One of Washington's largest condominimum development firms allegedly submitted a fraudulent $165,000 security pledge for its restoration of a Capitol Hill condo, triggering concern among District housing officials that security bonds covering hundreds of condo projects could be worthless.
Robert D. Holland and Bruce D. Lyons, whose Holland & Lyons Associates Inc. has been one of the most active of the District's condo developers, allegedly submitted a false letter of credit to secure conversion of the Stanton Manor apartments at 644 Massachusetts Ave. NE. The charge was made in a lawsuit filed by the building's residents March 17.
Neither of the developers could be reached for comment. Their lawyer in the suit, Nelson Deckelbaum, said it would be improper for him to comment beyond saying, "We will vigorously defend the lawsuit."
Under D.C. law, the security pledges -- in the form of bonds, letters of credit, land or other securities -- must be posted by a developer to protect condo buyers if he fails to complete the construction or conversion of a condominium. This pledge, or bond, also protects against a developer who fails to provide promised features, such as new appliances, cabinet work or reconditioned elevators.
James E. Clay, deputy director of the D.C. Department of Housing and Community Development, said last week that there are more than "a couple of hundred" cono projects -- involving perhaps thousands of units -- still covered by such pledges. These warranties last up to two years after a building is completed.
Clay said there was no immediate way to determine whether the security requirements of the D.C. law have been followed in other projects. As a result, he said, "It would be irresponsible for us not to conduct some kind of review at this time."
Clay acknowledged that the bond provisions of the law were not vigorously enforced in the past and that "the kind of review performed by the [housing] staff was cursory at best."
On Thursday, Clay said he had reviewed the Stanton Manor documents and found that the letter of credit from the National Bank of Washington submitted by Holland, Lyons and their partner, Douglas C. Miner, was "not valid." Clay said he would order that a new bond be posted this week.
On a broader scale, he said, "There is concern in my mind that this may be the rule rather than the exception."
If, indeed, the law has been widely ignored and sporadically enforced, thousands of District condo dwellers could be unprotected at a time when a recession in real estate could force builders to abandon uncompleted projects.
On the other hand, the Stanton Manor example could be an isolated case. "I'd like to think it's the exception," said Clay.
Instead of providing security for the Stanton Manor residents, the letter of credit filed by Holland and Lyons with the city actually secures a Holland and Lyons loan at another bank, where the developers had borrowed $1.7 million to acquire and removate the Stanton Manor building.
NBW's letter of credit manager, Paul Shaffer, confirmed the terms of the letter, but added, "We have nothing to do with whatever Holland and Lyons did with our letter of credit. All I can say is that we issued it, and if there had been any change in its status, it would have to be noted in an amendment. It has not been amended and Union First [National Bank] is the sole beneficiary."
Clay said he has asked the D.C. Corporation Counsel to determine whether Holland and Lyons violated the D.c. Condominium Act, which carries criminal penalties for willfully submitting false information.
The idea that bonds posted by other dvelopers may be worthless poses obvious problems for condo residents and potentially serious political problems for city officials charged with administering what has been called a model condominium law.
One condo developer who asked not to be identified said it is common to be identified said it is common practice in the D.C. real estate industry to circumvent the bond provisions of the law. "People don't like to tie up their money for that long," the developer said. "I'm sure that half the developers in town are in violation."
The developer said that on one project in the Dupont Circle area, city housing officials did not challenge the absence of any bond, letter of credit or any other security when the developer applied for a restoration permit.
Holland and Lyons, both in their mid 30s, converted Stanton Manor to a condominium in 1978. In recent months, they have acknowledged that their 10-year-old firm is in serious financial trouble.
Those troubles include:
The pullout last fall by their major financial backer, Warren Avis, who founded the rental car company that bears his name.
Severe cash flow problems caused by millions of dollars in outstanding construction loans that are driving up this firm's interest payments because the loans are set to "float" at two or three points above the prime rate, which is now 20 percent.
Almost negligible sales on an inventory of dozens of condominium units, most which are concentrated at The Papermill, the firm's flagship development on the Georgetown waterfront.
Holland and Lyons' creditors include a small Rockville air conditioning firm that has not been paid $16,000 for work done eight to 10 months ago; a real estate agent named Robert J. Jersky, who is suing over nonpayment of a $12,500 commission and an Oxon Hill contractor who wants $2,900 for stucco work he performed last December.
Lyons resigned from the board of the National Bank of Washington March 17 after it was revealed that he owed the bank $3.6 million in loans, most of which the bank considered high-risk because "management cannot properly assess the posibility of loss," according to the bank's annual statement.
Under the condominium law, developers are required to post a cash bond or some other security equal in value to 10 percent of the construction or restoration costs of a project. If the developer is not able to perform the promised work, the law makes the funds available to residents who have already moved to help pay for the project's completion.
The bond must be posted prior to the sale of the first unit and remain posted as a warranty on each condo as well as the so-called "common areas" of the building.
The bond is held like a security deposit for up to two years. If a condo resident claims that promised work was not performed on his unit, he or she may petition the city to use money from the bond to complete the work.
This basic consumer protection was included in the District's law and in the laws of dozens of other states following condominium failures that have occured around the country, especially during the 1975 recession. At that time, developers in large numbers abandoned their projects in midstream, leaving buyers with incomplete buildings and nowhere to turn for help.
"The whole purpose of this law and of the bond was to prevent exactly this situation," said Peter Kolker, the attorney for the Stanton Manor residents. "How could the District not have looked at this more carefully. Clearly they were asleep at the switch."
Kolker was in D.C. Superior Court Friday morning to ensure that Holland and Lyons do not sell the last of the 44 condo units at Stanton Manor. Kolker said the residents intend to seek a ruling that would allow them to use the proceeds from the sale of the last unit to complete renovations to the building.
In a sworn statement submitted to D.C. housing officials, Holland and Lyons claimed that the $165,000 letter of credit was issued, "by the National Bank of Washington at the request of the Declarant [the developer], and designating the Mayor and the [residents'] association as joint beneficiaries."
The sworn statement, filed in September 1978, says further that, "upon receipt of joint, written instructions from the [residents] association and the Mayor or his designee, the declarant authorizes the . . . [housing department] to release the letter of credit to the Mayor for purposes of meeting requirements of . . . the act and the terms of declarant's warranty."
A copy of the letter of credit obtained from housing department filed sets forths the terms clearly and concisely in three paragraphs. Nowhere in the letter are the residents of Stanton Manor or the mayor identified as beneficiaries.
The lawsuit filed on behalf of the residents claims that Holland and Lyons sworn statements that the letter of credit was drafted for the benefit of the residents "were false when made and were known by these defendants to be false when made."
The validity of the letter of credit is important in the suit because, among other things, the residents claim that Holland and Lyons misrepresented work done on the building's roof, elevator, electrical system and fuel oil tanks.
Moveover, the residents claim that portions of walls remain unplastered, old plumbing was not replaced as promised and that workmanship was not up to represented standards.