Vartan Management Co., a developer and former owner of the troubled Forum Place officebuilding in Harrisburg, Pa., has been tapped to take over operations of the buildingwith the hope of returning it to profitability after a court order put it inreceivership earlier this week. The company is owned by Vartan Group Inc., whosefounder, John Vartan, holds a chunk of the bonds issued to fund the building's purchase.
While Forum Place is owned by the Dauphin County General Authority, Vartan Management,which was chosen by local bankruptcy and creditors' rights attorney Robert Chernicofffor a three-year contract that begins today, will oversee the building's day-to-dayoperations.
The order from the Court of Common Pleas of Dauphin County follows DCGA's most recentdefault on two series of bonds it issued in 1998 as part of a $86 million sale ofnonrated revenue bonds to fund the purchase of Forum Place, a nine-story office buildingin the heart of Pennsylvania's capital city. Dolphin & Bradbury Inc. was the underwriteron the negotiated deal.
According to DCGA attorney Charles Zwally, holders of Series 1998B bonds did not receivetheir payments due July 15, while holders of Series 1998 A bonds were paid from a debtservice reserve, constituting a technical default. A similar default occurred inJanuary, Zwally said.
The authority's first default came last July when it defaulted on $3.1 million of SeriesB bonds. The DCGA was able to make a $2.03 million debt service payment on $70 millionof Series A bonds at that time.
About $67.4 million is outstanding on the Series A bonds and $1.2 million is outstandingon the Series B bonds. No payments are currently due on the accreted $14.9 million ofSeries C capital appreciation bonds, of which John Vartan is the sole owner. The bondswere not insured.
A spokesman for the trustee, Manufacturers and Traders Trust Co., said outside counselwas in the process of sending notices of the receivership to bondholders but declined tocomment further. According to court papers, the authority's debt service falls more than$2 million short annually at current rent levels.
The move to receivership, however, has been "an ongoing process" on the part of seniorinstitutional investors, said Rick Frimmer, an attorney with Greenberg Traurig inPhiladelphia who represents the bondholders.
"You don't have a receiver appointed because things are going well," Frimmer saidyesterday.
Frimmer's comment makes reference to Forum Place's dismal occupancy rates, currentlypegged at about 50%, a situation made worse when the Pennsylvania Department ofTransportation moved out of the building two years ago.
Zwally, who said the authority consented to the receivership, admitted the DCGA has haddifficulty securing leases at Forum Place but denied mismanagement on the authority'spart.
"I don't think it's an opinion that's widely shared," he said.
To secure the bonds' tax-exempt status, it was stipulated that 90% of the building'sleases must go to either state or local agencies. Otherwise, bonds used for privateactivities would be taxable. This stipulation, listed in the indenture, cannot bealtered without sacrificing the tax-exempt status, both Frimmer and Vartan said.
The selection of Vartan Management as Forum Place's new overseer may surprise some whorecall when county officials charged that the bonds were issued without assessing thevalue of the property and that John Vartan was paid above market value, triggering aninvestigation by the Securities and Exchange Commission last summer.
Vartan said an independent appraiser hired by the county has assessed Forum Place at$70.5 million. But, according to Chernicoff, appraisals have ranged from $35 million to$75 million.
"We've heard all kinds of numbers," Chernicoff said.
Vartan first plans to inspect the building to address any health and safety issues andthen clean and refurbish it before reaching out to possible tenants. The building,located on Walnut Street across from the state's capital complex, should be a choicespot for permissible agencies, said a lawyer representing Vartan.
"We are going to do everything in our power to return Forum Place to its rightfulposition as the crown jewel of Harrisburg's downtown," John Vartan said in a writtenresponse.
