Daily Business Review
May 8, 2006
By Jessica M. Walker
Robert Falor and his Chicago-based Falor Cos. arrived in South Florida three years ago touting ambitious plans to renovate glamorous but fading hotel properties and convert them into hip condominium-hotels.
The Falor Cos. has taken the public lead in the conversion and operation of projects including the Royal Palm Hotel, the star-studded Tides, Breakwater and Edison hotels in Miami Beach and the Mayfair Hotel in Coconut Grove.
The Falor Cos., which is owned in trust by the Falor family, including Robert, his father David, his brother Chris and their current and former wives' has amassed a nationwide portfolio that Robert Falor and his firm currently value at $1 billion. Of those assets, 65 percent are in South Florida.
Robert Falor and his projects have drawn positive attention in the business press. Falor has been quoted in the New York Times and USA Today on condo-hotel development, and his projects have been featured in the Miami Herald, Chicago Tribune and Crain?s Chicago Business. A Forbes article in December held Robert Falor up as a serious rival to Donald Trump in the Chicago condo-hotel market.
But since the Falor Cos. arrived in South Florida, litigation filed by partners and investors has mounted in the local state and federal courts. In civil lawsuits, the Falor Cos. has been accused of mismanagement, theft, fraud, embezzlement and overcharging hotel customers' credit cards.
Under Falor Cos. management, the Sovereign Hotel in Miami Beach allegedly attempted to rent rooms to prostitutes and their patrons for hourly rates. The Falors also are accused of vandalizing hotel property after a partnership soured.
In addition, Robert Falor and his companies allegedly failed to come up with capital they promised for deals. Robert Falor acknowledges that he promised dazzling returns of 175 percent or more to one of his investors. Even his investment partner in that project called that profit projection exaggerated.
According to the suits, Robert Falor and the Falor Cos. attract investment partners by talking up their experience renovating and operating condo-hotels. But once the development begins, in some cases relations between Robert Falor, his company and the partner soon have turned hostile.
"He doesn't pay his bills," said Miami attorney Andrew Hall, of Hall Lamb & Hall in Miami who represents Robert Falor's partner in a Miami Beach condo-hotel project in a fraud suit. "There's a continuing pattern of him not honoring his obligations and making promises that he cannot live up to."
But in a recent interview, Robert Falor, 38, president and chief executive of the company, denied allegations of any business misconduct. "There's a couple of lawsuits out there, while we're involved with multiple projects and tons of vendors," Falor said. "It's a very small percentage of all the thousands of people we deal with."
David and Chris Falor did not respond to requests for an interview sought through Robert Falor.
If the portrayals of the Falor Cos. in the business lawsuits are accurate, it would hardly be the first time aggressive real estate operators arrived in South Florida from elsewhere in the country and left a string of angry investors in their wake.
"It's been happening here since they were selling the Everglades in the 1890s," said Mark Raymond, managing partner of Broad and Cassel in Miami. "It never ceases to amaze me at how people seem to rather easily make investments with people they don't know that well."
Robert and Chris Falor literally grew up in the hotel business. Their father, David Falor, now 66, was a hotel manager who moved from city to city with his family as his job required. David, his wife Marie and their two sons often lived in the hotels that David managed.
In the early 1980s, the Falors finally settled down in Chicago. After decades working for others in the hotel industry, David Falor started his own business.
His first venture, Paramount Hotels, eventually acquired almost two dozen hotels before running into financial trouble in the early 1990s. But David tried again, forming Allied Hospitality and Nationwide Hotel Supply and bringing his two sons into the business. Allied's strategy was to find struggling hotels, then corral investors to turn the properties around.
That business proved profitable. As of 1997, the company owned and operated 18 hotels, reporting $138 million in annual sales that year, according to a 1999 article in the Daily Herald in suburban Chicago. Allied Hospitality is no longer in business.
In the 1990s, the Falors expanded into the restaurant industry, operating several suburban Chicago steakhouses. But the Sept. 11, 2001, terrorist attacks hit the Falor Cos. and other hotel operators hard. The Falor companies faced severe financial problems, and lawsuits began cropping up against them in Cook County, Ill.
"We were very profitable until 9/11 hit," Falor acknowledged. "Then we had $8 million in bad debt, and our company went under. I ended up holding the bag on about $3.8 million in personal guarantees to vendors, which have all been paid."
Court records in Cook County show there have been more than two dozen commercial lawsuits filed against the Falors since 2001, claiming unpaid amounts in each case ranging into the tens of thousands of dollars.
In 2002, Merrill Lynch Business Financial Services won an $847,000 judgment against David and Robert Falor personally and the Falors' company, Nationwide Hotel Supply. In 2003, that judgment was transferred to Florida, where Merrill Lynch took out a lien on the Falors' yacht, a 47-foot Sea Ray named Pleasures. The boat was titled to Robert Falor and his mother, Marie.
According to court documents and the affidavit of a Merrill Lynch attorney, Merrill Lynch had the yacht seized, paying more than $14,000 to accomplish the task.
But another Falor creditor, Standard Federal Bank, also laid claim to the yacht, alleging that the Falors had fallen behind on the vessel's mortgage. Standard Federal moved to foreclose on the yacht. A federal judge in Miami ruled that the bank rather than Merrill Lynch had first dibs on the boat in 2003.
Despite court records indicating that the yacht was seized in 2003 by Merrill Lynch, Falor denies that his yacht, Pleasures, was ever repossessed. "That's inaccurate," Falor said. "It never happened." He also insisted that the debt to Merrill Lynch has been paid in full.
Neither Merrill Lynch nor Standard Federal Bank provided comment for this article.
Despite the multiple lawsuits over money allegedly owed by the Falors, when the Falor Cos. did its first deal in South Florida in 2003, it had no problem finding partners and investors here.
Hookers and garbage
The Falor Cos. got off to a strong start in South Florida with the renovation and condo-hotel conversion of the elite Cheeca Lodge & Spa in Islamorada, where former president George H.W. Bush holds an annual bonefish tournament. For the Cheeca, Falor partnered with Wyoming-based Johnson Resort Properties.
Then the Falors ran into problems. In 2002, before the Falor Cos. got into the condo-hotel business, the company. and Soave Enterprises, a company owned by Detroit real estate investor Anthony Brown, joined to buy the Sovereign Hotel in Miami Beach through a Florida limited liability company called Miami Beach Hotel Investors.
The partners obtained a $7.8 million loan from Ocwen Federal Bank to finance the purchase. Brown also hired the Falors to manage the hotel.
But in 2003, the partnership between Brown and the Falor Cos. turned sour. Brown first filed claims of fraud and breach of fiduciary duty in a suit against the Falors in U.S. District Court in Michigan. He accused them of diverting funds, mismanagement and of attempting to rent hotel rooms to hookers.
The Falors countersued, claiming Brown was responsible for the financial problems at the Sovereign. The suits were dismissed for improper jurisdiction.
But the battle continued in the Southern District of Florida, where Brown took Miami Beach Hotel Investors, which owned the Sovereign Hotel, into Chapter 11 bankruptcy proceedings. The limited liability company was on the hook for a $7.3 million mortgage.
As the bankruptcy case unfolded, Brown accused the Falors of funneling $133,000 to their own companies over a two-month period, without properly accounting for the money. Brown claimed that the Falor Cos. filed invoices for vendor payment, then didn't pay the vendors.
Brown also alleged that the Falor Cos. allowed a putrid pile of trash to collect at the Sovereign Hotel. "As the financial situation worsened," Brown claimed in court documents, "The Falors' gross mismanagement of the hotel degenerated into systematic acts of fraud, theft and outright vandalism."
Brown claimed the Falor Cos. improperly charged hotel guests' credit cards in advance, pocketing thousands of dollars. In one instance, Brown said, the company charged a mentally retarded man $30,000 in advance for three months lodging, even though he was not a guest at the time.
The suit also alleged that Chris Falor presented himself as an official representative of the company that owned the Sovereign Hotel, and entered three loan agreements on behalf of the hotel to secure loans with 500 percent interest.
Chris Falor, who manages renovations for the Falor Cos., was convicted of credit card fraud in 1993 in U.S. District Court in Chicago and was sentenced to nine months in prison. In an interview, Robert Falor said that his brother's criminal record is fully disclosed to Falor Cos. investors and partners.
Brown alleged that the Falor Cos.' payment problems with Merrill Lynch in Chicago caused Merrill Lynch to withdraw financing on the Sovereign project. He also claimed that Marriott International withdrew a franchising agreement with the Sovereign Hotel because the Falors were involved.
The Falors fired back in court, claiming that Brown "used the hotel as a piggybank and failed to make capital contributions." In an interview, Robert Falor repeated those allegations and denied that he, his brother or his companies had done anything wrong.
"The general partner in that deal [Brown] was not funding the money necessary to complete the operations and the business plan," Falor said. "As a result, we ended up having a disagreement and we pulled out of the deal. It was totally and completely absurd, and he ended up paying us a half-a-million-dollar settlement."
Court documents and previous news reports, however, put the settlement total at $300,000. The Falor Cos. is no longer involved in the Sovereign Hotel or with Soave Enterprises.
Brown did not respond to requests for an interview.
Big promises to one investor
As the Sovereign partnership was deteriorating, the Falors were on a buying binge in the Miami area. In the summer of 2004, the Falor Cos. partnered with Los Angeles-based real estate investor Colony Capital to buy Mayfair House for $14.2 million. The partnership announced plans to do a $10 million condo-hotel renovation.
In November of that year, the Falor Cos. also bought the Tides Hotel, an oceanfront hotel frequented by the rich and famous, for $26.5 million. The company obtained a $25.1 million mortgage from Delaware-based Aurinko LLC. For the deal, Falor partnered with London-based Tamares Real Estate.
Robert Falor and Tamares subsequently got into a dispute over Falor's promise to sell two penthouse condos at the Tides to an Ohio investor in the Falor Cos. named Michael Voll. Tamares balked, claiming that Falor did not have the authority to sell the penthouses.
Voll sued the Tides owners in Miami-Dade Circuit Court to get an injunction to force Tamares to sell him the units, alleging breach of contract. Tamares argued that it had no knowledge that Falor committed the penthouses to Voll. The London-based company said in court documents that it only learned of the deal when Voll e-mailed a Tamares executive informing him of his interest in the project.
For his suit, Voll presented a letter from Robert Falor describing his investment agreement with the Falor Cos. According to the letter, dated Nov. 9, 2004, Voll had invested $150,000 in the Mayfair and $400,000 in the Hyatt Printers Row, a Falor Cos. condo-hotel project in downtown Chicago.
In the letter, Falor credited Voll with a 210 percent return on his investment in the Mayfair and a 220 percent return on the Hyatt investment, then rolled the credits over into the Breakwater-Edison project and the Tides. He wrote that Voll should expect a return of 175 percent on the latter two investments.
In the letter, Falor also asked Voll for an additional $500,000 investment, which would bring a return of 200 percent. In exchange for this additional investment, Falor offered Voll first right of refusal on two penthouses at the Tides, for $3.15 million, assuming the Falor Companies are in a position to offer such units.
According to the letter, Voll was assigned "reinvestment credits" for his investment companies, allowing his investment and earnings to be rolled over into new projects without cashing out. In the letter, Falor told Voll that his reinvestment credits could be applied to the purchase of the two Tides penthouses.
Two attorneys knowledgeable about real estate and securities were troubled about the letter when it was described to them by the Daily Business Review. The attorneys, who are not involved in any Falor-related litigation or transactions, said that not only did the offer seem highly unrealistic financially, but that it raised issues of possible securities fraud.
"I've never seen anything like that, and the developer would have to be careful for securities reasons with anything like that," said Janice Russell, a real estate attorney and shareholder at Akerman Senterfitt in Miami.
Robert Falor acknowledged that the returns he promised Voll were extraordinary, but said that they were not the usual returns for his projects. "That's obviously high," Falor said. "Mike [Voll] was involved in other deals."
If Falor gave Voll a special rate of return in projects and didn't offer it to other investors, that would be odd, said Hal Lewis, a partner at Pathman Lewis in Miami. "It would be unusual not to treat your investors equally," Lewis said. "It doesn't make sense.'
In court filings responding to Voll's lawsuit, Tamares said Robert Falor's profit projection of 175 percent for the Tides project was too high. "A review of the purported agreement describes exaggerated profit for Voll," Tamares said.
According to Tamares' court filings, Robert Falor wore out his welcome as a partner early.
In an affidavit, Tamares vice president Michael Treanor said that in November 2004, Robert Falor got into a dispute with the Tides project's brokerage firm, and that the brokerage firm then suspended all sales activity. Treanor also accused Falor of failing to obtain proper government approvals to sell condo-hotel units at the Tides, and of failing to invest additional capital as agreed on.
Falor denied these allegations. "I can't comment on that because it's not accurate," he said.
In January, having sold only 10 of the Tides' 50 units, the Tides project sold the remaining 40 units to the project's hotel operator, KOR Group of Los Angeles.
With the sale to KOR, the Tides project grossed $11.4 million before carrying costs. While the sale was profitable, it's unclear what the split was between Falor and Tamares. The initial agreement was for an almost 50-50 profit split.
Falor said the sale was not the result of any bad blood between his company and Tamares. "The majority investor in the deal [Tamares] was concerned about the condo market overall in South Florida," he said. "We took the opportunity to sell at very, very nice profit."
While Falor Cos. was experiencing problems at the Tides Hotel, its partnership was disintegrating with hotelier Jonas Mimoun.
In 2003, Mimoun owned the Breakwater Hotel in Miami Beach when Robert Falor approached him about a deal. The plan was to combine the Breakwater and the neighboring Edison Hotel, two landmark art deco properties in South Beach, in a condo-hotel conversion.
The partnership was formed under the limited liability company South Beach Hotel Investors. The partnership purchased the Breakwater from Mimoun and also bought the Edison.
But last year, Mimoun sued Falor in Miami-Dade Circuit Court, claiming that Falor still owed him $1 million for the sale of the Breakwater. The project also faced other troubles, including a default last year on a $21 million loan that financed the hotels' acquisition.
Mimoun claimed that unbeknownst to him, Falor filed a Chapter 11 bankruptcy petition on behalf of South Beach Hotel Investors. The filing came just hours before the lender, Perry Real Estate Partners, was set to buy the project at a foreclosure auction. The bankruptcy filing thwarted the foreclosure sale, and Mimoun subsequently withdrew his litigation.
But the dispute between Mimoun and Falor continued to percolate. This past March, Mimoun again filed suit against Falor Cos. in Miami-Dade Circuit Court, alleging breach of contract, fraud and unjust enrichment.
According to Mimoun, the Falor Cos. diverted its initial $1.7 million capital investment for its own use. Mimoun also claims that Falor asked to defer a $1.9 million payment owed to the partnership for the sale of the Breakwater, then never paid it.
The new suit also alleges that Robert Falor failed to comply with court orders from Mimoun's previous litigation, including orders to make up the shortfall to Mimoun, work with a crisis manager in running the project and keep his brother and father away from the project.
But in the interview, Robert Falor blamed Mimoun, claiming that the near foreclosure occurred because Mimoun failed to disclose structural problems within the hotel, causing investors to balk. Falor told the Daily Business Review that the bankruptcy filing was necessary to ward off the lender until the problem could be resolved.
Falor called Mimoun's current litigation a ploy. "Those are colorful attempts to apply pressure to get us to buy him out," Falor said. 'It's a lot of ridiculous complaints."
Meanwhile, Falor said, construction on the Breakwater-Edison condo-hotel project is progressing well.
Lost discovery materials?
The Falor Cos. also is facing litigation over one of its biggest South Florida acquisitions, the $128 million purchase of the Royal Palm Crowne Plaza in Miami Beach.
The broker in the deal, Dianna Cheng, sued Robert Falor personally in Miami-Dade Circuit Court last October for breach of contract. According to the suit, Falor claimed he was strapped for cash, borrowed $500,000 from fees owed to Cheng to close the deal and gave her a promissory note. On the $500,000 loan, Cheng alleges, $300,000 remains unpaid.
Falor's defense is that Cheng promised to bring a Hard Rock Cafe to the hotel, and that his decision to buy the property hinged on getting it. He said the restaurant chain has not agreed to locate one of its outlets there.
Cheng also contends that the Falor Cos. failed to comply with requests for documents and discovery in the case. Falor denies that. When asked whether he and his companies ever have resisted a request for production, Falor replied: "No, not at all. Everything was produced when it was subpoenaed."
Not exactly. In a March 1 deposition, Falor said his office lost hard copy documents in the case when the office was being renovated and filing cabinets were discarded. He also said e-mail documents were lost when his computer server crashed.
On March 9, Judge Gerald D. Hubbart signed an order granting Cheng's motion to compel discovery in the Royal Palm case.
Cheng's attorney, Harris Buchbinder of Buchbinder & Elegant in Miami, scoffed at Falor's claim that he complied with all discovery requests. "That is an absolutely false statement,' Buchbinder said. "There are court orders and a series of motions that have showed Mr. Falor has done anything but comply."
In other troubles on the Royal Palm project, the original operator of the hotel, Sol Melia, backed out in March. But Falor claimed the departure did not signify problems at the hotel.
"We and they together made the decision that we wanted to focus on a different direction in terms of design and focus," Falor said. "We decided it was best to part ways."
Falor said the allegations in the various lawsuits against him and his company over the past several years have had no impact on his ability to find partners and financing. "People write about this like it's the end of the world," he said. "But anybody who knows the facts knows different."
Despite Falor's contention that the various suits against him and his company are frivolous, real estate experts doubt that lenders and potential partners would find the fraud allegations and bankruptcy filings in the Falor Cos. recent history lacking in interest.
Where there are questionable allegations in a real estate developer's background, sophisticated investors will seek explanations and perform extra due diligence, Akerman's Russell said.
"I can understand if there a big case, or maybe even two, if the guy has been doing this for years," Russell said. But fraud allegations raise particular concerns because plaintiffs must provide specifics in their pleadings. "If you've been sued for fraud on a number of occasions, it depends on how it comes out in the end," she said.
Lewis, of Pathman Lewis, agreed that multiple lawsuits and bankruptcies raise red flags. He noted, however, that sometimes bankruptcy is a better option than allowing a mortgage foreclosure action to proceed.
Still, with the South Florida condo and condo-hotel market cooling, a developer with existing legal and financial problems is likely to face bigger challenges going forward.
"It's not going to get any easier," Lewis said. "If you couldn't do well in the last couple of years, you're probably not going to do well in the future."
Jessica M. Walker can be reached at email@example.com or at (305) 347-6649.