Tuesday, May 02, 2006

Boom to Bust

We are hearing of many condo's and in South Florida either converting back to apartments, halting construction, or going bankrupt as reported in this story.

In less than six months after being converted from low income housing to high priced condos, millions of dollars are lost and the lender goes bust.

"Lender USA Commercial Mortgage Co. and its related companies — better known as USA Capital — filed for Chapter 11 bankruptcy protection in Nevada on April 14. The filing follows a Securities and Exchange Commission investigation of how the company and its affiliates financed construction projects.

"Up until last week, we had no inkling that anything was wrong," said Virgil Birgen of Nevada, who, with his wife, invested $150,000 to build Sail Club at Clear Lake. About 200 people from across the country gave Nevada-based USA Capital or a sister company money to fund the four-tower, 590-unit luxury high-rise on Executive Center Drive.

Here's how it worked:
People placed their money with the company, usually in increments of $25,000, $50,000 or $100,000. The company bundled the investments into trusts worth millions of dollars.
The money then was loaned to developers, usually for a short time, and usually for very high rates: 17 percent was not uncommon. That allowed USA Capital to pay returns of as much as 13 percent.

Formerly a 186-unit apartment complex housing mostly low-income families, Lake Pointe Villas changed hands in January 2005. Homes for America Holdings Inc. announced plans to raze the apartments and start fresh with condo towers, lofts and town houses ranging from the $300,000s to more than $800,000.

One apartment building has been leveled, but two others remain open, their ovens and water heaters pulled from the wall. A refrigerator stands in the middle of one parking lot, an abandoned portable toilet is in another. Mattresses rotted to their springs lie on the ground. Windows are broken. Yellow flowers have begun to grow up the side of 20-foot-high piles of rock and sand left undisturbed since Christmas.

"This caught us all by surprise.... USA Capital is a source we have used for many years on a number of different projects."

Investors said they weren't aware of progress — or the lack of it — at Sail Club, or any other projects.

But their checks from USA Capital with the promised returns always came. Bankruptcy court filings suggest that investors got paid even when USA Capital didn't get money from developers to pay investors. In theory, without money from developers, money should not have been available to pay handsome double-digit returns.

"We have always gotten paid," said an investor in the local property who asked that her name not be used. But when she recently asked to withdraw her $100,000, there were weeks of delays. Then the company went into bankruptcy court.

"I didn't get anything back," she said.


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