A Shaky Foundation - Second in a Series
The $1 Building
Anyone sifting through the public records of tangled real-estate transactions conducted by the Baptist Foundation of Arizona will soon begin asking questions:
What would possess a religious foundation to pass up the opportunity to acquire a $1.9 million office building for $1?
Why would that foundation turn around and option the same $1 building to a former board member?
Why would it then allow that same former director to use the building to collateralize millions of dollars in loans he already had received from the foundation?
There are no common-sense answers.
But that's business as usual at the Baptist Foundation of Arizona (BFA), a $368 million religious organization that claims devotion to charitable causes while handing out nearly $140 million in loans to insiders. BFA officials hide their deals behind a thicket of more than 60 subsidiary companies, some non-profit, some for-profit.
In the case of two New Mexico real-estate deals, BFA appears to have padded its assets with multimillion-dollar notes from an insider.
Both deals went down within two weeks in 1992. Both involved a company called Barclay New Mexico Associates and former BFA director Jalma Hunsinger, who controls a slew of companies of his own (most of which use BFA's address). Hunsinger declined to comment for this story. No BFA officials would consent to interviews, although the foundation did respond in writing to written questions posed by New Times.
Barclay owned Simms Tower, a 13-story office building in downtown Albuquerque, New Mexico. Simms Tower was appraised at $1.9 million, BFA says in its March 24 letter to New Times. Barclay also owned a parking garage adjacent to Simms Tower.
To understand how BFA passed up a chance to make a killing on the Simms Tower, one must back up and examine what Hunsinger and BFA did with some Maricopa County land, and what Hunsinger and Barclay did with the parking garage.
The complicated transactions began in Phoenix on September 22, 1992, when a BFA subsidiary deeded four parcels of Maricopa County land to a Hunsinger company for $3.3 million, according to sworn affidavits signed by Hunsinger and BFA attorney Tom Grabinski.
The same day Hunsinger bought the land from BFA, he "flipped" the parcels through several of his Arizona companies. (A land flip occurs when a piece of land is sold quickly--sometimes several times a day--between related parties or shell corporations. The land value can be artificially lowered or raised. Land flips are illegal if artificial values are used to create fake appraisals or bogus income tax advantages, or increase net worth to deceive lenders or investors.)
In one day, the BFA land that was flipped repeatedly by Hunsinger plummeted in value from $3.3 million to $960,000--a difference of more than $2.3 million, according to the sworn affidavits.
Grabinski signed affidavits attesting to the $3.3 million value of the four parcels; Hunsinger signed affidavits attesting to both the higher and the lower values of $3.3 million and $960,000--all on the same day.
What did Hunsinger get for his contortionist real-estate transactions? He swapped the Arizona parcels to Barclay New Mexico for the parking garage next door to Simms Tower. On that very busy day, Barclay deeded the $960,000 garage to a Hunsinger company.
As compensation for the four Maricopa County parcels, Hunsinger had signed an IOU to BFA for $2.3 million--$1 million less than BFA's own attorney swore the parcels were worth earlier that same day. Worse, BFA then allowed Hunsinger to collateralize the multimillion-dollar note with the New Mexico garage he'd acquired for land allegedly now worth only $960,000.
All this happened without any indication that Hunsinger paid a penny to anybody.
The public record and BFA's letter of explanation about the New Mexico transactions raise serious questions: Why did the Maricopa County land parcels lose millions of dollars in value after BFA insider Jalma Hunsinger flipped the acreage through his companies? Did BFA book millions in questionable assets on the Maricopa land to offset losses elsewhere? Did Hunsinger claim paper losses for tax advantages?
The paper trail is littered with suspicious documents.
In the first place, BFA's Grabinski's affidavits swore that the four Arizona parcels were worth $3.3 million, yet BFA allowed Hunsinger to purchase them for a $2.3 million IOU on the same day. Then BFA turned around and allowed Hunsinger to collateralize his $2.3 million IOU with a parking garage that was apparently worth only $960,000.
Two weeks later, Barclay offered BFA an option to buy the $1.9 million Simms Tower--next to the garage--for $1.
"Barclay desires to donate the building to BFA in such manner that the transaction will constitute a charitable gift by Barclay to BFA under the Internal Revenue Code, and BFA desires to accept the same in the form of a freely assignable option to acquire the building for no or nominal consideration," the October 8 option agreement says.
A Barclay official said in a recent interview that the building was free of debt at the time. But Barclay claims it never took a tax write-off for the building.
That's because BFA did not hold on to the option.
If BFA had accepted the donation, could it have sold the building at a fire-sale price and then funneled the entire sum to needy Southern Baptist causes?
Why did BFA pass up a chance to cash out, opting instead to bolster its bottom line with a $1.9 million IOU from Hunsinger?
The same day it got the $1 option from Barclay--October 8, 1992--BFA passed the option through several of its subsidiaries in recorded documents signed by Grabinski. BFA says in its letter to New Times that it didn't want the building because it contained asbestos.
Ultimately, the option to acquire the Simms building was passed to Hunsinger's real-estate company, ALO. BFA staff attorney Grabinski, acting now as lawyer for ALO, passed the option to another Hunsinger company, which passed it to another. BFA insider and former board member Harold Friend signed as secretary for the Hunsinger company.
That same day--October 8, 1992--Barclay deeded the Simms Tower to New Mexico Executive Center, one of dozens of Hunsinger-owned companies that share an address with BFA's Phoenix headquarters, 1313 East Osborn.
Hunsinger then signed a $1.9 million IOU to BFA to buy the option. For collateral, BFA allowed Hunsinger to put up the Simms Tower--the very same asbestos-contaminated building that it had refused to buy itself.
Next, BFA allowed a Hunsinger company to use the Simms Tower to collateralize a $4.9 million note Hunsinger had owed BFA since 1987, New Mexico records show.
The bottom line: BFA allowed Hunsinger to use a $1.9 million asbestos-contaminated building (which it could have bought for $1) as collateral for $6.8 million in loans.
BFA also allowed Hunsinger to convert land parcels worth $960,000 into collateral for a $2.3 million loan.
Altogether, Hunsinger collateralized more than $9 million in loans from BFA with this whirling New Mexico landplay which, under the most generous appraisal, was worth many millions less than Hunsinger's debt.
When asked to explain the baffling New Mexico deal, BFA wrote that it was "unaware" that the New Mexico building had been collateralized for more than it was worth. It sees no breach of fiduciary duty or conflict of interest in the way it handled the loan.
"Barclay granted an option to BFA to acquire the office building for $1 as a charitable gift because the building contained asbestos, and BFA did not want to incur the cost of liability of cleaning up the asbestos," the foundation wrote.
"BFA then sold the option on the office building to a Hunsinger company at the appraised value of $1.9 million, which value reflected the cost of asbestos remediation, in exchange for a promissory note secured by the building," BFA's letter says.
"The net effect of this complicated transaction produced a profit for BFA of $1.9 million and converted non-income producing assets into notes receivable."
BFA says the Hunsinger notes on the Simms Tower have been renegotiated or paid off. It offered no documentation to support its claim, and did not explain how Hunsinger paid off the notes--with stock, cash or land. As of March, companies controlled by Hunsinger owed BFA at least $124.8 million.
Asked for his version of the deal, Chuck Howe, a spokesman for Barclay New Mexico's parent company, Barclay Associates in Greenbrae, California, said: "You'll have to go through the public records. It's not worth it for us to go to storage and look up something that occurred in 1993."
Alleged breach of contract.
Defaults on government loans.
Questionable financial statements.
The Baptist Foundation of Arizona says it has never lost a penny of the more than $265 million it has borrowed from investors, many of them Southern Baptist congregations and individuals. But public records in several states suggest that BFA has engaged in real-estate deals that could put the foundation at financial risk--and could make it difficult for BFA to pay all the money it has borrowed from the public.
A six-month investigation by New Times reveals that BFA created a complicated maze of more than 60 non-profit and for-profit subsidiaries and used them to funnel nearly $140 million in loans to companies controlled by insiders--sitting BFA board member Dwain Hoover, and former directors Jalma Hunsinger and Harold Friend.
Some of the insider deals were done without the knowledge of the full BFA board. Many of the assets BFA plowed into such deals came from religious investors who were told that BFA would return profits to Southern Baptist causes. But as insiders used $140 million to build real-estate empires, Southern Baptist causes have gone wanting. In 50 years, BFA has given only $1.3 million to the Southern Baptist community for new churches and other good works, according to its letter. (It also manages trust funds that return money to Southern Baptist causes.)
BFA claims to be a $368 million company, holding a $147 million real-estate empire that extends from Florida to California, with most of the crown jewels--golf developments and retirement communities--situated in Arizona. BFA claims a net worth of $9.9 million, but BFA's audited statements do not give sufficient information on the real-estate holdings to determine BFA's actual financial condition.
BFA has not been investigated by any law enforcement agency and has not been accused of any crime, but public records raise questions about whether some of the insider deals violated the Internal Revenue Code and state and common law regarding fiduciary duty that prohibit self-dealing--the practice of benefiting insiders at the expense of the corporation. Penalties for self-dealing range from criminal prosecution in some cases to revocation of tax-exempt status by the IRS.
BFA officials Hunsinger, Hoover and Friend all refused interviews for this story. In its March 24 letter, BFA did answer 61 questions submitted in writing by New Times.
The letter denies any conflicts of interest or self-dealing occurred, and says the real-estate deals with insiders benefited BFA. In fact, BFA's letter paints a picture of benign business transactions.
New Times' findings, however, suggest otherwise:
* A partner in Coyote Lakes, a west Valley real-estate development, sued BFA for breach of fiduciary duty, contending BFA looted the partnership and engaged in a sham sale of partnership assets to Dwain Hoover to gain a bogus tax advantage. BFA won the case on a technicality on April 17. But during court proceedings, BFA admitted the Hoover sale occurred.
* BFA and Hunsinger invested in Stillwaters Resort, a golf community in Dadeville, Alabama. Public records show no trace of a $14.9 million building that BFA claims to have there.
In state Corporation Commission records, BFA listed a "Country Club Manor Building" as an asset for two separate corporations. Country Club Manor is the name of BFA's $6.5 million Phoenix headquarters on East Osborn. Listing the asset twice in the same year--for $14.9 million in one report and for $6.5 million in another report--would have the effect of bolstering assets to offset losses on financial statements.
BFA denies it listed the same asset twice, saying the second "Country Club Manor Building" is part of an Alabama property. Alabama tax and property records do not reflect BFA's claim. BFA's own audited statements make no mention of a $14.9 million building at the Stillwaters Resort. And resort officials say they have no buildings that could be construed as Country Club Manor.
* BFA's insider deals were conducted with little oversight from the federal government. The federal tax code prohibits the IRS from normal audits of BFA because it is a non-profit religious foundation. And because of its religious status, BFA also is not required to file an annual Form 990 with the IRS, a public record disclosing finances that non-religious foundations must file.
* An Arizona law that took effect on January 1 enables BFA's for-profit companies to operate without disclosing financial information to the Arizona Corporation Commission. The law, sponsored by Republican state Senator Carol Springer and backed by business lobbyists, revokes an earlier requirement that for-profit Arizona corporations file annual financial statements with the Corporation Commission. Springer's law bars the public and businesses from critical financial information about BFA subsidiaries and other for-profit companies. It erects the same veil of secrecy for thousands of other Arizona companies as well.
* While BFA claims its investors have never lost a penny entrusted to BFA, government lenders have lost millions. In one case, BFA refused to make payments on a HUD loan for a Phoenix condominium complex, leaving taxpayers with a $1.3 million bill. In another case, BFA defaulted on a $1.5 million note it had personally guaranteed to Century Bank, which had become insolvent and had been taken over by the FDIC. After the default, taxpayers were left with a 78-acre alfalfa field that the FDIC says was worth about $680,000 less than the loan.
Six years ago, Phoenix real-estate developer Michael Brown thought he'd found the ideal partner to help him transform raw west Valley desert into a verdant golf community.
In the summer of 1992, Brown signed a partnership agreement with Arizona Southern Baptist New Church Ventures--a non-profit corporation he understood was affiliated with the non-profit Baptist Foundation of Arizona. In fact, it is a non-profit corporation presided over by former BFA board member Jalma Hunsinger. Arizona Southern Baptist New Church Ventures, ostensibly chartered to help get new churches built, has 10 subsidiaries, seven of which are for-profit.
Brown says representatives of BFA and Arizona Southern Baptist New Church Ventures made a positive first impression--they seemed to have solid Christian values.
"We trusted them a great deal, unfortunately," says Brown.
Michael Brown doesn't trust anymore.
Just a few weeks after he signed the partnership papers with Arizona Southern Baptist New Church Ventures, the non-profit company transferred its interest in the project to Foundation Development Company, a for-profit BFA subsidiary which must pay taxes.
Brown claims that Foundation Development edged him out of day-to-day operations and looted the partnership.
Four years later, Brown sued BFA and Arizona Southern Baptist New Church Ventures in Maricopa County Superior Court. He claimed the companies breached their fiduciary duties to the partnership, violated the partnership contract, withheld critical partnership financial documents from Brown, secretly borrowed $1.5 million against the partnership's assets, and went behind Brown's back to rig a December 1992 sham sale of 100 Coyote Lakes lots to Dwain Hoover--a former BFA director at the time of the sale who has since returned to the board--in order to gain a tax benefit for for-profit BFA subsidiaries.
In court documents, both BFA and Arizona Southern Baptist New Church Ventures deny any wrongdoing. They say that Brown suffered no damages and had to be removed from the Coyote Lakes project because he couldn't get along with builders and was responsible for huge cost overruns.
Hoover purchased the 100 lots from the partnership in December 1992. Brown did not know about the sale until after it had occurred, he claims in court. He says Foundation Development rigged the sale to gain an income tax advantage--the partnership's profits offset other losses in other BFA companies in 1992.
In its letter to New Times, BFA admits that the lots were sold to Hoover "at year end to accelerate the profit."
"It was not a paper profit, but a real profit that obviously benefited BFA," the letter says.
In February 1993, two months after he had originally purchased the parcels, Hoover resold the land to a homebuilder that had planned to buy the land in the first place--at no profit.
At the time Hoover acquired the lots in 1992, he was not a member of the BFA board, although he had served several three-year terms. He rejoined the board in 1993, according to BFA's records.
Hoover would not comment for this story.
In court, BFA said that since the partnership's original business plan called for sale of the lots in 1992, no harm was done to either Brown or the partnership.
In January, Judge William Shafer granted BFA a motion for summary judgment because of a legal technicality--Brown's attorney hadn't filed the right documents, the judge said.
On April 17, Shafer denied Brown's request for a new trial. Brown's opinion remains unchanged.
One partner shouldn't be betrayed by a more powerful partner, he says.
"It's just greed," says Michael Brown.
"There's no other word for it."
Not a Penny Lost
In its brochures and on the Internet, BFA claims that it hasn't lost a penny of its investors' money.
But public records examined by New Times reveal two instances in which BFA subsidiaries defaulted on loans tied to one investor--the United States.
In June 1986, BFA created a new for-profit subsidiary, Ironwood Apartments Incorporated, expressly to get a loan from the federal government--a loan BFA would default on, leaving taxpayers with a $1.2 million tab.
Records show that in October 1986, Ironwood scored big, receiving a $1.6 million loan from DRG Funding, a Washington, D.C., mortgage company that was shut down in 1989 by the government amid charges of fraud, theft and money laundering.
Although Ironwood's HUD-backed loan was supposed to fund improvements to condominiums at 9802 North Ninth Avenue (which secured the loan), the clauses demanding such improvements were actually scratched out in the DRG-Ironwood loan document. Ironwood was to pay off the loan in 35 years at 10 percent interest.
Public records do not show whether Ironwood put any of the HUD-insured loan into condo improvements.
But Ironwood, BFA's subsidiary, quit making monthly payments on the loan in 1989. The property was eventually sold at auction for $365,000, far less than the $1.6 million BFA's company had borrowed on it. The taxpayers were left with a $1.2 million bill.
"BFA made payments until the real estate market in Phoenix turned down," BFA says in its letter to New Times. "BFA determined that the amount owed on the loan was in excess of the value of the property. Thus BFA stopped making payments to HUD and HUD took the property back for the value of the loan."
BFA has defaulted on a government guaranteed loan at least one other time.
A 1991 Federal Deposit Insurance Corporation document obtained by New Times shows that BFA also defaulted on a $1.5 million note it had guaranteed to Century Bank, which had become insolvent and had been taken over by the FDIC.
BFA had collateralized the note with a 78-acre west Valley alfalfa field appraised by the FDIC at about $820,000, records show.
In 1991, at the time of the loan default, BFA had about $3.7 million in cash on hand, according to its audited financial statement.
BFA could have kept its end of the agreement and paid off the loan in full. Instead, BFA wanted to renegotiate the note.
The FDIC refused. The United States government foreclosed on the property and sued BFA in federal court, alleging BFA owed it money and had failed to renegotiate the loan in good faith.
But the FDIC lost.
BFA won the case, convincing a judge that it had tried to renegotiate the loan in good faith.
For its efforts to enforce the deal, the federal government was rewarded with an alfalfa field.
Stillwaters Run Deep--and Murky
In 1996, BFA appears to have listed the same building as an asset in two different Arizona corporations--a move that would increase BFA's net worth on financial statements distributed to investors.
In 1996 financial statements filed at the Arizona Corporation Commission, two BFA subsidiaries listed "Country Club Manor Building" as an asset. BFA's Phoenix headquarters is called Country Club Manor.
One BFA subsidiary--The Foundation Companies, Inc.--recorded Country Club Manor as a $6.5 million asset.
The other BFA subsidiary--Foundation Stillwaters, Inc.--recorded Country Club Manor as a $14.9 million asset.
When asked if it listed the same asset twice, BFA denied the allegation.
BFA claimed that in 1996, it only recorded the Phoenix Country Club Manor headquarters once--for $6.5 million.
It said the other $14.9 million Country Club Manor Building pertained to "assets in Alabama."
"The $14.9 million amount is not related to Country Club Manor [the Phoenix headquarters], but rather assets in Alabama," the letter says.
Although it is true BFA and Hunsinger invested in Stillwaters Resort, a golf resort in Dadeville, Alabama, BFA's 1996 audited financial statement and Alabama property records show the foundation owns only about $4 million worth of property---not $14.9 million. And Foundation Stillwaters, the BFA subsidiary that claimed the $14.9 million asset in 1996, is not listed in Tallapoosa County property records as owning any property there whatsoever.
When asked if a $14.9 million building called Country Club Manor exists at the resort, Marie Stanley, spokesperson for the resort, answers: "No. We have a lot of beautiful buildings, but we have no building called Country Club Manor."
Jalma Hunsinger kept Simms Tower in Albuquerque for three years, until 1995.
That was three years too long for Simms Tower's tenants. The building didn't conform to fire code. Promised improvements weren't made. The landlord wanted to boot tenants out before their leases were up and sell the building without compensating the tenants for their broken leases, says attorney Albert Lassen, a tenant.
Lassen and the other tenants seem confused about who their landlord was, and about the connection between BFA and Hunsinger.
Some tenants sued in state court in New Mexico, but because of the BFA-Hunsinger maze of companies, they didn't know who to sue, exactly.
In June 1995, J.M. Campbell and Anita Campbell, who leased space for their sandwich shop in Simms Tower, won a $170,324.54 judgment in state court against BFA and Albuquerque Executive Center. Since there is no Albuquerque Executive Center--Hunsinger's company is New Mexico Executive Center--and since BFA was not an owner, the Campbells' judgment for fraud, breach of lease and unfair practices is uncollectable.
Neither BFA nor Hunsinger ever paid the Campbells.
"There was no judgment against BFA or any of its subsidiaries in New Mexico, occurring in 1995 or any other year," BFA wrote in its letter to New Times.
In 1995, Hunsinger sold the properties to a New Mexico partnership, Papalote Partners. Robert Custer, a spokesman for the partnership, won't disclose the sales price. And since New Mexico is a non-disclosure state, the sales price cannot be gleaned from public records.
Contact Terry Greene Sterling at 229-8437, or online at firstname.lastname@example.org
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