SEC is looking into Better Housing Foundation deals in Illinois

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The Securities and Exchange Commission and Illinois Attorney General’s office are examining the Better Housing Foundation as investors fret over the uncertain prospects for recovering their $170 million investment in the not-for-profit’s defaulted debt.

BHF lawyers disclosed the receipt of a SEC subpoena related to the not-for-profit’s past managers in a recent court filing as part of the Chapter 11 bankruptcy being pursued by Lindran Properties LLC, the owner of the foundation's Chicago-based Shoreline portfolio.

An SEC subpoena came to light as part of the Chapter 11 bankruptcy of a Better Housing Foundation affiliate.

The bankruptcy would pave the way for a sale of the portfolio's properties, which are in disrepair, free and clear of existing liens with proceeds going to pay overdue taxes, expense vouchers from housing court-appointed receivers, holders of $13.6 million of bonds, and various other fees.

Shoreline is one of five troubled Ohio-based BHF affordable housing portfolios. Lindran is a subsidiary of BHF. The other four portfolios are in various stages of trouble. All have defaulted on bonds.

“Prior to the commencement of the debtor’s chapter 11 case, BHF was served with a subpoena from the Securities and Exchange Commission seeking records related to the events that preceded current ownership’s involvement in BHF and its affiliates,” Clark Hill Plc attorney Scott Schreiber reported in the filing. “Clark Hill has and continues to represent BHF in that investigation.”

The SEC declined to comment. Stifel, which underwrote the bond issues, also declined to comment.

The bonds were sold between 2016 and 2018 through the Illinois Finance Authority. Defaults occurred in June on the three Chicago portfolios — Shoreline, Icarus, and Ernst — and in December on the suburban Blue Station and Windy City portfolios. Blue Station was recently put on the selling block. The suburban portfolios are in better shape and have higher occupancy rates than the nearly empty city portfolios

Control of the BHF has changed hands since the bond offerings and current leaders blame the properties’ mess on their predecessors.

Representatives from bond trustee UMB Bank NA and the city of Chicago, which took BHF to housing court over the properties’ poor conditions, sought a meeting last year with Illinois Attorney General Kwame Raoul’s office and said the AG was “actively looking” into the situation, a source said.

The city’s law department confirmed the meeting. Bond trustee representatives declined to comment. The AG office said it could not immediately comment.

Lawyers following the bankruptcy case and efforts to resolve the defaults on the other portfolios said they don’t see a SEC investigation or other potential probes interfering with the Chapter 11 or other workouts that may be coming for the other four portfolios. That prediction is based on the probe being limited to past BHF management and could change if the inquiries entangle the current leaders and claims are asserted. “That could complicate” any workouts, said one lawyer.

BHF’s current president, Andrew Belew, said the SEC subpoena was received around October and his attorneys complied by providing about 17,000 documents. He believes the inquiry is focused on the origins of the not-for-profit.

“We are cooperating. Whatever the SEC asks for we will provide. We have nothing to hide,” Belew said in an interview. He said he knows of no other regulatory inquiries.

Belew is a managing director at Florida-based Consilium Capital Partners LLC, which describes itself as specializing in real estate lending, loan workout, finance, capital markets and property management. He became president of BHF in late 2018. He blames the original managers in bankruptcy court documents.

BHF was launched in 2015 in Ohio by Ohio-based attorney Meredith Rosenbeck. She worked with local real estate investor L. Mark DeAngelis, head of Integrus Realty Group LLC and Desak Development Corp., on the purchase of properties and DeAngelis firms served as property managers. Rosenbeck served as BHF’s attorney on the bond deals, according to IFA documents.

The Chicago Tribune chronicled how management, legal and other fees were pocketed and the properties left to languish in an August 2018 story.

“DeAngelis, Integrus and Desak’s management was horrific, at best,” Belew writes in a court filings defending the Shoreline Chapter 11 filing and asset sale. “The property fell into disrepair and neglect and, ultimately, Lindran was named in approximately 200 separate housing court lawsuits in the Circuit Court of Cook County.”

Belew said this week Ohio Attorney General Dave Yost’s office in last year contacted him about Rosenbeck. The Ohio AG office said it could not confirm or deny whether it was conducting an investigation. Previous phone numbers and an email for Rosenbeck are no longer in operation so she could not be reached to comment. DeAngelis did not return a call requesting comment.

BHF won property tax breaks from Illinois that were later rescinded as questions were raised over whether it was violating its not-for-profit status by evicting tenants for non-payment. The downward fiscal spiral accelerated as there was insufficient money to fund repairs and the Chicago Housing Authority rescinded the properties’ qualifications for housing vouchers.

The BHF board handed control in 2018 over to Florida-based not-for-profit Invest in America’s Veterans. The new entity turned to Belew that November saying it was not equipped to take on the management of such distressed properties.

The state housing court eventually appointed receivers for all three Chicago portfolios to manage the properties. Meanwhile, BHF’s efforts to secure new capital to fund repairs fell short leading, to the decision to file Chapter 11 and sell the assets.

The debtor selected PRE Holdings 14 LLC “over other stalking horse bidders because of its liquidity, strong reputation with the city of Chicago, and their vast real estate experience and holdings around the south side of Chicago,” Belew wrote.

The 13 buildings with 260 units in the Shoreline portfolio include only about 10 units that are inhabitable and occupied. If additional bids are received over PRE Holdings an auction will be conducted. PRE said it would invest at least $10 million in repairs.

A proposed schedule before Judge Jack B. Schmetterer in the U.S. Bankruptcy Court for the Northern District of Illinois, Eastern Division, envisions a spring sale. The bankruptcy trustee, however, has filed an objection, challenging assertions by the debtor and the bond trustee UMB that the bankruptcy-driven sale offers the best option.

The fate of and potential recovery rates for all the portfolios remain uncertain.

The trustee could pursue foreclosure, but that’s a time-consuming process and could result in a weaker recovery given the poor condition of the properties and mounting liens and BHF could pre-empt those efforts with bankruptcy proceedings.

All but one series of the BHF bonds carried ratings in the triple-B to single-A category from S&P Global Ratings when they were sold.

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Bond defaults Bankruptcy SEC Illinois Finance Authority Affordable housing bonds Illinois