Partners in the development team that renovated the Sexton building into condominiums have filed lawsuits against each other, making allegations that include fraud and misuse of construction funds.
Residents of the Sexton, located at 521 S. 7th St. in Elliot Park, are caught in the middle of the dispute. They bought parking spaces in a ramp they expected to see when they moved in last year, but now the ramp’s construction prospects seem shaky.
An attorney who represents investors in the Sexton said her clients have informed the bank holding the construction loan they will not further fund the project. It is possible the project may enter foreclosure proceedings, according to attorney Mary Cullen Yeager, and new owners would ultimately determine how to handle Phase II of the project.
Sexton Phase II was proposed to be a 252-unit condo project rising 34 stories. Nine levels of parking were going to be beautified by a local artist who designed parking screens that looked like window curtains.
But the money intended for construction of the ramp is spent, according to the litigation, and the development team is locked in a dispute over the project’s management.
Investors from South Dakota and Nebraska who obtained the Sexton’s construction loan have alleged that Brett Thielen, the chief manager of JJT Development and vice president of Sexton Lofts, has sold units in the building for hundreds of thousands of dollars more than the listing price and doled out exorbitantly high sales commissions.
In turn, Thielen has filed a complaint in U.S. District Court alleging that the construction loan was drained and spent on cost overruns without his consent.
When the Downtown Journal contacted the attorney for JJT Development, he said the litigation has already been settled.
“We’re just trying to tidy up the details,” said attorney Benjamin Houge. “It’s going to hopefully get the project squared away and make sure the tenants and everybody are protected and taken care of. … The plan is to go ahead with Phase II.”
However, Yeager said Houge’s clients offered a settlement proposal about six weeks ago, and she hasn’t heard from the group since that time.
The Sexton’s website is down, and Yeager said Thielen has agreed to temporarily stop closing on condos.
Residents of the Sexton said they love the location and the brick-walled units, but they want the building to be full and the parking issue to be resolved.
“It’s very frustrating,” said resident Brian Scates. “You haven’t seen a lot of developments fall apart after it’s up and running.”
“I paid $18,000 for a parking space that I don’t have,” said Kelly Guest, who works and lives in the building. “But so many of us who bought in here love the history of the building and the look of it. We’ll keep our fingers crossed.”
A condo conversion of the Sexton office building was first proposed by Swervo Development in the fall of 2004.
Swervo later turned the project over to the current developers.
The legal battle was initiated by Heather Enterprises II and Medved LP, according to Yeager. Together, the companies own 50 percent of the Sexton Lofts, and they filed a complaint in federal court on April 27 against Thielen and JJT Development — the firm that owns the other half of the Sexton project.
The following is a summary of allegations outlined in Heather’s complaint:
In the summer of 2006, Thielen sold units at the Sexton for higher than advertised prices and gave real estate agents hefty sales commissions.
For example, unit 305 was originally listed at $243,750 and was eventually sold for $391,275 with a sales commission of $135,291.
Concerned about the possibility of mortgage fraud, Heather wanted to approve all terms of each sale in advance. Although Thielen agreed, he continued to attempt to close sales with high commissions.
Thielen also rented out at least nine units, but the Sexton Lofts recorded only a single rental payment on one unit and no payments for the others.
In addition, Thielen executed purchase agreements for Phase II that guaranteed a doubled return on each investor’s $9,000 deposit. Thielen did not disclose the extra guarantees to Heather, and used the purchase agreements to misrepresent the level of interest in the second phase of the project.
The $26 million construction loan is set to mature, but Thielen has refused to consent to restructuring the loan.
Heather’s allegations against JJT Development include fraud, fraud by omission, breach of fiduciary duties and obligations, breach of contract and additional violations under state law.
Yeager said that shortly after Heather alerted JJT Development they were planning legal action, Thielen filed a complaint of his own.
The following is a summary of Thielen’s May 18 complaint:
When Heather agreed to provide financing for the project, the firm requested that their principal’s construction company, Regency Commercial Services, be given the construction contract. Heather officials said hiring Regency would be more profitable because the contractor was non-union and knew how to save money.
The construction firm failed to begin work immediately, and incurred an estimated $7 million in cost overruns without Thielen’s consent. In addition, Heather spent the entire $2.4 million allocated for the parking ramp without building the ramp.
A principal of Heather suggested they try to sell units faster and pay down the bank loan by offering higher than normal real estate commissions, and an attorney signed off on the concept.
Consequently, the Sexton paid out about $900,000 in commissions to real estate agents who brought in buyers for the Sexton. Officials from Heather now claim they had no knowledge of the agreed-upon commissions.
Heather’s principal also suggested they start selling the second phase of the project and offer an extra incentive for buyers. When Thielen did so, Heather officials again claimed they had no knowledge of the extra incentives.
Thielen’s lawsuit accuses Heather of breach of contract, negligence, fraud, libel and slander.
The waiting game
Residents in the building know about the litigation; the developer sent notice through the mail a couple of months ago.
They continually press the developers for updated information; some of their calls are returned and some are not. They have started an e-mail list to keep each other abreast of the latest news.
The condo owners include young professionals; young married couples and a few businesses in the live/work units, according to one resident who asked not to be named.
This condo is the resident’s first home purchase, and she is the only resident at the end of her hall. She wants to know why the remaining units cost so much more than what she originally paid, and why the parking garage isn’t built.
Resident Kelly Guest said she wanted to buy a unit in the building that was a mirror image of her own, but she was told the unit would cost over $75,000 more than the unit she purchased. The unit she wanted to buy is still vacant.
She is also upset about the parking issue.
“One of my biggest requirements was covered parking, and now I have to wait for a valet. It’s a hassle,” she said.
Not all residents are worried about the ramp. Resident Shilpa Alva said she doesn’t have a car, so she is not too concerned.
Resident Brian Scates said he doesn’t understand why a one-bedroom unit can be listed for $260,000, and six months later the unit is selling at $360,000 to investors. He said he hopes that any illegal activity in the building is exposed.
“That’s hurting our real estate values,” he said.
Scates said they were supposed to move in and start using the parking garage last year, but the developers don’t even push back the parking garage completion date anymore — it’s as if they hope they get around to constructing it, he said.
Heather has filed a motion to dismiss JJT Development’s complaint. A U.S. District court hearing on the motion is scheduled for Aug. 28.