ITHACA, N.Y. — A large regional developer with ties to the Ithaca market was the subject of a Federal Bureau of Investigations (FBI) raid in suburban Rochester last week.
The offices of Robert Morgan, owner of Morgan Management LLC, are being investigated due to suspicious activity related to the company’s business practices. The court-authorized raid was carried out on the morning of Monday the 14th.
Morgan Management LLC, which does business as Morgan Communities, has major assets in the Rochester, Buffalo and Syracuse markets, and owns or manages properties in fourteen states. The firm was founded in 1979, but most of its growth has been in the past decade, expanding from 1261 units in 2005 to over 36,000 apartment units last year. In Ithaca, Morgan owns the Gun Hill apartment complex near Cornell University, and is the property manager for the City Centre project underway in Downtown Ithaca. A request to City Centre’s Newman Development Group to clarify Morgan Communities’ role in the City Centre as either an investor or hired hand was not returned.
According to Rochester Democrat and Chronicle, Morgan Management LLC is accused of inflating the value of its properties, which allowed him to borrow more money than what would otherwise be allowed by lenders. Robert Morgan reportedly told the Buffalo News that his firm has made efforts to conceal the actual sales of properties from county assessors “to avoid showing full price so the assessor doesn’t, you know, bang us for the full value of the property.”
Lenders typically do their own appraisals, but they rely on accurate information about rents and vacancy rates. Morgan’s son Todd and nephew Kevin are accused of falsifying this information to obtain larger loans for their property acquisitions, and may have committed bank and wire fraud in the process. The Buffalo News is reporting allegations that the pair would place radios in empty apartments and shoes outside doors to give them the appearance of being occupied during lender-required inspections – a lower apparent vacancy suggests a stronger market performance and a more valuable property in the eyes of the lender. They are also accused of inflating income statements given to lenders as documentation, which would have also artificially increased property value.
Since loans are typically capped at either purchase price (if recent) or 80% of a property’s current value, this would have allowed Morgan Management to take out bigger mortgage loans from banks. Some of these mortgages were repackaged and sold to investors as regulated securities.
Interestingly, the 94-unit/273-bed Gun Hill complex has quietly been on the multi-family real estate market for several months. The sales brochure touts the property’s below-market rents for its location, and the potential to significantly raise rent with modest renovations. The listing price is undisclosed. Morgan purchased the property in February 2011 for $6.15 million, and the current county assessment for Gun Hill is $12.65 million.