Hundreds of investors in a struggling luxury student apartment building near the University of Texas at Austin are set to recoup much of the $75 million they committed to the project, the bulk part of the bill being taken care of by a management company which has sparked complaints from tenants across the country.
Nelson Partners Student Housing will pay $50 million to the investor group that includes doctors, lawyers, teachers and engineers in a preliminary settlement approved by a Texas state judge. The deal or “liquidation plan” could force Nelson Partners to sell many of its nearly 20 properties to raise cash. Investors could also get several million dollars from a New York hedge fund that financed the deal, following a jury verdict on Wednesday in a related trial.
The proposed settlement would resolve a bitter legal battle in which investors in the Skyloft student housing complex claimed they were defrauded by the company’s chief executive, Patrick Nelson, who has aggressively purchased properties for the past four years.
But Mr. Nelson and his company have encountered financial problems and bankruptcies at several properties while resident students at different complexes have complained of poor living conditions, including broken elevators, dark hallways, uncollected trash, insect infestations and pools covered in algae.
The Skyloft settlement, which received preliminary approval from a Texas state judge late last month, would force Mr Nelson to drastically curtail his ambitions to become a major regional player in the student housing industry of 100 billion dollars. If the plan is finally approved, Mr Nelson and his company would have up to 18 months to raise funds for the fund, which will be overseen by the court.
Recent issues on US college campuses
The San Clemente, California-based company’s contributions will come from equity interests in properties it controls in several states. Many of them were bought using private investment deals similar to the Skyloft arrangement that Mr Nelson and stockbrokers had pitched to other investors.
Mr. Nelson did not respond to requests for comment.
Skyloft investors could also receive additional millions from Axonic Capital, the New York-based hedge fund that helped finance the purchase of the 18-story student building with a $30 million loan. After declaring Nelson Partners in default, Axonic seized the property in December 2020 and then quickly resold the building to a New York real estate company.
A jury in Austin on Wednesday ruled that Axonic was liable for some of the losses and awarded investors $17 million in damages. But it may be a while before investors see any of that money: the jury, when asked to apportion responsibility for investors’ losses, placed 75% of the blame on Nelson Partners.
Axonic, in a statement, said it believed it only owed investors $4.25 million.
“We strongly believe that we were collateral damage to Nelson’s fraud in this matter,” the company said.
Robert Brownlie and Doug Brothers, attorneys for the investors, said they were happy with the decision.
Mr Nelson has repeatedly blamed the Covid-19 pandemic for creating cash flow problems which forced him to stop paying dividends to investors in Skyloft and other properties. Since last July, he has put three other properties out of business.
In a recent press release, Nelson said the “heavy” federal government lockdowns during the pandemic had created problems for his business.
“Even though the government prohibits landlords from evicting non-paying tenants, it has done nothing to protect companies like Nelson Partners from their lenders,” said Mr Nelson, whose firm has received little more than $1 Million in Help from the Federal Paycheck Protection Program.
Skyloft investors, in court documents and in interviews, have claimed that Mr Nelson misappropriated some of the $75 million he raised from them to fund the operation of other properties. Mr. Nelson denied the charges.
Mr. Nelson began taking steps to sell some of the properties managed by his company prior to the settlement agreement. In January, Nelson Partners sold a high-rise student apartment building in Tempe, Arizona, for $36 million, and it received several offers for an upscale student housing complex in Tucson.
Nelson Partners should have little trouble finding buyers. Student housing is seen by investors as a stable source of income, as rents are often paid with student loans. High-end off-campus housing has become popular in recent years as universities and colleges spend less money building dorms, and some students seek housing with additional amenities.
The student housing market recently got a big boost with Blackstone Group, the leading private equity firm, announcing a deal to buy American Campus Communities, the nation’s largest publicly traded student housing company. The deal values American Campus at $13 billion.