Sunday, October 31, 2010

The Big Bang that Started Pamiko's Downfall

1211 Knox Ave N

2402 4th St S

2616 Cedar Ave
Post and photos by the Hawthorne Hawkman, although the photos first appeared on the Johnny Northside blog.  The three properties above were owned by Pamiko at the time of the photographs, and had been part of a lawsuit involving various partners who made up the numerous Dream Home LLCs.

POST IN PROGRESS - more hyperlinks to add back stories will be added later.

Physicists widely point to "The Big Bang" as a likely starting point for our universe, and although they can surmise the origins of the universe, there are two questions such a theory leaves unanswered:  1) Why did matter exist in the first place? and 2) What CAUSED the Big Bang?  We can measure up to the first few nanoseconds, but still are unable to fill in the gaps these conundrums leave us.

Likewise, NoMi blogs (more famously on Johnny Northside) have chronicled the downfall of Paul Koenig, Michelle Koenig, and their various LLC's - Pamiko, MCK Investments, and Marklee Construction.  However, we never really answered the questions of why Koenig was allowed to acquire so many properties in the first place (technically in the second place, since he screwed over north Minneapolis first with the Dream Homes and then through Pamiko).  Nor have we understood what was the spark that set off the 80-foreclosure powder keg.

Well, after finding a confession of judgment on the Dream Homes lawsuit (a previous JNS post chronicled much of that suit, but had not come across its conclusion), I now have a theory about what started Pamiko's foreclosures over a year ago.  Bear in mind, this is only a theory, and there may be equally valid theories out there - although I sincerely doubt "Intelligent Design" is one of them.

First, a brief history...
Paul Koenig first arrived on the scene in NoMi through the Dream Homes fiasco, where he and David Kohlenberger, and their spouses Sharon Kohlenberger and Michelle Koenig, purchased scores of vacant lots throughout the metro area.  Most were concentrated in the Hawthorne, Jordan, Near North, Willard-Hay, and McKinley neighborhoods of north Minneapolis.  Their plan was to build pre-fab homes on these lots, most of which had would have six or more bedrooms, no basement, and no garage.  The homes were, unfortunately without irony, called Dream Homes, and the houses looked like crap.  They started several LLC's to manage the acquisition, construction, rental, and resale of these properties.  Those entities were Dream Home Development LLC, DPK Properties LLC, and KOKO Property Management.

Well, thanks to the fact that they were all lying to each other and their investors over what kind of income the properties really produced, and how much they might be worth, the whole thing came crashing down before they could acquire as many properties as they wanted.  However, it did lead to a moratorium on new construction in north Minneapolis.  Then two of the investors who were scammed fought back and filed a lawsuit against the Kohlenbergers, Koenigs, and their various LLC's (which by that time included Pamiko Properties LLC, MCK Investments, and Marklee Construction).

Fast forward a few years:  Pamiko wound up owning many of the Dream Homes, and had purchased scores of other rental properties as well.  Like before, many were concentrated in the same north Minneapolis neighborhoods.  Most were, at best, poorly managed or maintained.  Some residents over on Hillside Avenue in Jordan began complaining to me about Pamiko/Koenig right around the time I found a property in Hawthorne that was being foreclosed on for the dollar amount of $2.5 million.

This, and a series of other questionable financing practices, led us to investigate Pamiko further, and we just kept on finding more and more horror stories.  It turns out that the type of commercial loan the Koenigs received might have been quite common.  However, there is enough of a trail of malfeasance to make many NoMi residents (myself included) believe that there has been some level of criminal fraud that took place.  The Koenigs lost these properties to foreclosure as well, leading to a second round of scores of foreclosures in NoMi caused by one person in the span of roughly five years.

In his discussions with Jordan residents, Koenig led them to believe that the interest rates on his loans with Minnwest Bank were just raised arbitrarily, and that led to his financial woes.  However, in discussing this scenario with another personal banker, it seems that's quite unlikely.  What is more probable is that these loans that Koenig had included clauses that would trigger a "default rate," or a significant increase in the interest rate based on the belief that the borrower had either committed fraud or was in a position where the loans were unlikely to ever be repaid.  The question then becomes, what triggered that default rate switch?

And that, my friends, leads us back to the confession of judgment. Stephen Kranz and Donal Parks (that is "Donal" without a d at the end), along with Round Table Properties LLC, sued the Koenigs, Kohlenbergers, and pretty much every LLC either of them had used for property acquisition, management, or development, as well as the Realtors involved in the scheme.  When Kranz and Parks bought six Dream Homes, they did so based on a promise that the properties generated a certain amount of income from Section 8 and also from neighborhood non-profits.

Problem was, that second source of income simply didn't exist.  It was the Dream Homes entities paying themselves and inflating their bottom line.  In the course of the lawsuit, the Kohlenbergers admitted to the fraud, and the Koenigs managed to pin the blame entirely on them.  Kranz and Parks won two separate judgments, one for an even $1,000,000 and a second or $75,000.

The people on the losing end of those judgments were Dream Home Development LLC, DPK Properties LLC, KOKO Property Management LLC, David and Sharon Kohlenberger, Michael Czarnik, Edina Realty, and Realtors Jay Jasper and Tammi Panning-Jasper.  While the Koenigs weren't directly mentioned, and while their main LLC's (Pamiko, Marklee, and MCK) were taken off of the confession of judgment, They still had contributed to the operation of DHD, DPK, and KOKO at the times material to the lawsuit.

Furthermore, the three properties photographed above, 1211 Knox Ave N, 2616 Cedar Ave, and 2402 4th St S, were among 71 properties listed in the suit and confession of judgment as ones transferred back and forth between the Koenigs and Kohlenbergers.  Oh, I forgot to mention that detail.  In an attempt to hide assets that might have been considered in this litigation, the Koenigs and Kohlenbergers were transferring properties to themselves or their various LLC's.  Those three properties above were ALSO owned by Pamiko and were included in the multi-million-dollar bundled commercial loans Pamiko had through Minnwest.

Remember, the whole reason Koenig said he went into foreclosure was because the bank jacked up his interest rate.  But that would only happen if caused by something else.  Now, if you had just won $1,075,000 in judgments against someone who was transferring assets/title back and forth, what would you do?  I know I'd file a lien against ALL properties and ALL assets that my debtor owned.  If that happened with some of the properties with a Minnwest Bank lien on them, it could have started the whole domino effect of Pamiko foreclosures.

And if we understand how things all got started in the first place, then hopefully we can keep them from happening again.

11 comments:

  1. Great Posts!

    While the financial damage to our community can be documented, the deeper personal wounds to those residents who lost their homes, saw property values tumble, or were impacted by the deterioration of neighborhoods these sleazeballs caused is immeasurable.

    What steps are our civic leaders taking to prevent this type of activity from continuing?

    What community leaders are stepping forward?

    How can NoMi residents interact to encourage our representatives to take a harder stand on these slumlord investors ability to impact our community?

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  2. Well, Hennepin County Attorney Mike Freeman did have his office look into the Pamiko stuff. They haven't found anything that indicates more than just a failed business scheme...yet.

    Don Samuels has been a tremendous leader when it comes to supporting Minneapolis' fight against slumlords, and our inspections, reg services, and problem property departments at the city have really stepped up their game over the past few years. There are still things they could do better, but we're definitely seeing progress.

    I've seen quite a few increases in fees, but I'm not sure if that is really a deterrent or if it just generates more revenue. But even a revenue generator could be positive if it allows for more inspections enforcement.

    Personally, I'd like to see a few things happen. First, let's start to put a clamp down on provisional rental licenses; make them harder to get and set a limit to the number that landlords can have outstanding at any given time. Second, let's see the continued improvement in enforcement. Third, let's put a kibosh on any conversions of porches to year-round living space.

    Finally, for now, a more generalized issue: The majority of rental properties in north Minneapolis are single-family houses or duplexes propped up by section 8 or other assistance dollars. I don't have anything against section 8/public assistance, other than the fact that the financial model of renting out single-family homes in NoMi is generally not profitable without this. When these properties and/or their tenants are poorly managed, we get hit with the double whammy of having our tax dollars support a slumlord while also having to spend money cleaning up that person's mess. I'm not sure what the answer is to that particular dilemma though.

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  3. Jeff, you are truly the Stephen Hawking of mortgages.

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  4. Also, um...

    Why aren't these bad actors being criminally charged? Is it because it's so hard for any district attorney to remain conscious long enough to understand the tedious details?

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  5. Believe it or not, there are folks at various levels of government who are as geeky or even more so than I am. The difficulty in the case of Pamiko and the Koenigs is that it's not easy to make a clear distinction between a very bad business decision and what amounts to criminal activity.

    And since these cases move very slowly and are quite costly to prosecute, (and yes, because eventual jurors are going to have a hard time remaining conscious throughout a trial) the bar for bringing charges is pretty high.

    And that brings the responsibility, for better or worse, back to people on the neighborhood level. It's up to us to keep bad actors like the Koenigs in the spotlight so that charges can someday be brought, or at the very least, they stay out of our neighborhood.

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  6. Okay. So I think we should set up a landlord rating service.

    We'd market ourselves to banks. Simultaneously we find out who's interested in buying up properties in NoMi and suggest to them that if they want their loan to be approved at a low rate, and to ensure minimal future trouble with the City, they should make sure to achieve a Triple-A or hopefully Triple-A-Star rating, which we establish by reviewing their other rental properties and vetting their documentation. As in any arm's length transaction, the potential landlord pays us for this service. The bank also pays us service fees to make for efficient document delivery.

    Naturally, any given rating gets quite a number of points added based on how many Neighborhood Stabilization Socials the landlord throws (open bar and good food catered from NoMi, of course,) and also based on "Neighborhood Improvement" activities the landlord undertakes. For example, a nice exterior paint job on my house would raise the desirability of nearby rentals, and that landlord's paint crew is just sitting around waiting for his loan to go through.... Everybody wins!

    Once a high-rated landlord is into his properties, we give him every benefit of the doubt if there's trouble--we give him lots of chances rather than alerting the authorities. After all, he didn't get that Triple-A-Star rating by being a bad landlord now, did he? But when we do call, we call without mercy or remorse. He's dead to us, and it's certainly NOT because of information contained in the following paragraph:

    As in every business model, we like to share in neighborhood growth--and we also need insurance against any events that might negatively affect our cash flow. So we'd buy shares of the total landlord loan portfolio, while also holding lucrative Credit Default Swap options should a landlord get into trouble. This way, if a landlord goes belly up, we'll have enough to buy up his properties, fix 'em up how we like 'em, and rent 'em out or sell 'em to our new junior partners.

    (For all who think this Credit Default Swap idea crosses a line, why shouldn't we be able to bet against our own clients? I mean, we've SEEN their documentation.)

    ****

    I have other, real ideas, too. But right now I have to go try to bathe away this awful, dirty feeling. Sigh.

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  7. Anon 11:32

    I really like those thoughts regarding establishing a database of ownership. Perhaps based on Hennepin Counties tax maps. I think it would be useful information to portray how the rental problems overlay crime statistics.

    The same concept could be applied to the cockroach tenants who migrate from one slum house to the next. This could be provided to landlords interested in protecting their properties and used by law enforcement to better organize neighborhood patrols.

    However; I am not sure how feasible it would be to try and get lending practices changed. Even if you get the banks to look at the information you compile, it would be a slippery legal slope to deny funding based on this information and getting both the subject of the loan and the Bank to pay for this info is a pipe dream.

    I think a better tact would be to maintain pressures on our civil servants to better define the distinctions between a "very bad business decision and criminal activity" and increase enforcement. I mean come on - if blogers and residents throughout the community can identify the sources of community degradation, why can't our elected officials?

    Jeff has great ideas. Maybe we need a manifesto that outlines our ideas for changes to improve our communities that can be used as a road map for our representatives.

    1. Limiting the density of rental units within a community.

    2. Preventing the creation of shadow companies for real estate transactions.

    3. Limiting rental licenses to investors without back taxes and assessments in the last 2 years.

    4. Requiring annual inspections of section 8 rentals to ensure safe and legal rentals.

    5. Tracking the causes of special assessments back to those section 8 tenant applicants who are habitual abusers.

    6. Higher rental license fees.

    7. Establish community Design Guild lines.

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  8. Pamiko houses all seem to have a certain look about them. They look like cardboard boxes with siding.

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  9. I guess I should have more clearly indicated that my "landlord rating service" concept was intended as dark, snarky humor, based on the actual bond rating/property appraisal system that led us into the foreclosure crisis. Sorry about that.

    Regarding actual ideas, I agree that it would be helpful if the city could make its database searchable by property owner. But if the city can't/won't do this, couldn't we look for one of those websites that maps the connections between businesses/people and use it to show which properties belong to whom, as well as how they are interrelated?

    I will see if I can find an example.

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  10. The site I was describing is called CorporationWiki.

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  11. "I found a property in Hawthorne that was being foreclosed on for the dollar amount of $2.5 million."

    This most likely is not on a single property but a blanket line that covers multiple properties. The foreclosure documents would need to be examined to see if this a foreclosure from advertisement or action and what assets are included in the lien or mortgage.

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