January 11, 2014

Can Kahn hold on? Influential Columbia developer faces financial crisis

Kahn, who will turn 74 this year, is locked in the crisis of his life: How to satisfy what now has ballooned into more than $100 million of publicly declared debt in U.S. Bankruptcy Court, while hanging on to whatever vestiges he can of the once-wealthy empire he built up. His story is spelled out in voluminous court filings.

A pocket-gouging 1973 crude oil embargo and energy crisis the decade after young Alan Bruce Kahn finished business school barely fazed the Columbia upstart’s new real estate development company.

That wasn’t the case for his family’s established business, though. M.B. Kahn Construction Company almost went under because of the crisis, but Kahn and his father took out a personal loan to pay off the creditors, enabling the business to continue.

Forty years later, Kahn, who will turn 74 this year, is locked in the crisis of his life: How to satisfy what now has ballooned into more than $100 million of publicly declared debt in U.S. Bankruptcy Court, while hanging on to whatever vestiges he can of the once-wealthy empire he built up. His story is spelled out in voluminous court filings.

Specifically, Kahn is trying to hold on to his homes here and abroad, his nearly $2 million retirement account, a children’s trust, and hundreds of thousands of dollars of future earnings.

But creditors are swarming around the established developer. They’re challenging him for cash and assets in a move that could hurt his prize accomplishment, the trendy Village at Sandhill shopping complex in Northeast Richland County.

Kahn – who has put up tall buildings in downtown Columbia, an iconic 1980s shopping mall on Two Notch Road almost three decades ago, and the pace-setting Village at Sandhill shopping center and residential complex at Two Notch Road and Clemson Road in 2002 – is no stranger to business and public controversy.

In 2004, after the public and many public officials agonized over whether or not to build a $37.4 million convention center in Columbia, M.B. Kahn Construction Co. shoehorned the 142,000-square-foot facility into the downtown landscape as if it had always belonged on Lincoln Street, some say.

Kahn, who is chairman of that company but is not involved in its ownership, filed for Chapter 11 bankruptcy protection from creditors last April. The construction company is not part of the bankruptcy filing.

The filing covers Kahn and two companies he controls, Kahn Family LLC and Kahn Properties South LLC. But it is Kahn’s exposure through personal assets where creditors appear to have their sights set.

A judge on Feb. 28 is set to hear arguments concerning Kahn’s assets and the debt he says he owes but can’t pay back in full, involving at least $55 million in unsecured debt and $65 million of secured debt his creditors declare he owes, according to court records, with more filing time still on the clock.

Long-standing respect

Highly respected for decades in Columbia business and civic circles, even by his competitors, Kahn also has been highly criticized for some of his business practices, including his longstanding decision to operate more than 200 business entities out of a single bank checking account.

Such practices have raised objections, and even suspicions, about Kahn among some of his creditors who fret – needlessly, some say – that they won’t be treated fairly in the distribution of assets.

“Alan Kahn is one of the most honorable persons I know, relative to the 20 years I was mayor,” said Bob Coble, who served from 1990 to 2010. “They built the (Columbia Metropolitan) convention center, and that was one where it was very controversial.”

Questions swirled as to whether the facility would suit a purpose, be built on time and come in under budget, Coble recalled. “They did just an absolutely wonderful job with that – on time, under budget and had just wonderful minority participation,” Coble said.

“They were a great company and (Kahn) a great person to work with,” Coble said.

His detractors, some of whom also are his creditors, have filed a plethora of court motions seeking to get Kahn’s hands off the levers of that lone checking account that controls his empire. They effectively accuse Kahn of a “robbing Peter to pay Paul” business philosophy by which/ he also uses cash assets generated by his businesses to enrich himself, by funding a legally protected retirement account, and his 73-year-old wife, Charlotte, via a $3,500-a-month check.

Kahn in December filed a proposal in the courts to pay back his creditors 5 cents for every dollar he owes them. He also foots the bill for the upkeep of a few homes, all of them listed in his wife’s name: one in Columbia on Lake Shore Drive and another on Isle of Palms near Charleston.

According to court records, the 75-year-old Lake Shore Drive property, which has been in Kahn’s wife’s name for two years, is infested with mold and is unlivable and unsellable. The Kahns actually live in a rented apartment at his Village at Sandhill complex, court papers show.

The Isle of Palms house has been in Kahn’s wife’s name since 1995, and Kahn foots the bill for the upkeep on a $291,000 Paris apartment owned outright in his wife’s name for more than 13 years, records show.

Creditors’ motions

Kahn’s chief creditor Gibraltar LLC, a Pennsylvania-based distressed real estate and investments company, is leading the effort to have the court appoint a trustee to take over business activities in the Kahn empire. Other Kahn creditors also have stepped forward to oppose Kahn’s proposed repayment plan, including Wells Fargo Bank.

Wells Fargo says it holds six Kahn-related loans totaling $62 million, guaranteed by Kahn and secured by various collateral pledged by debtor and non-debtor entities. Wells Fargo filed a Jan. 8 motion asking the court to prohibit Kahn from using cash collateral from his business transactions, over concerns the spent cash further diminishes their odds for getting that a just repayment by Kahn.

The San Francisco-based bank also joined Gibraltar in petitioning the court to appoint a Chapter 11 trustee in the case, something Kahn has said he would vigorously oppose. Wells Fargo and Gibraltar together account for nearly $100 million of debt claimed against Kahn in the case.

“Due to the nearly countless number of affiliated entities and related parties and the self-dealing transactions necessarily caused by the way in which the debtor has organized his business affairs, cause exists and it is in the best interest of creditors to appoint a Chapter 11 trustee to investigate the assets and transactions of the debtor,” Wells Fargo said in its motion.

Columbia certified public accountant Marty Ouzts, said he was appointed by the Bankruptcy Court as the accountant for Kahn in the Kahn Family LLC case and is likely to be appointed accountant in the related Kahn Properties South LLC case.

“I have been working with Mr. Kahn since 2010 in an effort to come to mutually agreeable resolutions with his creditors and we have successfully resolved the majority of the creditors that were involved at that time,” Ouzts said in response to written questions about the case.

Ouzts also dismissed the criticisms lodged in the case about the business methods Kahn employs, operating from a single bank account.

“This has actually been a common practice in real estate-related businesses for a long time,” Ouzts said. “As projects are in the development phase even when things are going well, the projects do not generate cash flow for years from inception to stabilization.

“The common bank account allows developers to fund the startups without having to make transfers sometimes on a daily basis,” he said. Ouzts also chided Kahn’s detractors about cash disbursements.

“In this instance, the funds were completely tracked from an accounting standpoint so the result is the same,” Ouzts said. “The facts in this case are that the projects financed by Gibraltar, the creditor who is complaining about it, was actually the principal beneficiary of the use of the common bank account.”

In another Jan. 8 filing in the case, three finance companies, including Bank of America, Fleetwood and Deutsche also asked for appointment of a trustee in the case, citing Kahn debts totaling $7.3 million, and asking the court to approve partial use of cash collateral by Kahn going forward.

Chapter 11 bankruptcy laws generally allow a debtor to retain control of his or her possessions and business enterprises, which Kahn’s attorney, Geoffrey Levy, has said is very important to his client.

Kahn’s children, Monique, Kevin and Charles Kahn, recently filed a creditor’s motion in the case as ABK Children’s Trust, opposing appointment of a trustee citing $6.6 million owed them for guaranty of notes from the trust to Kahn.

‘Work things out’

When faced with all the turmoil that besets a Chapter 11 bankruptcy filing, from having to publicly disclose one’s finances to having creditors call in to question your personal integrity, Kahn, who has a master’s degree in finance from George Washington University, reverted to one of his earliest, real-life lessons in business: Try to work things out.

It was a lesson he learned as a young man fresh out of school. When Kahn’s father’s business was about to go under in the 1973 energy crisis, Kahn and his father took out a loan to pay off construction costs owed by companies the elder Kahn was doing business with at the time of the crisis that already had gone under.

Begun in 1927 by the young Kahn’s father, Irwin, and his uncles, M.B. Kahn Construction Company had been “severely affected” by the shocking ’70s energy crisis, Kahn declares in court papers now. It was the place where young Kahn had gotten his start in business, shoveling dirt on Greene Street as early as 1955 when he was 15, to put down the foundation of the Russell House at the University of South Carolina.

But the 1973 economic hit was so severe it threatened to close the doors and force the company to renege on loans to two local banks that would have cost in the millions, Kahn maintains.

Lenders on the construction projects had gone under, so M.B. Kahn, the general contractor on the projects, wasn’t going to be paid and neither were the subcontractors and suppliers.

So, Kahn and his father went to the two banks, The Citizens and Southern National Bank and Bankers Trust, and took out a “personally guaranteed loan” to pay off the construction projects M.B. Kahn had underway, which ensured suppliers and subcontractors would be paid.

Sandhills struggles

In the ’80s, Kahn out-competed Cleveland, Ohio regional mall developer Jacob, Visconsi & Jacob ultimately to develop the 1.2 million-square-foot Columbia Mall on Two Notch Road. JVJ was vying to build a retail center on Farrow Road and had attracted J.C. Penney as an anchor. But JVJ was unable to attract Sears Roebuck to Farrow Road, and Kahn succeeded in attracting that retailer to Columbia Mall. J.C. Penney followed, and Kahn built the mall, later attracting Belk and Rich’s Department Store.

In 1998, Kahn formed Kahn Family LLC and Kahn Properties South LLC, and with a partner, Ted Hunt, developed more than 30 Walgreens and other projects.

In 2002, when Kahn entered the very public battle to purchase 300 acres in Northeast Richland County from Clemson University for $13.5 million to build the 1.5 million-square-foot Village at Sandhill shopping complex, he successfully lured J.C. Penney away from Columbia Mall to be an anchor in his new complex. But there was strong public opposition to Village at Sandhill.

The public opposition raged for a year, before the battle shifted to zoning, which took another year to resolve, Kahn cites in court papers. So toxic was the zoning battle and so uncertain was its outcome, that Kahn said some of the projected anchors for the Village at Sandhill development recoiled and located instead to nearby Two Notch Road.

Kahn says in court papers that the struggles with public opinion, public officials and zoning laws left his new development with only a Bi-Lo store, a J.C. Penney and Belk as anchors for his 300-acre complex, which he had to purchase from Clemson as a whole. Books-A-Million, Home Depot and a Regal Cinema movie house also came aboard.

Kahn said the first phase at Village at Sandhill went well, achieving 100 percent leasing and financing. The second phase also was substantially leased at 90 percent and fully and permanently financed. The lifestyle center at the Village at Sandhill was constructed, substantially leased at 90 percent and permanently financed, Kahn’s papers say, but the Forum II development at the complex encountered trouble in the downturn of the Great Recession and was unable to expand.

The second phase of Village at Sandhill also encountered trouble in the economic downturn of the recession starting in 2008, when potential tenants became scarce.

Kahn’s troubles snowballed in the recession when last year the developer had trouble paying prior year taxes on portions of the development. Kahn eventually paid the tax tab and penalty seven months late. Then this year, Kahn saw about 95 acres of undeveloped property at Village at Sandhill, or roughly one third of the total site, fall to auction for $850,000 due in overdue taxes.

Kahn, who has said he’ll probably retire or cut back sharply on his work schedule when he turns 75, still can redeem that auctioned property before the end of the year, if he pays the taxes.

Meanwhile, Kahn said in a statement to The State Friday that all his financial records are “an open book,” that full, transparent records are and will continue to be provided to his creditors, and that things are looking up at Village at Sandhill.

“I am continuing to insure that each of my creditors is dealt with correctly, fairly, honorably and equitably and that we maximize their recovery,” Kahn said. “To do this, I am focusing on leasing and marketing their collateral. These efforts seem to be working.

“The Village at Sandhill is turning the corner of the recession with continuing year over year store sales gains,” Kahn said.

Citing evidence of a turnaround at the complex, Kahn said Grow Financial Federal Credit Union followed up November 2013’s most successful opening in the company’s 56-year history with business that is running 37 percent ahead of plan. Last year, 7.7 million vehicles visited the Village, which is up 1 million visits over pre-recession levels, he said.

More land contracts are in process now at the Village than any time since before the recession, Kahn said.

Also, East Coast Pizzeria, owned by families from Providence, R.I., with more than 40 years of successful restaurant operating business experience, is opening an Italian restaurant at the end of this month, he said.

And, in Chesapeake, Va., where Kahn also operates, there is stronger leasing demand than any year since 2005, with three serious leases in negotiation, Kahn said.

Debts and bankruptcy

Barbara Barton is a specialist in bankruptcy in Columbia who has practiced for 37 years, almost all of that time in the bankruptcy arena. Certified as specialist in bankruptcy law by the South Carolina Supreme Court and the American Bankruptcy Institute, Barton also is a member of the American College of Bankruptcy, one of only three such attorneys in South Carolina.

Chapter 11 Bankruptcy is designed to restructure a business’ debt in such a way the business is capable of repaying them, Barton said.

“Chapter 11 used to be a much stronger stigma than it is now,” she said. “It used to be that if a company filed Chapter 11, the creditors would refuse to continue working with them, and they would not be able to reorganize, just because it was such a mark of shame. But now, in this business climate, some people understand that sometimes filing a Chapter 11 can be the smart business choice.”

Under Chapter 7 laws, for instance, creditors might get nothing, Barton explained. Filing Chapter 11 where the business can continue to operate and generate funds usually means the creditor can get more.

“In any type of distress situation, the creditors are going to be trying to evaluate the best way for them to be paid the most,” Barton said. “The question becomes do you work with the debtor outside of bankruptcy or would you be better inside bankruptcy. The difference between the two is oversight of the Bankruptcy Court, she said. “If a creditor loses confidence in the debtor, and does not believe that the debtor is contributing all of its assets, or making its best effort to make these payments, then sometimes being inside bankruptcy can be helpful.”

The bankruptcy code is supposed to create another level of credibility by assuring that information about all available assets and all available cash flow is known, and that all parties are paid fairly, Barton said.

And there is little chance for obfuscation, she said.

“If an individual files Chapter 11, everything that he owns is an asset of that Chapter 11. Every asset that he has is an asset of that Chapter 11. So if he has an ownership interest in any other business, then that ownership interest (whatever percentage it is) is an asset of that Chapter 11.”

In addition, in Chapter 11 for an individual, the person’s entire income is an asset of the Chapter 11, Barton said.

So, if Kahn owns Village at Sandhill, or some percentage of it, that ownership also is an asset of the Chapter 11 bankruptcy, Barton said, and can be reached by his creditors. The same is true of any income derived by Kahn from Village at Sandhill, she said.

“The reason a creditor might want a trustee or examiner appointed in a Chapter 11 case is if they believe the debtor is not operating in good faith,” Barton said. “A debtor in possession has a responsibility, a fiduciary obligation, which means he has to put his creditor’s interest ahead of his own, and that’s a really hard thing for a debtor to do. It’s a very hard thing.”

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