A Throwback to Pre-2008 Real Estate Scandals: New York Investors Plead Guilty to Fraud
Remember the days before the 2008 financial meltdown, when securing a loan was so easy that even those without a heartbeat seemed to get approved, and inflated property values and cash-back deals were rampant? Recently, three investors from the New York Tri-State area seem to have time-traveled back to that era of financial recklessness. They’ve just admitted guilt in a scheme involving a Cincinnati apartment complex that would astonish even the most seasoned fraudsters of the past.
Overstated Prices and Forged Documents
A recent CoStar article reveals that DOJ investigators uncovered a lengthy scheme that resulted in an $18 million loss for commercial brokerage JLL. Investors Fredrick Schulman, 72, from New York; Chaim “Eli” Puretz, 29, from New Jersey; and Moshe “Mark” Silber, 34, also from New York, have pleaded guilty to wire fraud. They had secured a $74.25 million loan from Fannie Mae for the 976-unit Williamsburg of Cincinnati Apartments & Townhomes, which they had purchased for $70 million in March 2019. They attempted a double closing by inflating the building’s price to $95.85 million, using fraudulent documents to deceive lenders, as reported by the DOJ.
The scheme involved Silber, Schulman, and their co-conspirators using stolen identities to misrepresent the buyer for the inflated purchase price, with the fraudulent transaction occurring on March 8, 2019.
JLL has reported this loan as an $18 million loss in their second-quarter earnings. According to a recent Wall Street Journal article, such fraudulent activities have led to more stringent loan application procedures. Lenders now must independently verify borrowers' financial information for multifamily property loans, with Freddie Mac and Fannie Mae backing 40% of the $2.2 trillion in multifamily mortgage debt as of September 2023.
Property Value Collapse
Ironically, the Cincinnati property was appraised at $99 million when the loan was issued in 2019, justifying the higher sale price. However, due to possible mismanagement, fluctuating interest rates, or tenant turnover, it was reappraised at $34 million in March 2024 and was over 90 days delinquent, according to CoStar data.
Karen Brennan, JLL’s CFO, mentioned on the company’s earnings call that a receiver has been appointed to stabilize the property, including improving occupancy, before its sale.
Additional Fraudulent Activity
The DOJ also revealed that the three individuals admitted to another fraudulent scheme involving a JPMorgan Chase loan for a commercial property in Troy, Michigan. Silber, Schulman, and Puretz purchased Troy Technology Park for $42.7 million in September 2020 but inflated the purchase price to $70 million. They submitted a forged letter of intent to the lender and appraiser to support this inflated price. JPMorgan provided a $45 million loan for the Troy property, which was moved to special servicing in December due to mortgage fraud and remains overdue, according to a July bondholder report. The property was foreclosed in May 2024.
Silber, Schulman, and Puretz are set to be sentenced on December 3, 2024, with a maximum possible sentence of five years each.
Increasing Mortgage Fraud
Since 2022, fraudulent mortgage schemes have increased as rising interest rates have led to declining commercial property values. The DOJ’s intensified scrutiny has led to requirements for borrowers to provide rent receipts and face closer examination of their financial documents.
Common fraudulent practices include falsified income statements and inflated property sales. Fannie Mae has been actively blocking mortgage brokers like Meridian Capital Group in response to allegations of impropriety aimed at securing larger loans.
Concluding Thoughts
The boldness of the fraudulent schemes in Ohio and Michigan suggests that they were not isolated incidents. It implies that other investors may have attempted similar schemes, possibly encouraging Silber, Schulman, and Puretz to pursue their own fraud.
Before the 2008 crash, manipulated financial documents were prevalent in real estate, often going unnoticed as long as transactions were profitable. The sheer audacity of the Ohio and Michigan schemes, resulting in substantial losses for JLL and JPMorgan Chase, is perplexing. It's unclear how Silber, Schulman, and Puretz expected to escape detection, though they may have been inspired by the successes of others who previously committed similar frauds.
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