Business

Investors surprised by markups on Pittenger land deals

Congressman Robert Pittenger, a Republican in his second term, speaks to the audience during a town hall meeting in Mooresville in August 2015.
Congressman Robert Pittenger, a Republican in his second term, speaks to the audience during a town hall meeting in Mooresville in August 2015. rlahser@charlotteobserver.com

The land company founded by U.S. Rep. Robert Pittenger has amassed thousands of acres and around 1,400 investors – some of whom say they’re unhappy with the way the company, now run by Pittenger’s wife, has handled their investments.

Those complaints emerged this month when Pittenger disclosed the existence of an FBI investigation into the company. Pittenger, who transferred ownership to Suzanne Pittenger after being elected to Congress in 2012, said he was confident that he and the company have done nothing wrong.

An Observer examination of land records has shed light on how Pittenger Land Investments functions, including how the company marked up the price of speculative tracts that it sold to investors.

In addition to management fees and a profit taken when a property is sold, land records in more than a half dozen deals show how Pittenger’s company bought the land at one price before immediately selling it to the investors assembled by the company at prices ranging from 13 percent to 70 percent higher.

Investors contacted by the Observer said they were unaware of this markup.

Marc Oken, a former bank executive who invested in a Union County property in 2002, said the deal’s investment summary did not disclose a 70 percent markup on the land Pittenger’s company sold to him and other investors.

“I would never have made that investment if that information had been disclosed,” said Oken, who is also the founder of a Charlotte private equity firm and a former Securities and Exchange Commission employee. “I’m not sure many others would have either.”

The Observer reviewed investment summaries sent to investors on three land deals from 2002 to 2005. The documents include a footnote that says the Pittenger company sells the land to the investors and takes an unspecified “assessment” to cover fees paid for “research analysts, zoning and utilities consultants, and for property procurement and marketing.”

In an email to the Observer, Suzanne Pittenger, the company’s CEO, said the company changed the way it disclosed the markups in later deals. She didn’t say when the change was made. Investment summaries now say that the purchase price paid by investors “is greater than the price to be paid by” the company to acquire the property, she said. Such markups offset fees and expenses and are a standard industry practice, she added.

I’ve been continually frustrated by a lack of movement in spite of an upturn in the real estate market.

Dr. Briggs Cook, a Huntersville plastic surgeon who has invested in two deals with Pittenger’s company

The offerings to investors, Suzanne Pittenger told the Observer, were “always well below market comparables, providing an excellent investment opportunity.” Prior to the recession, the company produced an average internal rate of return – a measure of profitability – of 18 percent, she said.

“PLI has an unbroken history of service for its members over the past 25 years,” Suzanne Pittenger said in the email. “The returns PLI members have enjoyed are the result of daily hard work, and the Pittenger family shares a common interest in the success of each (investment) and its members.”

Robert Pittenger, in an email Saturday, said the company “has always been transparent and straightforward in its communications. We all understand that an ‘assessment’ is an added cost for services rendered which has the same effect as referring to it as a ‘mark-up,’ different choice of words by different attorneys who wrote the various operating agreements.”

Nine investors interviewed by the Observer, however, raised concerns about the company’s operations. Their complaints ranged from the slow pace of land sales to a lack of transparency about the company’s financials to Robert Pittenger’s sale of the company to his wife. A proposed deal this year to transfer management of the company to a Florida-based real estate firm called Landeavor also spurred protests. Suzanne Pittenger called off the deal this month.

Then came news of an FBI investigation. A source told the Observer that a Pittenger-related matter came before a federal grand jury impaneled in March. Federal grand juries typically sit for 18 months as an investigative body that can decide on indictments. The focus of the investigation is not clear. The U.S. attorney in Charlotte, Jill Rose, declined to comment; the FBI neither confirms nor denies investigations.

Dr. Briggs Cook, a Huntersville plastic surgeon who has invested in two deals with Pittenger’s company, said he has been concerned about the lack of land sales and has sought answers from the company about the FBI investigation.

“I’ve been continually frustrated by a lack of movement in spite of an upturn in the real estate market,” Cook said.

Vast tracts, big profits

Robert Pittenger founded his namesake company in 1985 after moving to Charlotte from Texas.

Here is how the firm worked: The Robert Pittenger Company – PLI’s former name – would gather dozens of investors and present them with the opportunity to buy a tract of land. The investors chipped in and bought the real estate, with a new limited liability corporation formed to own the property. Pittenger’s company took a 10 percent stake in each LLC and marketed the tracts to developers, hoping to sell at a profit for his company and the investors.

Over the years, the firm has accumulated vast tracts in the Carolinas, Tennessee and Texas. In the Charlotte area, the company’s investors own more than 9,200 acres in Union, Gaston, Cabarrus and Lincoln counties, with a tax value of more than $80 million, property records show.

The business model does work. It’s just patient money.

John Fraley, who brought in 400 investors as an independent contractor for Pittenger’s company.

John Fraley, who runs a real estate business in Gaston County, said he has recruited about 400 of the company’s investors as an independent contractor for the Pittenger company. Fraley, whose late father was CEO of Carolina Freight Carriers, said he has been told the company has about 1,400 total investors. One of the company’s early investors, he said, was the late John Belk, former Charlotte mayor.

Examples in a 2005 investment summary show deals that produced returns ranging from 15 to 32 percent.

“The business model does work,” Fraley said. “It’s just patient money.”

The Observer examined nine large deals that took place between 2002 and 2006. In those deals, the Pittenger company bought land and immediately sold it to investors at a markup, according to county real estate records.

For example, in 2006, a company controlled by Pittenger called Vanguard Properties of the Carolinas LLC bought a tract in Cabarrus County for about $6.1 million. Vanguard on the same day sold the land to a group of Pittenger investors for almost $1 million more.

In another example, Pittenger’s company assembled a group of investors in 2002 to buy land in Union County, near the intersection of N.C. 218 and Mill Grove Road.

The Robert Pittenger Company bought 304 acres from the landowners on April 1, 2002, for about $1.9 million in two transactions, and then sold it on the same day to two LLCs for a total of about $3.2 million, according to Union County property records.

Three investors in that deal told the Observer they were unaware of the earlier transaction. A letter to investors promoting the $3.2 million deal said they were buying the land at a “very low” basis.

One investor who spoke on the condition of anonymity said he was shocked to learn about this practice. He knew the Pittenger company was to make a profit when the land was sold to a developer, but he said he didn’t know about the upfront markup.

“That’s a rip-off,” he said. “If they are making money on the front end, what is my motivation to buy the property?”

Fraley said that about 10 years ago, some of the investors he recruited asked about Vanguard’s role in the transactions. Robert Pittenger told him that he sometimes used the entity to buy land because sellers might demand higher prices if he used the Pittenger name.

Since the FBI investigation became public, Fraley said some investors have been researching transactions and asking him about possible markups.

“I think it is a very valid point and should be investigated and looked at,” Fraley said.

Securities questions

Suzanne Pittenger said such markups were disclosed in the investment documents.

“It requires a great deal of time, expense and expertise to make these properties available to potential members,” Suzanne Pittenger wrote. “Finding and offering investment properties required the company to pay for research, market analyses, engineering studies, environmental studies, researching the current zoning code, soil studies, traffic studies and other professional fees, along with fees paid to marketing representatives and investment advisers for capital raised for the acquisition, all paid from the mark-up.”

One potential trouble spot for the company: Authorities might consider the transactions to be the sale of securities rather than business decisions made by the members of an LLC, two law professors told the Observer. That could raise questions about whether the deals should have been registered with state and federal regulators and whether the markups were properly disclosed, they said.

“I would be shocked if this was not a security,” said James Cox, professor of corporate and securities law at Duke University. That’s because courts have repeatedly held that if investors aren’t actively involved in key decisions, the promoter of the investment is actually selling a security, he said.

Even if the LLCs were considered exempt from registration, the deals could be subject to securities fraud laws, which are more robust than common law fraud, the professors said.

For example, disaffected investors could claim that the company “sold the security … and failed to disclose a material fact,” said Tom Hazen, a law professor at UNC-Chapel Hill.

Cox said the way the Pittenger company describes the markup on the properties could be considered “fraudulent representation” if investors perceived the markup to be covering modest costs, “where in fact it is to garner a secret profit.”

In its investor summary for two of the deals, the company says the LLCs are organized in a way that they are considered general partnerships – but cautions that there is no certainty that the LLCs won’t be considered securities.

Everything that’s been done has been done with the greatest integrity, and I have no concerns whatsoever.

U.S. Rep. Robert Pittenger

In a statement, Suzanne Pittenger said: “Multiple law firms have advised our company over the years and have stated that our business practice is a partnership. We have followed the advice of knowledgeable and capable securities attorneys.”

Asked about the FBI investigation, she said: “The FBI keeps its inquiries secret so that innocent people are not wrongly subjected to public conjecture. PLI has and would provide any requested information. Members can be assured that the request for information has nothing to do with the marketability of their properties or PLI’s efforts on their behalf.”

Robert Pittenger, a second-term Republican congressman, has said he is not concerned about the federal inquiry.

“All I know is that they’ve asked for information and we’ve gladly turned it over,” Robert Pittenger told reporters earlier this month. “Everything that’s been done has been done with the greatest integrity, and I have no concerns whatsoever.”

Other investors pleased

Over the years, Pittenger has made pitches to investors at Quail Hollow Club in south Charlotte and at the company’s former office in SouthPark, said Linwood Bolles, a Charlotte Realtor who has invested with Pittenger.

“Robert Pittenger was the rainmaker,” Bolles said. “He had the vision. You could buy into that vision. He had the passion that brought people to the table, and they wrote checks.”

Bolles said he turned a sizable profit on one of Pittenger’s deals in the 1990s and wishes he had done more deals. He said he wasn’t aware of any markups.

Another satisfied investor was Richard Worrell of Charlotte, who said he has made a profit on three or four Pittenger parcels he invested in that were sold to developers, and holds interest in several more. “My experience has been very favorable,” he said.

The company’s leadership shifted when Pittenger was elected to Congress in 2012. House of Representatives rules prohibit members of Congress from engaging in fiduciary professions that involve managing others’ assets, including law and real estate, because of likely conflicts of interest. Pittenger said the House Ethics Committee has provided him with a letter that approves the sale to his wife, but he has declined to release it.

Asked whether Robert Pittenger has any input in company decisions, Suzanne Pittenger said: “Congressman Pittenger has a full time job representing the people of the 9th Congressional District.”

Their son, Bobby, served as president of the company, but he said he left 10 months ago to spend more time with his family. He now works for Bahakel Communications, which owns TV and radio stations. Suzanne Pittenger’s father was the late Cy Bahakel, who founded that company. She said she has an extensive business background and works daily with professional advisers, consultants and brokers.

Robert Pittenger was the rainmaker. He had the vision. You could buy into that vision. He had the passion that brought people to the table, and they wrote checks.

Linwood Bolles, a Charlotte Realtor who has invested with Pittenger

Some investors told the Observer that they were unhappy with the management change, saying they invested with Robert Pittenger, not other family members. An investment summary for one of the deals says the “administrative manager of the company” may resign at any time by giving written notice to investors.

Pittenger’s business practices have come under scrutiny before. During the acrimonious 2012 Republican congressional primary, an opponent noted that, as a state senator in 2003, Pittenger voted to annex into Waxhaw a tract owned by a partnership in which he held an interest. The annexation made the land more valuable.

Pittenger countered that the Senate Ethics Committee, which received a complaint about the vote, never acted on it publicly. He said he’d done nothing wrong.

Winding down, selling land

After years of buying property, Pittenger Land Investments appears to be winding down.

This spring, the company decided to focus on selling existing properties, rather than buying new ones, Suzanne Pittenger said. And in April, the company disclosed to its investors a deal that would have effectively turned over the management and marketing of the properties to a Tampa-based company called Landeavor.

Landeavor would have a seven-year option to buy the properties, but would take over annual tax payments and work to gain zoning approvals needed to sell the land to developers. Investors, however, complained about the complexity of the deal and the speed at which they were being asked to approve the transaction.

The scuttled deal compounded investors’ concerns about the company, including a lack of communication about their properties and expensive annual fees. For example, a person with a $100,000 investment in the Union County property could pay as much as $2,590 per year in taxes, administrative fees and other expenses, the investment summary shows. One investor who spoke on condition of anonymity said she stopped paying the fees in protest.

The company has also been downsizing. It went from around eight employees to just two, Suzanne Pittenger and an assistant. The office has moved from Sharon Road to a co-office space on Fairview Road.

Daniel Burns was previously a managing director at the company, according to his LinkedIn page. He told the Observer that his employment ended June 30 “due to internal restructuring within the company.”

The downsizing came not long after the FBI’s inquiry started this spring. Burns said he became aware of the FBI investigation during his time at PLI in April, but “I don’t have any specific knowledge of the details involved and have not been interviewed or questioned by the FBI.”

On Friday, Suzanne Pittenger sent a memo to investors saying Charlotte-based NAI Southern Real Estate will represent the company in selling the properties owned by the LLCs to developers. She said a “major developer” is already interested in some of the company’s properties.

PLI still manages 52 LLCs, she told the Observer. Pittenger family members have invested in many of the LLCs, so they “share a common interest with the other LLC members to maximize the profit on sales,” she added.

For some investors, it’s been a long wait.

The Union County property, a few miles east of I-485, remains unsold after 13 years, despite being described in a memo to investors as a “very attractive investment in an excellent growth area.” A Robert Pittenger Company sign offering the property for sale is barely visible from N.C. 218, shielded by shrubbery and surrounded by trash.

Staff writer David Perlmutt contributed.

Rick Rothacker: 704-358-5170, @rickrothacker

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