Sexton Building: 'That place is a mess'

  • Article by: SUSAN FEYDER , Star Tribune
  • Updated: April 28, 2008 - 1:49 PM

The Sexton, a downtown Minneapolis condominium project at 521 S. 7th St., sits half-finished and in foreclosure, with developers suing one another.

Photo: Glen Stubbe, Star Tribune

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The three dozen residents of the Sexton are scattered widely among the mostly vacant 123 units in the downtown Minneapolis condominium building. But mutual misfortune has turned them into a tight-knit bunch.

"We've all gotten to know each other. We all consider ourselves victims," said Brian Scates, the only occupant among 19 units on the top floor. The owners have sued developers for failing to complete the project, but Scates and other residents wonder if their claims will get lost amid the tangle of lawsuits plaguing the Sexton.

Late last year, the project's lenders began foreclosure proceedings on the Sexton, and a receiver was appointed to oversee the lender's interest in the property. Earlier in 2007, the project's partners sued each other, claiming a variety of financial misdeeds.

More recently, one person was convicted of mail fraud and conspiracy for illegally profiting from the sale of a unit at the Sexton. As part of a guilty plea, Joseph Huebl, 28, has agreed to cooperate with an investigation by the U.S. attorney's office into mortgage fraud. The investigation includes others involved in Huebl's fraudulent Sexton transaction as well as people he worked with at a Bloomington mortgage-lending firm.

Assistant U.S. Attorney Joseph Dixon has declined to say whether the investigation continues to look at other possibly fraudulent transactions at the Sexton. But an examination of Hennepin County property records reveals several other sales at the building similar to the one involving Huebl, who also goes by the name Joseph Nguyen.

Some sales involve other Nguyen family members. Another transaction involves one of three people convicted last year for taking part in a mortgage fraud scheme run out of LHS Mortgage in Burnsville.

The questionable sales involve both mortgage flipping and foreclosures. Flipping, the purchase and quick resale of a property for a much higher price, by itself isn't illegal.

But it's fraudulent when the higher resale price is based on false appraisals or false buyer-income verification. When the housing market was still hot, people engaging in mortgage fraud figured that inflated appraisals would be covered by rising property values. The market downturn has exposed some of those schemes.

Numerous instances of mortgage fraud have surfaced in recent months throughout the Twin Cities. But it would be unusual to see several at a single building, according to Tom Melchior, a multifamily analyst with Minneapolis-based LarsonAllen. It would be even more unusual at a building where fewer than 50 of the project's 123 units have been sold.

While area real estate professionals aren't familiar with the details of the legal problems at the Sexton, its reputation as a troubled project is widely known, Melchior said.

"[The Sexton] doesn't come up in conversations very often, but when it does, the comment usually is something like 'That place is really a mess,'" Melchior said.

In his plea agreement, Huebl admitted buying a unit in the Sexton in March 2007 for $366,756 and reselling it the same day for $700,000 to another person he had recruited to be part of the scheme. Huebl admitted helping the new buyer falsify financial information in order to qualify for a mortgage, which subsequently went into foreclosure. The plea agreement says Huebl and the developer's agent, who had supplied the inflated appraisal, split the $333,244 profit from the fraudulent transaction.

About a week after the Sexton transaction, the buyer recruited by Huebl bought a house for $320,000 in St. Paul from a Nguyen family member.

Court documents don't name the developer's agent, but property records identify the seller as Sexton Lofts LLC. Court documents filed in connection with a separate lawsuit by an investor in the project say that Sexton Lofts' majority partner, Brett Thielen, owed Huebl $350,000.

Thielen's attorney, Ben Houge, said his client had no knowledge that the sale engineered by Huebl used an inflated appraisal or other false financial information.

Houge also said that several Sexton units that would appear to have been sold and quickly resold for higher prices were actually transactions that occurred as much as two years apart. Houge said purchase agreements reached in 2005 might not have been recorded until much later as closed sales. Many early sales were made at lower prices to attain a level of pre-sales sufficient for the project's developers to get financing, he said.

Boom and bust

In some cases, unit sales at the Sexton mirror the boom and bust of the condo market. One unit sold in August 2006 for $620,000 with no down payment, according to property records. It went into foreclosure nine months later and most recently was listed for sale at $109,900.

Thielen had no experience as a developer before the Sexton, according to documents filed in connection with some of the litigation concerning the project. He had worked as heating and air conditioning contractor, helping to run a family business with work that included some projects developed by local investor Ned Abdul. Abdul had purchased the Sexton, an 82-year-old commercial building, in 2004. He sold it to Thielen's partnership, Sexton Lofts, in spring 2005.

St. Joseph's Financial, where Huebl and some Nguyen family members worked, has been linked by federal authorities to a mortgage fraud scheme run out of LHS Mortgage, where three former employees have been convicted of wire fraud and money laundering. One, Mario Lewis, bought a unit at the Sexton on Dec. 13, 2006, for $243,500, then resold it the next day for $566,826 to Thielen. On Dec. 29, 2006, Thielen sold the unit again, for $590,000, according to property records. That buyer also bought a house in Savage from a friend of the Nguyen family. The mortgage on the Sexton unit has gone into foreclosure.

IRS agents raided St. Joseph's offices last summer, seizing documents belonging to Huebl and a cousin, Johnny Phong Nguyen. An affidavit filed in connection with the raid said they participated in about a dozen fraudulent mortgage transactions closed by Jill Lehn, another former LHS employee convicted for taking part in an illegal mortgage scheme. The affidavit doesn't say whether any of Lehn's dealings with Huebl and Nguyen involved units at the Sexton.

Johnny Phong Nguyen, through his attorney Fred Bruno, declined to comment.

The possiblity of prevalent mortgage fraud at the Sexton would come on top of other legal and financial problems outlined in lawsuits among the project's partners. Thielen is the majority partner in Sexton Lofts through his company, JJT Development.

Lawsuits in two directions

Minority partners have accused JJT of selling condo units for more than advertised prices and paying real estate agents inflated commissions.

JJT has accused the minority partners of mismanaging a $26 million loan that played a part in the project's foreclosure. The funds were supposed to be used for a second phase that was not built but was to include a parking ramp for residents in the existing building.

The lack of a parking ramp plays a major part in the lawsuit by Scates and other Sexton owners who paid $20,000 for parking spots. They not only paid for something that has not been provided, but now are paying an additional $125 a month for parking spots in other nearby ramps. Valet parking that was supposed to last until the ramp was built ended when the project went into foreclosure.

Owners also have been precluded from selling until the legal mess is sorted out. An unpaid builder placed a $5 million lien on all units in the building.

Owners are hoping the lender will turn the project over to another developer that could complete the parking ramp, said Rachel Malvin, who bought a one-bedroom unit about two years ago. Like many residents, she was not a first-time home buyer and had thoroughly scouted the market before buying at the Sexton.

Malvin said owners now take turns hosting monthly gatherings that are purely social.

"We got tired of only talking about legal issues at our association meetings," she said. "We try to stay away from all that, making it more of a happy hour. It's a great stress reliever."

Susan Feyder • 612-673-1723

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