Well-known developer surrenders real estate license
Developer Phil Lester has surrendered his real estate license after the California Department of Real Estate filed a “notice of intent” to bar him from conducting any real estate business.
Lester is well-known in Nevada County, both for development projects that include Osborne Hill and Kenny Ranch, and also for philanthropic efforts that include donating land for the new Hospice of the Foothills residential care facility and financing the purchase of the Center for the Arts building in downtown Grass Valley.
In a wide-ranging conversation Thursday, Lester admitted to making some errors, but maintained he has conducted his business in the community with integrity.
“I’ve been licensed for 33 years, and I’ve never been charged with anything,” Lester said. “The sad thing for me is I spent over half my life (in real estate), and this is the way I get to go out. I resent it.”
The issues that led to a complaint against him were caused by the market downturn, which left him – and his projects – in “free fall,” Lester said.
“Everyone is going to be angry if you’ve lost some money,” he said. “But unfortunately, in this case, it’s a misplaced anger … If I had done everything they charged me with (the) right (way), it wouldn’t have made a difference.”
The bar order would prohibit Lester from holding any position of employment, management or control in a real estate business, from working as a Realtor, from engaging in any real-estate business activity on the premises of a real estate business and from participating in any real estate-related business activity of a finance lender, mortgage lender, title company or escrow company.
Lester’s individual broker license expired in February, but he did have a two-year right to renew late, said Department of Real Estate spokesman Tom Pool.
Lester would have needed to request a hearing within 15 days of the notice, which was issued Aug. 26.
The state filed an accusation against Lester and Gold Country Lenders on Aug. 13; Lester is the owner of the Grass Valley mortgage brokerage and its designated broker.
“The bar order means we feel he should not be in business in real estate or a related field,” Pool said. It means Gold Country Lenders should no longer be operating, because Lester is the designated officer.
According to the accusation, Lester negotiated seven multi-lender construction loans for a development and construction company named Linx between January 2007 and September 2009. Lester was president and part-owner of Linx.
The loans ranged from $300,000 to $2.7 million for a total of nearly $6.3 million, and involved anywhere from eight to 24 lenders on each loan. The loans were for properties that include a 7-acre parcel at Empire Meadows, one of Lester’s housing projects; two buildings on East Main Street in Grass Valley; and a building on High Street in Auburn.
Lester allegedly recruited investors to buy into construction loans without telling them he was part-owner of the properties, which is illegal.
“That’s called self-dealing,” Pool said. “If you have an interest in property, there are certain requirements, you have to make certain disclosures, because there’s potential for an inherent conflict of interest. The investors need to understand what they’re getting into prior to investing their money.”
In five cases, Lester allegedly sold loans to more than 10 lenders, which is against the law, according to the accusation. He also failed to “qualify” seven investors from investing more than 10 percent of their assets in two of the loans, also code violations.
He failed to place funds with a neutral third-party escrow holder, failed to use a comprehensive draw schedule or verify draws, and failed to obtain appraisals by a licensed professional, the accusation continued.
“At all times … Lester failed to exercise reasonable supervision over the acts of GCL (Gold Country Lenders),” the accusation stated.
On at least three loans, Gold Country Lenders allegedly failed to provide written disclosure statements, and failed to retain paperwork for the legally required three years, the accusation read.
And Gold Country Lenders depleted a trust fund without first obtaining written consent from the owners.
“The protocols and laws are set up for a reason: to make sure investor funds are protected,” Pool said. “I wouldn’t dismiss the gravity of the accusations.”
Most of the charges are technically true, Lester said, but he denied any willful neglect.
He surrendered his license for several reasons, one of which was financial, he said.
“It would have cost $35,000 to defend myself,” Lester said. “It cost $3,000 just to meet with the DRE for just a few hours.
“When you’re in my position, and you’re working on essentially Social Security (benefits) and unemployment, it was too much to consider,” Lester added. “That’s at the heart of what kept me from defending myself. Some of my investors have offered funds to defend me, but I felt it was a waste of money.”
Too, Lester said, he has not used his real estate license for two years and does not foresee going back into business even after the three-year suspension.
Lester characterized the majority of the charges as “administrative issues.”
In the case of record-keeping, “we have every single record for all our trust accounts,” Lester said. “The only thing we did not have was the backs of the checks, which were not sent by our bank. We didn’t realize this was an issue.”
An auditor from the Department of Real Estate spent weeks going over the accounts at Gold Country Lenders, Lester said.
“She specifically told me I was not one of the bad guys,” he said. “She did find administrative errors. But there was no evidence of misappropriation of funds, no evidence of misleading of investors, no evidence of misrepresenting values.”
Lester said he was blind-sided by the accusation, receiving the notice just a few weeks before the scheduled hearing.
“The DRE did not talk to me personally until two or three days before hearing,” he said. “I told them I wasn’t going to their circus. From my standpoint, it seems like (they) would want to represent me, as well as the public.”
Lester denied that he willfully disregarded any regulations and that he acted improperly on loans in which he had a financial stake.
“Is (self-dealing) wrong? I would say yes,” he said. “Was I self-dealing on the golf course (Auburn Valley Golf Club) or High Street? I wasn’t.”
Lester was a lender on the golf course and took a financial stake when he had to foreclose on the property four years later, he said. The High Street buildings belonged to Nevada City developer Steve Elder, he added.
“It was a plagued project, and eventually I took it over,” he said. “My investors were generally thrilled that I was involved in a project.”
When interest in a loan is sold to an investor, the broker is not allowed to have a financial stake as an owner or developer of the property securing the loan – unless that financial interest is disclosed.
It is not illegal if the property is going into foreclosure and the broker is acquiring the property under a deed of trust securing a loan for which he was the servicing agent, however.
Lester was candid about the effects of the recession on his development projects and his investors, saying, “the truth is the truth … No one wants to say they’ve made mistakes, but I made tremendous mistakes. I spent all of our money on these things.”
Lester has been through downturns before, including during the 1990s.
“Everything went to hell in a handbasket,” he said.
At the time, about $2 million in projects went into default, and Lester used his own assets to stay afloat, he said. He lost about $200,000 of investor money, which he eventually repaid, he added.
“Until this recent free fall, I never even made a late payment to an investor,” Lester said. “I continued to pay my investors all these years. (But) I always told them the same thing – if everything goes to hell, I can’t cover $40 million (in loans).”
Lester did cover the “first several million,” he said, using equity from a house he sold in Penn Valley and his 401(k) account.
“I put all that money in deals to keep them afloat, thinking we were going to work our way through,” he said. “Then it became clear (a recovery) wasn’t going to happen. In some case, values dropped 90 percent.”
Even though Lester did take some properties back in foreclosure, he did not have the resources to cover all the losses, he said.
“To the best of my ability, I’ve managed the best I could,” Lester said. “In some cases, you’re going to take losses, like it or not.”
Investing in hard-money loans is a risk, he said, and one that investors should take only if they are willing to risk their funds.
“I would never recommend anybody do that,” Lester said of investing everything in hard-money loans. “If you do that, you’re greedy.”
Margaret Fowler, of Fremont, is one of the investors listed in the accusation. She said she and her husband invested nearly $400,000 in Lester’s projects.
“There are a lot of investors who aren’t aware of the problems,” Fowler said. “Going public is a way to let them know. It’s very heart-breaking. I felt we got burned, but others got burned worse. It’s ruined a lot of people’s lives.”
The Fowlers had invested in the Auburn project, and were promised returns of anywhere from 8 percent up to 11 percent, depending on the loan, she said.
“We received a letter from him in September 2008 saying that for a period of six months, our interest payments would be discontinued, because borrowers were having a hard time making their payments,” Fowler said. “We didn’t know he was the borrower.”
When the High Street project went into foreclosure, Lester didn’t notify them until it was too late, Fowler said. He then told them he would try to file a Chapter 11 bankruptcy to save the building, but wouldn’t answer her questions, she added.
“We asked him numerous times what happened to our money, but he never responded,” Fowler said. “We just felt something was wrong with the whole scenario he was providing to us.”
Fowler filed a complaint with the state in 2009.
Phyllis and James Shippen are listed as investors in the DRE accusation; Phyllis Shippen confirmed they invested $50,000 in the High Street property.
“That was foreclosed on a year ago,” Shippen said. “Our money is gone, period, along with that of all the other investors.”
Shippen declined to comment further.
Other investors remained confident in Lester, however.
“If the bottom falls out of the market … I think everyone’s lost money,” said Larry Rieger. “Phil was in a holding pattern with most of the loans I’m in and we’re just trying to wait this thing out, knowing full well it might take eight to 10 years for the market to come back.”
Rieger expressed disappointment with the state’s decision to pull Lester’s license.
“We were relying on Phil, but now we don’t have anyone at the helm,” Rieger said. “I’ve invested with Phil for 15 years now. I’ve never had a problem.”
In fact, Rieger was one of the investors in Lester’s projects that lost money in the 1990s, and he confirmed that he was paid back in full.
“I’ve never been in a conversation where Phil thought of himself first,” said Jon Blinder, who has worked with Lester for years on his development projects. “He’s always been thinking of his investors and how he could make things right.”
Whether Lester is currently barred from developing projects is not clear.
If he acts in a real estate transaction as the principal, acting on his own behalf, that is legal. But he is barred from working on projects involving a corporation, where he is a manager or an employee, Pool said.
“We will respond to any complaint we receive,” Pool explained. “People in a small community are cognizant of what’s going on, and we find out through complaints; if he is acting contrary to the bar order, we would go investigate.”
“I’ve referred all my servicing to Susie Laferte (Lester’s sister-in-law) at Lender Solutions,” he said. “I’m referring all the (development) project stuff to (project manager) Jon Blinder.
“I’m 63 years old,” Lester continued. “I don’t have any equity left. I’m only doing it for the investors.”
To contact Staff Writer Liz Kellar, e-mail firstname.lastname@example.org or call (530) 477-4229.
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