August 22, 2010 in Business

Oregon-based Sunwest collapse offers hard lessons

Diane Dietz (Eugene, Ore.) Register-Guard
 

EUGENE – As the dealmakers, investors, residents and employees who were part of the former Sunwest Management company endure what turnaround specialist Clyde Hamstreet calls the “tough, hard grind” of its multibillion-dollar liquidation, they say there are lessons to be learned.

Sunwest was a Salem-based company built by a couple of young men from Roseburg that started with a handful of senior living centers and became a national real estate/property management company with 270 assisted living centers.

Over the past two years, Sunwest was sued hundreds of times, declared bankruptcy and during the coming year will be dissolved as buyers are found for its few remaining properties.

Company founder Jon Harder has been banished for life from financial dealings in the state of Oregon. Sunwest’s 1,200 investors lost $750 million. As many as 35,000 residents and employees at the facilities faced uncertainty as their homes and workplaces were auctioned and new owners came in.

For starters, the Sunwest investment plan, in retrospect, was unsuited for most of the investors, who were retirement age and older, said Portland attorney Michael Esler, who represented 350 investors in Sunwest proceedings.

The setup joined each investor with several other investors to buy shares of an individual Sunwest property through a process called tenants in common, or TIC.

“The worst part of this type of investment is you end up owning 5 or 10 percent or sometimes as little as 1 or 2 percent of a building that you can’t sell. There’s no market for people to go and sell their 1 percent TIC interest.

“If you needed money for anything, you can’t get it. For any person who’s 65 or older, this is the wrong kind of investment.”

In addition, the Sunwest investors believed they were reducing their risk by spreading their investments across several Sunwest projects. The thinking was, the projects couldn’t all lose money.

But in practice, Harder ran Sunwest’s properties as a single company, moving money from one assisted living center to others – meaning that all the properties were at risk should the entire company stumble, which is exactly what happened beginning in 2008.

Investors should have been wary, said Annette Cooley, whose parents put $1 million into Sunwest ventures.

“They were deluded into thinking it was different entities,” she said. “They thought they were diversifying when they weren’t. That was silly on their part.”

Sunwest financed its rapid expansion by taking on $1 billion in debt. At the same time, the company told thousands of investors to expect double-digit returns. The strategy proved to be too much, too fast.

The lesson of the Sunwest story is “don’t get greedy,” Hamstreet said. “That applies to investors who thought they were going to get 10 or 12 percent returns and the people who took their money to build an empire.”

Investors, in the future, may want to steer clear of securities that aren’t registered with the state through an exemption in Oregon law, some of the people who’ve dealt with Sunwest said.

The state reviews its registered securities to ensure that they are set up for the benefit of investors and that they meet the standard of “fair, just and equitable,” said David Tatman, administrator of the Division of Finance and Corporate Securities.

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