz says.
Miller, the Apex attorney, says his clients have been treated unfairly. "These guys have been so good to the Short North," he says. "They have developed so much property and done a nice job of building this community over here and helping the city out, and now they are getting blasted for this."
Audacity, in many ways, has been the key ingredient in the success of Brown and Lahoti. Their first business, Union Station, was a gay bar unlike any other in Columbus when it opened in 1996. It wasn't dark, dingy and in an off-the-beaten-path neighborhood. It was out in the open. It had a sign. It even had windows. "With the advent of Union Station, there was no hiding," Council told Columbus Monthly in 2006.
And they weren't afraid to step on toes, especially Lahoti, the brains of the operation. When they launched their nightclub Axis in 1999, they caused friction in the gay community when they tried to recruit employees from the Garage, the iconic downtown dance club that closed about a year later facing competition from Axis. And they sued two former employees when they opened a competing bar, Level Dining Lounge, in 2009, alleging the ex-staffers stole trade secrets and confidential documents to launch the venture. "Rajesh has a reputation as a real hard ass," says Mark Sroufe, an investor in Ibiza who believes the Apex principals treated him fairly. "He's young. He tends to shoot first and ask questions later, and he makes snap decisions. And he has pissed a lot of people off in a lot of different areas. I think there is a lot of schadenfreude going on here."
They took chances with Ibiza, too. The key issue in the upcoming civil trial is what constitutes "construction costs." The case will test what exactly legislators meant when they expanded in 2004 the state's condominium law to allow for developers to use deposit money on such expenses. Cleveland lawyer David Kaman, an Ohio condo law expert who consulted with state officials on the changes, says Ibiza represents the first time the question has gone to the courts since the state approved the amended law. Kaman, who's not involved in the Ibiza case, argues that the law sets a strict definition: Developers can use deposit money strictly for "physical construction directly tied to the purchaser's unit." Ibiza developers took a much broader view, however, contending that architecture, engineering and other pre-construction costs are allowed as well.
O'Neill, the Ibiza depositor, says the developers infuriate him with what he perceives as their arrogance. "When somebody walks around and acts like, 'I can do anything I want. I'm entitled. I'm important. I built this neighborhood. Bow down and worship me,' I have a real problem with that," he says. "I don't want to discredit the things these guys have done in the past to support the community and build the neighborhood up. That is awesome. I love that. But that doesn't give you the right to step on people and play with their money and then say, 'Oops. Sorry. Good luck.' "
Indeed, Lahoti didn't back down during a tense deposition in January with O'Neill's attorney, Laliberte. Lahoti stepped back a bit from Ibiza during the past couple of years as he founded an Internet venture called FindFred, a dating website for gay men. But he stayed on top of financial matters, according to internal e-mails filed in connection to various lawsuits, pushing his partners to get as good a deal as possible during their unsuccessful negotiations with Core Properties. "We need to be reimbursed for expenses and make some money," he wrote in a Nov. 23, 2010, e-mail to his partners. Council said in his deposition that Lahoti was the top guy. "He made himself or put himself in a position to always, you know, like, be the final word."
Lahoti challenged Laliberte as the lawyer grilled him on these matters. "Mr. Lahoti, don't fence with me," Laliberte said. "I'll ask my questions, and you'll answer them on the record." Laliberte became so frustrated with Lahoti at one point he threw a three-ring binder to the floor, says McGuire, who was at the deposition. Lahoti even started to record the session with his iPhone, further infuriating Laliberte.
Laliberte hammered Lahoti about where the cash went. Under questioning, Lahoti acknowledged the deposit money was gone, and he and his partners spent it. But they couldn't agree on much else, even on what constitutes a structure.
"And there's no building," Laliberte said.
"There's no vertical building, no," Lahoti countered.