Developer’s use of Sacramento railyard loans raises eyebrows [The Sacramento Bee, Calif.]

Aug. 28--In early 2007, with the economy still buoyant, a billionaire developer from Georgia and a well-heeled investment firm from Illinois saw gold in downtown Sacramento's dilapidated railyard.

The Illinois firm wound up loaning $185 million on the historic property and, in the spirit of the pre-recession era, attached few strings. The borrower, real estate tycoon Stan Thomas, was juggling projects from San Antonio to London and was free to use the loan money as he saw fit.

Since then, Thomas' finances have crumbled, the railyard is sputtering -- and how Thomas used that loan has become a matter of controversy.

A federal judge in New York, ruling on a dispute between Thomas and his former partners, said the developer indeed spent some of the loan money on projects outside of Sacramento. The judge didn't say how much, but the former partners pegged it at $98 million.

The ruling raises concerns that Thomas, by spending some of the loan money elsewhere, may have weakened the project's financial underpinnings.

Thomas defaulted on the loan in June and may lose the property via foreclosure to the lender, Inland American Real Estate Trust Inc. Although site work is continuing, the default prompted a state agency to withhold most of a $30 million grant to fund infrastructure work.

City officials, who helped Thomas pull together $245 million in taxpayer subsidies for the railyard, said Friday that their lawyers are reviewing the court records.

"There are a number of sections that have piqued some interest," said Assistant City Manager John Dangberg.

Thomas said Friday that while he sometimes moved money between projects, he didn't violate any rules on his government subsidies. He added that he's worked feverishly to keep the railyard funded during difficult economic times.

"We have continued to pour money into the project," he said in a rare interview with The Bee.

State officials are talking to Thomas and will meet with Inland and the city next week. "We want to figure out where Inland is overall so we can try to keep this project moving," said Chris Westlake, deputy director at the state Department of Housing and Community Development.

His agency awarded the project $30 million in 2008. In his application, Thomas said he faced a major "financing gap" and didn't have other funds available. The rules governing the grant say Thomas was eligible only if "no other source of compatible funding is reasonably available."

Westlake said he doesn't think Thomas violated any grant guidelines. The agency disbursed $6 million of the grant but is withholding the rest until the project's finances are sorted out.

Although default is often the first step toward foreclosure, Thomas said Friday that he's reached an "understanding" with Inland to resolve matters. Inland said the two sides had reached agreement "on the main principles but do not yet have a signed agreement." Neither side would elaborate.

After years of false starts, city officials in 2004 turned to Thomas and his firm, Thomas Enterprises, to transform the railyard into an urban village of shops, offices and homes. A portion of the land could be devoted to a new arena for the Sacramento Kings.

Thomas has a 20-year track record in real estate and boasted of a $3.5 billion net worth before the market collapsed, according to court records.

Thomas found an enthusiastic lender at Inland. When the first installment of the loan closed in April 2007, one of Inland's top executives bragged about the money to be made in Sacramento.

"One BIG, BIG loan on one historic location!" wrote Joseph Cosenza, founder of Inland's parent, in a memo to colleagues. The second phase of the loan came a year later.

Thomas and Cosenza now say in court papers that the loan dollars weren't confined to Sacramento.

Called to testify in the lawsuit between Thomas and his former partners in March, Cosenza repeatedly said he wasn't interested in how Thomas used the loan, according to a transcript. The reason: Thomas had pledged a ton of collateral, including the railyard and 9,700 acres of prime real estate near Sarasota, Fla.

A lawyer for Thomas' ex-partners asked if Cosenza knew that $98 million -- more than half the loan -- was spent outside Sacramento.

"I wouldn't be surprised," the Inland executive said. "And I don't care."

Cosenza's comments are emblematic of attitudes of some lenders during the real estate boom. Loans with few restrictions were rare but not unheard of in "the bubble period, when things were going up and up and up," said Stuart Gabriel, a finance and real estate expert at UCLA.

Paul Petrovich, a prominent Sacramento developer, said Inland was also likely influenced by a "very long and good relationship" it already had with Thomas. The Illinois firm has bought $400 million worth of shopping centers from Thomas in the past decade.

When Thomas booked the loan on the railyard, he was riding as high as the economy. He had retail projects getting under way in attractive markets like San Antonio and suburban Atlanta, plus a hotel-apartment complex set to roll near the Tower of London.

Last fall, the San Antonio and Atlanta projects went into bankruptcy and the London project has stalled. Wells Fargo recently sued him for $119 million. Thomas is suing the bank, saying it reneged on loan deals.

Last fall, Thomas told The Bee that he'd laid off 90 percent of his work force. Practically the only thing keeping Thomas Enterprises afloat was the government money flowing to the Sacramento railyard, which he called his "shining light."

But that light has dimmed. Thomas has been sued by various vendors over unpaid bills, and earlier this year he was late paying a property tax assessment on the railyard.

A year ago, Thomas was sued by three former partners in the railyard project. Thomas bought them out in 2004, and they claimed their sale agreement entitled them to a portion of the Inland loan proceeds.

U.S. District Judge Shira Scheindlin ruled in their favor and said a jury will have to determine how much they're owed. She added that Thomas had used the loan funds "on other projects."

The ex-partners don't know where the money went.

"I wish you could tell me," said former partner Joel Ross.

Thomas sued the former partners this week. The suit accuses one of them, Eric Levine, of taking $713,000 in project money for his own use.

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Call The Bee's Tony Bizjak, (916) 321-1059. Bee columnist Marcos Breton contributed to this report.

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