Investor blaming appraisal for steep loss at Lake Las Vegas

A view of the MonteLago Village at Lake Las Vegas Thursday, May 26, 2011.

Hundreds of millions of dollars are at stake in the latest legal battle over the collapse into bankruptcy of the Lake Las Vegas community.

Commercial real estate giant CB Richard Ellis Inc. of Los Angeles on Friday filed a lawsuit in federal court in Las Vegas as a preemptive strike in the dispute with Lake Las Vegas investor Highland Capital Management L.P., a Dallas firm managing some $23 billion in assets.

Lake Las Vegas is a 3,600-acre, 1,600-home resort community in Henderson, near Las Vegas.

Friday’s lawsuit says Highland funded more than $200 million of a 2007 loan to Lake Las Vegas that was arranged by Credit Suisse Securities (USA) LLC, and that Highland then invested tens of millions of dollars more into Lake Las Vegas.

The suit says Highland has advised CB Richard Ellis that it believes the Las Vegas office of CB Richard Ellis provided a faulty appraisal of Lake Las Vegas, causing Highland to lose its entire $200 million-plus investment in Lake Las Vegas.

CB Richard Ellis’s lawsuit says Highland has presented a draft lawsuit to CB Richard Ellis accusing CB Richard Ellis of fraud and negligent misrepresentation and that Highland is seeking information on insurance coverage that CB Richard Ellis may have to cover its claims.

The lawsuit alleges Highland repeatedly suggested the appraisal overstated the value of the property in ways that were concealed from Highland, but has failed to back up these allegations with detailed information.

Highland, for instance, has failed to say how Highland calculated its damages and how Highland was actually harmed, the lawsuit says.

As a result, CB Richard Ellis’s insurance carrier has informed CB Richard Ellis it does not have enough information to meaningfully consider Highland’s claim and thus will not participate in planned mediation of the dispute, the lawsuit says.

The suit seeks a declaration that CB Richard Ellis is not liable to Highland, its affiliates or any of the limited partnerships it manages for any losses they allegedly sustained at Lake Las Vegas.

“CB Richard Ellis denies that the appraisal was inaccurate, that Highland relied on the appraisal to its detriment and that it bears any liability for Highland’s Lake Las Vegas losses,” said the lawsuit, filed by attorneys with the Las Vegas office of the law firm Glaser Weil Fink Jacobs Howard Avchen & Shapiro LLP.

This isn’t the first time appraisals have been at issue in lawsuits and bankruptcies involving not just Lake Las Vegas, but other projects funded around the West by Credit Suisse during the economic boom of the mid 2000s.

Lawsuits and bankruptcy filings say that in marketing hundreds of millions of dollars in loans as part of a new lending product for resort developers, Credit Suisse developed an unconventional and unsound appraisal methodology called “total net value” that did not comply with the Financial Institutions Recovery Reform Act of 1989 (FIRREA).

Using these allegedly inflated appraisals, Credit Suisse provided loans to the developers of Lake Las Vegas and other resort communities that would allow developers to distribute profits to themselves while generating handsome fees for Credit Suisse, the lawsuits say.

Several of these resorts, however, ended up in bankruptcy as the economy slowed down and they couldn’t service the debt provided by Credit Suisse. They include Lake Las Vegas and the Yellowstone Mountain Club in Montana.

But bankruptcy records show Credit Suisse maintains that it obtained appraisals (including a FIRREA-compliant appraisal in 2007) showing a loan to Lake Las Vegas for $560 million in 2004 was “substantially oversecured.”

Of the $560 million, some $470 million was distributed to the Lake Las Vegas investors, $50 million refinanced existing debt and the remainder covered fees and expenses for the loan and provided working capital.

Lawsuit records say that in marketing the 2004 loan to Lake Las Vegas, Credit Suisse obtained an appraisal from Cushman & Wakefield finding that, based on this total net value method, the project with extensive undeveloped land holdings was worth about $1.1 billion.

CB Richard Ellis then appraised the Lake Las Vegas development as being worth $510 million to $807.7 million as of April 2007 in what has been called the FIRREA-compliant appraisal. That appraisal was commissioned by Credit Suisse for a $540 million loan refinancing the 2004 loan, records in the Lake Las Vegas bankruptcy case show.

By the summer of 2009, however, as Lake Las Vegas was preparing to emerge from bankruptcy, the punishing recession had slashed the value of its land holdings.

Lake at Las Vegas Joint Venture reported at that time it held assets of $191.2 million, mostly in undeveloped real estate, against liabilities of $728.4 million. Included in the liabilities was $675 million Credit Suisse says it was owed.

The main Lake Las Vegas investors include Texas billionaires Lee Bass and Sid Bass and Transcontinental Corp. of Santa Barbara, Calif.

Since July 2010, when Lake Las Vegas emerged from bankruptcy, the Bass brothers and Transcontinental have been engaged in legal combat with Credit Suisse and Highland Capital.

After the lenders converted their loans into equity of Lake Las Vegas, essentially taking it over, the bankruptcy’s creditor trust sued the Bass brothers, Transcontinental and other Lake Las Vegas equity holders in hopes of recovering the $470 million in distributions they had taken out of the Lake Las Vegas development company.

The Bass brothers and Transcontinental countered with their own bankruptcy court lawsuit against Credit Suisse, Highland and other lenders that would receive most of the $470 million if the creditor’s trust succeeded in obtaining the money.

Their lawsuit charged the lenders would receive an unjustified and illegal windfall in the form of both cash and ownership of Lake Las Vegas — and that this would violate provisions of the loans at issue that explicitly stated they were non-recourse loans and that the lenders’ sold remedy for default would be to foreclose on Lake Las Vegas.

On June 17, U.S. Bankruptcy Judge Linda Riegle dismissed the investors’ lawsuit, saying the creditor’s lawsuit alleging fraudulent transfers, mismanagement and “sham” transactions had nothing to do with the initial loan contracts.

This month, attorneys for Transcontinental and the Bass brothers appealed her ruling to U.S. District Court in Las Vegas.

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