April 17–The U.S. Small Business Administration has moved to foreclose on a Peoria hotel owned by a Florida man accused of defrauding investors, including an Illinois municipal fund, of nearly $180 million.
The agency’s claim adds a new wrinkle to the sale of the hotel. The hotel was one of several commercial and residential properties seized for the benefit of investors from Nikesh Patel, the man at the center of the federal investigation into a scheme involving government-backed loans.
Investors are counting on the sale of the properties to recover some of their losses. The Oak Brook-based Illinois Metropolitan Investment Fund, which invests taxpayer dollars on behalf of suburban and government agencies, lost $50.4 million.
The SBA said in a lawsuit filed last month that it holds a $5 million mortgage on the hotel and that the agency should be paid before other creditors, including Patel’s investors. The foreclosure action could affect the amount of proceeds investors will receive from the sale of the Peoria hotel.
The legal quagmire underscores the difficult road Patel’s investors face in trying to recoup money from him and his related companies. The liquidation of assets may take longer than first anticipated and may net less than investors hoped.
The Illinois investment fund, called IMET for short, recently forecast that its participants will recover about 53 cents on the dollar from Patel’s seized assets, less than initial projections.
Patel, of Orlando, Fla., was arrested on charges of loan fraud Sept. 30. Federal authorities said he forged loan documents on behalf of borrowers that were shell entities. Patel also is accused of fabricating documents to make people believe that the loans were backed by the Department of Agriculture when they weren’t. Patel’s company, First Farmers Financial, was an approved lender in a USDA economic development program.
Starting in 2012, Patel sold loans valued at about $179 million to Pennant Management, a Milwaukee-based investment adviser, according to the Illinois municipal fund, called IMET for short. Pennant raised the money from about a dozen investors, including IMET, community banks, credit unions and retirement plans.
In a civil lawsuit against Patel and his companies filed in Chicago federal court, Pennant alleges that Patel used the loan proceeds to buy commercial properties and fund a lavish lifestyle that included two multimillion-dollar homes and two luxury cars. A Chicago federal judge has appointed a receiver to oversee the sale of five hotels and other assets.
One of Patel’s homes, a waterfront mansion near Orlando listed for $4.5 million, was sold for $3.25 million this month, according to the Orlando Sentinel. The receiver also has a buyer’s letter of intent for the purchase of five hotels, according to IMET.
Last year Pennant initially estimated the value of the seized assets at $155.5 million, or about 87 percent of the $179 million loss, according to IMET.
IMET shared that estimate with its more than 200 customers, which include municipalities, police and fire pension funds, park and school districts, and libraries. IMET froze about 2.8 percent of each account in its Convenience Fund.
The estimated recovery gave IMET participants hope that they would recoup all of their losses. Participants expected the difference between the Patel recovery and total loss to be made up by insurance.
But IMET recently disclosed a lower rate of recovery from Patel. In its 2014 annual financial report, which it provided to participants last month, the fund said its best estimate of its expected recovery is $26.9 million, or 53.5 percent, of its $50.4 million loss.
Randy Lending, IMET’s attorney, declined comment on the SBA suit. He said IMET has received three distributions from the liquidation of some of Patel’s assets but he declined to disclose the amount.
In 2012, one of Patel’s companies purchased the Peoria hotel, a Four Points by Sheraton, and closed it for renovations. The hotel remains closed.
According to court documents in the SBA lawsuit, an entity called Sheraton Peoria Hotel LLC, which lists Patel as a principal, secured a $5 million loan in 2012 through the agency’s 504 loan program. The hotel worked with Peoria-based Illinois Business Financial Services, an SBA-approved certified development company, which works with private-sector lenders to provide financing for small businesses. In the 504 program, the SBA guarantees loans in case of default.
Charles Randle, president of Illinois Business Financial Services, did not return requests for comment.
The SBA said in the suit that the loan is in default and it is owed the $4.5 million remaining balance plus interest. The agency also said its secured debt should be paid before other claims, including Pennant’s. The SBA declined further comment on the suit.
Mark Elste, Pennant’s chief executive officer, declined comment on the suit. He referred the Tribune to the company’s lawyer, Paul Fox, who could not be reached for comment.
