08/11/09 11:54am

High-stakes real estate swindler Edward H. Okun was sentenced last week in a Virginia courtroom to 100 years in prison for absconding with about $126 million in funds entrusted to his qualified intermediary company by 1031 exchange investors. Meanwhile, back on the corner of Westheimer and Highway 6, one of his former properties went up for sale.

Okun’s Investment Properties of America bought the West Oaks Mall for $110 million in 2005. The sellers of the bankrupt property might expect to get $20 million for the million-sq.-ft. mall today, reports Globe St.‘s Amy Wolff Sorter:

The mall’s anchors include Dillard’s and Macy’s, which own their own space, and Sears, which is on a lease. [Holliday Fenoglio Fowler’s Robert] Williamson says the Sears lease is up in 2010, but negotiations are underway to keep the retailer in place.

When Okun bought the mall from Somera Capital and CoastWood Capital a little less than four years ago, the asset was 95% leased, and sported $10 million worth of exterior and interior improvements. IPA had even larger plans for even more renovations on the 33-acre site, Williamson says.

Less than a year later, the owner was able to secure $86 million of permanent financing for the mall. Yet by late 2007, IPA had filed for bankruptcy protection to stave off foreclosure. Okun’s troubles and a failing economy dropped the mall’s occupancy to a little less than 70%.

How’s the mall looking these days?


03/20/09 4:40pm

COMMENT OF THE DAY: FORMER WEST OAKS MALL OWNER TO RETIRE IN NEW HOME [Edward H. Okun] has been in jail since he was arrested by the Feds March 17, 2008. This week he was convicted in a Richmond, Va. Federal Court of 23 counts of conspiracy to commit wire fraud, money laundering, bulk cash smuggling and perjury the maximum sentence for which is 400 years so ‘Fast Eddie’ will die in a federal prison. All those charges related to his having ‘borrowed’ $126 million in 1031 exchange funds he was holding in escrow for 350 clients across the country. His cohorts and co-conspirators had previously pleaded guilty 10 years (Lara Coleman) and 5 years (David Field and Richard Simring) — all former employees (CCO, CFO and Counsel to) IPofA, Okun’s supposed real estate investment company. His defense tried to describe him as a business man with a plan that failed. West Oaks Mall would be just one example of Okun’s brilliant investment acumen. More indictments likely to follow.” [E. H. Callanan, commenting on JCPenney at West Oaks Mall: To the Bank]

02/02/09 12:17pm

Buyers didn’t show up for the latest sale at the old JCPenney building next to West Oaks Mall. So Wachovia Bank will foreclose on the property soon, the CoStar Group reports.

The bankruptcy trustee for the collapsed financial empire of Edward H. Okun had listed the vacant building, which Okun’s 1031 Tax Group had bought for $4 million. But no buyers were willing to pay even the amount of the financing, which was $3 million.

The Houston JCPenney building and a mall in Salina, Kansas — also now facing foreclosure — are Okun’s last remaining properties.

10/09/08 2:36pm

DELINQUENT DEBT: WEST OAKS MALL SALE! Here’s another chance to clean up some of the wreckage left by mysterious investor Edward Okun: “West Oaks Mall in Houston . . . has $81.3 million in delinquent debt attached to it in the form of commercial mortgage-backed securities. Joseph Luzinski, the federally appointed bankruptcy trustee for West Oaks Mall, said he hopes to sell the mall by year’s end, though store closures continue to hamper its value. [The mall] . . . is about 80% occupied, having lost a J.C. Penney, Linens ‘n Things and Whitehall Jewelers. The mall recently cut a deal to keep its Steve & Barry’s LLC store open amid that retailer’s bankruptcy. The special servicer for the mall’s debt, LNR Partners Inc., attempted to foreclose in September 2007, but Mr. Okun forestalled the move by putting the mall into Chapter 11 bankruptcy protection the next month. A federal grand jury indicted Mr. Okun on fraud charges last March after his 1031 Tax Group LLP, a company that helped facilitate tax-free real-estate deals for small investors, collapsed into bankruptcy and didn’t return $132 million of investors’ money.” [Wall St. Journal; previously]

04/17/08 10:08pm

An update on the 1031-exchange debacle surrounding the West Oaks Mall: In March, the mysterious Edward Okun — the mall’s owner — was indicted by a Virginia grand jury on charges of mail fraud, for misappropriating $132 million invested in his 1031 exchange company, 1031 Tax Group — along with bulk cash smuggling and related charges. Days later, Okun was arrested in his home on Hibiscus Island in Miami Beach.

To the 340 investors who had trusted $150 million of their 1031-exchange funds to supposedly-qualified intermediaries controlled by Okun, this was good news. But it doesn’t necessarily mean they’ll get their money back — or find a way around the huge tax liability now associated with their failed exchanges.

The 1031-exchange investors in Okun’s 1031 Tax Group had hoped to recoup some of their missing funds by raiding Okun’s other assets — including the West Oaks Mall. But the Okun-controlled companies that owned the mall declared Chapter 11 bankruptcy in October.

Today, the Costar Group reports that the freestanding building formerly known as JCPenney at the West Oaks Mall has been put up for sale, along with a mall in Salina, Kansas. The trustee in the bankruptcy case has hired Keen Realty, the new real estate division of KPMG Corporate Finance, to market both properties.

10/16/07 8:03am

Food Court at the West Oaks Mall, Houston, Texas

So much excitement at the West Oaks Mall! Don’t worry, it likely won’t be foreclosed on—because the owners of the super-regional mall at Westheimer and Highway 6 have now declared bankruptcy. This is bad news for about 340 investors who were hoping to recoup 1031-exchange funds that went missing in the middle of their transactions. They’ll likely lose more than $150 million dollars . . . and possibly be required to pay taxes on the gains they made (and were hoping to shield with the 1031 exchange) . . . before they lost them.

Their money was to be held in escrow accounts for when they came back to conclude the back-end purchase of their tax-free exchange. When that time came, the money was gone.

Now, one of the largest of those assets that creditors had hoped could be used to recoup some of their money is untouchable.

IPofA West Oaks Mall LP, IPofA West Oaks LeaseCo LP and IPofA WOM Master LeaseCo LP (collectively, the “West Oaks Debtors”), filed voluntary petitions under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Eastern District of Virginia, Richmond Division, last week.

The West Oaks Debtors are directly and/or indirectly owned and/or controlled by Edward H. Okun, a controversial investor who also controls several 1031 qualified intermediaries under the umbrella firm of The 1031 Tax Group LLC that are also currently tied up in bankruptcy proceedings.

Shopping’s still good, though!

1031 exchange investors: watch where your money goes.

Photo: West Oaks Mall

09/28/07 8:41am

Parkview II, 333 Cypress Run, Houston

Everyone knows having money gives you a big advantage when you try to make money. But think about the advantage already owning real estate gives you when you’re trying to buy real estate.

Imagine a buyer bidding against a crowd of competitors on a pair of fully-leased West Houston office buildings—say, Parkview I and II:

“They’re not active buyers and they had a specific need with 1031 exchange money,” says Marty Hogan, associate director in Houston for Holliday Fenoglio Fowler LP. Texas is a non-disclosure state so he won’t discuss the sale price of the 333 Cypress Run properties, but local experts confirm that similar class B buildings are trading for $110 per sf to $120 per sf.

Hogan says the assets attracted 10 offers, with a partnership from Greenwich, CT ending up with the deal because it offered a short due diligence and certainty of close. “The buyers also had a large amount of equity and the purchase wasn’t contingent on financing.” Hogan tells GlobeSt.com. “Given the market at this time, they weren’t high-leveraged buyers looking to get 80% to 90% of the purchase price financed so that was appealing.”

Sure, a lot of cash in the transaction is going to be pretty attractive to a seller. But other aspects of 1031 exchange requirements—if the buyer knows that’s what you’re doing—give like-kind-exchange buyers a decided advantage in any market: The seller knows you’ve got time constraints to complete the deal. And that you’ll likely have to pay a lot of taxes if you can’t pull it off. You look like a sure thing.

Of course, if the seller knows that you have no other 1031-exchange options available and the terms of your deal aren’t fully worked out yet, that’s another story.

Photo: Parkview II

06/19/07 11:24am

The 1031 Exchange industry grew enormously during the recent nationwide real-estate boom, as unwitting owners of suddenly high-priced real estate discovered that selling their properties would trigger substantial capital-gains tax bills. Real-estate owners hoping to defer capital-gains taxes when they sell their investment properties have regularly turned to firms touting their services as qualified intermediaries to help them get the benefits of the tax-free 1031 exchange.

1031 Exchange accommodators can help investors navigate the somewhat tricky process more flexibly, but the industry is largely unregulated. And now two of them have gone bankrupt or been accused of absconding with funds investors have placed with them between transactions:

Mr. McGhan and his companies allegedly misappropriated more than $95 million of customers’ proceeds to fund other business and personal activities, according to a lawsuit brought earlier this year by several aggrieved investors and now in federal court in Los Angeles.

The lawsuit alleges that Southwest was a Ponzi scheme in which Mr. McGhan allegedly took QI funds belonging to more than 130 clients, in part to finance investments in a company that manufactures silicone-breast implants.

Well, there’s another growth industry. But, says the Wall Street Journal,

a QI can do virtually anything with the funds in its possession, subject to its agreement with the taxpayer. “There isn’t any kind of prohibition in the tax code that says where those dollars can be placed,” says John King, senior vice president at a subsidiary of Fidelity National Financial Inc. in Jacksonville, Fla. that serves as a qualified intermediary.

Misappropriated investments are one thing; presumably the double whammy for investors whose funds have gone missing is that their exchanges will likely fail too, and they’ll end up having to pay a tax bill on gains they no longer have.

Some advice, then:

you must make sure your 1031 intermediary places your money in a segregated account (and “segregated” means only your money is in that account). You should also insist on a method to check on the account yourself to see that your funds stay put.