Friday, May 14, 2010

Governor Daniels Complicit in Shady Brizzi Real Estate Deal Or Just Hiding Egg on Face?


I don't care whether it's "technically" legal if it is, which is a huge if. But the Indianapolis Business Journal's Cory Schouten all but proves what I've believed all along.

Let's put together the pieces.

Paul Page says that Carl Brizzi brought an Elkhart property to his attention, so they bought it.

Really, Paul? I hadn't heard you dabbled in commercial. I thought you were a residential guy. But, hey, diversification is good. Just one question. What made you think this was a good deal?

Really, Carl? That's how you spend your free time? Trolling Elkhart, Indiana for hot commercial properties?

Did I mention that only a few months after Brizzi and Page bought the building, its value shot up $500,000 (from $700,000 to $1.2 million ) based on a 10-year lease with the Indiana Department of Child Services at a rate that, if all proceeds were applied to the mortgages, would have had the owners owning free and clear a building in about five years.

I bet if somebody knew that the Indiana Department of Child Services was looking for 13,000 square feet in Elkhart (in other words, a property exactly like the one Brizzi bought), that would be very valuable intelligence, wouldn't it?

But you'd have to know somebody with that kind of information, and I'm sure Brizzi didn't.....what's that? John Bales? You mean Brizzi's business partner? Wait. Isn't he the same guy who represents the state in about every county brokering deals for state agency office space?

But wait! We get confirmation from Page himself.

From Schouten:

[Page] said Brizzi earned his stake in the Elkhart building by bringing him an attractive investment opportunity. He said Brizzi and Bales, a Brizzi partner on previous deals, approached him about the Elkhart building.

It gets worse.

Schouten provides these details on the Elkhart deal. Read closely. You need to hear it all - the good, the bad, and the ugly about this property.

1. The property has two mortgages: A $1.2 million first mortgage with Huntington Bank and a second mortgage for an unspecified amount with a company called BAB Equity LLC, which lists a post office box real estate broker John Bales has used for his companies and political contributions.

2. A spokesman for the Indiana Department of Administration said the second mortgage does not appear to violate Bales’ state leasing contract, which bans him from any direct or indirect ownership interest in properties the state leases.

3. Bales said in an e-mail that he does not control BAB Equity but refused to say who does. He did not respond to follow-up questions including why the company uses his post office box.

4. Bales and his firm, Venture Cos., orchestrated the $2.5 million, 10-year deal that put the state’s Department of Child Services into the building a few months after L & BAB LLC acquired the one-story building at 1659 Mishawaka St. in February 2008.

Interesting. Does DCS know who runs BAB Equity? If not, how can its legal counsel offer any comment on whether Bales has an ownership interest? BAB. What could that possibly stand for? Brizzi AND....hmmm. I need a "B" name.

I wouldn't tell who owns it either if I were Bales because I'd know the follow-up question would be, "Who financed the 2nd mortgage?" As a perhaps related question, does anybody think it's weird the second mortgage wasn't recorded until the day before the FBI raided Tim Durham's office?

Some other choice tidbits:

- Venture (Bales' company) arranged to list the building for sale with an asking price of $1.8 million in late 2008, immediately after the DCS executed its lease deal. The property did not sell.

- The Elkhart building had a market value of about $700,000 before the state lease and $1.2 million after the lease, according to an April 2008 appraisal prepared for Huntington Bank. The appraisal says the building would be difficult to market to traditional office users because it is surrounded by industrial properties and has no street frontage.

- The 1986 building had been vacant for several months and badly in need of repairs when L & BAB put the property under contract. The appraisal noted the 15,200-square-foot building had interior mold, three broken AC units and deferred maintenance on windows, exterior bricks and parking-lot pavement.

- L & BAB had planned to spend $422,500 to renovate the building and prepare most of it, about 13,000 square feet, for the arrival of DCS. The company eventually paid $825,000 for the property, and got a $15,000 allowance from the seller to remedy an animal infestation.

- Financial documents included in the offering show the building owner, building seller, DCS and an insurance company split more than $577,000 of expenses to renovate and outfit the building. The owner’s portion was about $315,000, while DCS paid about $200,000 for upgrades including new restrooms.

The records show Page invested $321,835 in the building and financed $993,750. That includes a commission of $88,400, and a development fee of $45,600, both going to Venture (Bales' company).

- Records suggest Brizzi was added as a co-owner of the building late in the process. Financial documents provided to potential buyers in 2008 list Bruce Zeller of Carmel-based Zeller Construction Co. as co-investing with Page. Zeller did not return a phone message.

What does this all mean? Carl Brizzi got "inside" information from a guy who works for Governor Daniels. Because the Governor hates government owning things, we got fleeced. The State could have bought that building and saved a bundle. Instead, the guy Daneils entrusted to find it deals (and the one who advised and negotiates rates, right?), handed valuable intelligence to a business partner crony, and on top of that, the State even paid $200,000 to make the building better. Wow.

I asked a colleague of mine who is in commercial real estate how he thought this might have gone down, and here's his hypothesis:

(Bales) knows he has a 15,000 SF requirement in Elkhart. He identifies several possibilities, one of which is the building in question ("Building A"). He tips off Brizzi and Page. Brizzi and Page put the building under contract (or get an option with the owner) for 60 day "due diligence period" w/no penalty for not moving forward with deal - it's called a "free look" in the industry. This contract allows Brizzi/Page to purchase Building A at a fair market price (or a bit higher to sweeten the deal for the owner), but for a vacant property. So relatively cheap.

Bales decides w/state signoff that Building A is the best location for the state. Brizzi/Page exercise their option or otherwise move forward on their contract and close on the property. The contract might even have a clause that makes closing contingent on landing a deal. Regardless, state lease on Building A signed at closing or shortly thereafter. This has immediate impact on value of Building A, taking it from a vacant property to a fully leased (10-years), $17 per square foot (e.g., rich) property. Building A also becomes (theoretically) immediately marketable for its income stream to an investor, so it should be easy to flip.

Payoff for Brizzi/Page - at least $500k-$1million each, for almost no risk. Bales without doubt gets something something (like 50%) under the table from Brizzi/Page (without technically violating the self-dealing clause in his state contract).

Not bad for a days work. This scenario is comparable to Gordon Gekko, trading on inside information that the market does not possess. If Building A were a stock/security, there would be a good case for securities violations under federal law... Bales surely violated his ethical duties as a licensed broker, but I'm sure there is no paper trail! So good luck proving it.

All we know for certain is that Bales got $120,000 in commissions. What we don't know is if there were any other buildings in play. What if there weren't? At some point, isn't there a conflict when a broker helps a third party become an owner to consummate a deal that's already on the table? What we also know is that Bales has previously pitched crappy space to government decision makers. Remember when Bales tried to move the Metro Drug Task Force to a rat-den?

You know what I want to see now? Every contract with John Bales' name associated with it. How many friends has he enriched or gotten better deals than the market would have born, but for his intercession and trading on information only available to him? How much did he cost the taxpayers with Governor Daniels' blessing?

Were I the Governor or the Mayor of Indianapolis, I'd end any and all Bales' contracts right now pending a formal investigation.

Will you, Governor? Will you Mr. Mayor?

(Crickets chirp. Tumbleweeds roll through).



Anonymous said...

Chris, FABULOUS. Just FABULOUS. Nice catch on the date of the purpoted BAB Equity mortgage, who's going to drive up to Goshen, Indiana to record a purported mortgage, during Thanksgiving week, and of course just hours before the FBI raids Tim Durham, on a building that already HAS a mortgage that was already amended once!

Anonymous said...

But why? Why do they file the mortgage at all? The only reason a mortgage is filed is to stake your place in line in the event of a default. Was BAB (presumably Bales/Brizzi) worried Page would default on the first mortgage? If so, who were they trying to stay in front of as far as potential claims? Huntington would always be in first place. If something illegal was going on, then BAB's mortgage wouldn't stand up anyway. It just doesn't make sense to file a mortgage, a public record, to document a transaction you are trying to conceal. Can anyone help me understand?

Anonymous said...

Not sure if it's true but a state Senator from Noblesville is rumored to own real estate commercially leased to state or county agencies. Does anyone know?

I know said...

State appointed officials wrote their own state contract for a 40 year contract that the RFP called for 10 yrs.

One of Daniels appointees asked in writing that all other State Departments including the AG approve the self written deal even as they admitted the contract was not amenable to normal State Contracts and was outside the Standard State Bolier Plate.

The Governor signed it as a witness and the contractors then defaulted not once but twice on $370,000,000.00 in bonds and STILL have the contract at $7,000,000.00 A MONTH INCOME.

Tell me who is in charge in Indiana.

Anonymous said...

Was Bales the name associated with the inventory of "surplus" city-owned parks and also the commission to sell said surplus park land? Would he have sold it to himself or cronies, pocketed the commission and then owned the land also? Not sure how all this works, but I can figure out how it is SUPPOSED to work. As I remember the inventory/sales were never implemented due to public outcry. Thank goodness.

Anonymous said...

Public records indicate the property at 938 N Tenth St, Noblesville, which has DCS as a tenant, is owned by 938 North Tenth Street Partnership. I do not know if it is possible to track down who the members of the partnership are.