Out of the Dark
No City Felt The Effects Of The Bank Of The Commonwealth Scandal As Much As Norfolk. But A Few Developers Are Investing In The Buildings Left To Die, Bringing Many Downtown Properties Back To Life
The F.A. Roethke Building was left to rot.
The former home of the region’s oldest car dealership, this two-story warehouse was once a thriving symbol of 20th-century progress and ingenuity. Originally constructed in 1915, it doesn’t fit the standard structural boilerplate; an expansion in 1938 made it look even more unusual.
“It’s basically like two triangles fused together,” says Nicole Turner, a project manager at Luna Development, which bought the Roethke last year at auction for $225,000, a fraction of its value several years ago. The company is in the process of renovating the Monticello Avenue structure and renaming it Fort Tar Lofts in a nod to one of the three Colonial-era battlements that saw action during the War of 1812. The plan is to convert the building into 19 apartments, all of them paying homage to this striking slab’s former use.
“The apartment names will stick to the car theme,” Turner says. “We plan to give them names like the DeSoto and The Plymouth, to retain some of the history of the building.”
The renovated lofts will have an industrial feel with exposed brick, she explains, and the units will revert back to the original windows and flourishes. “We haven’t seen too many of these types of buildings in this area,” she says. “You have a lot of them in Richmond with their tobacco warehouses, and we’re trying to do something similar here with this renovation. This is a historic building, and we’re trying to preserve it.”
Turner pauses. “It’s been a challenge.”
Before Luna purchased the property, it had been deteriorating for years, with foliage seeping through the cracks, birds squatting in the rafters and mounds and mounds of indoor trash. “Structurally it was pretty sound,” she says. “There were a lot of broken windows, and it had holes in the roof so the weather just kept getting in.”
The Roethke’s previous owners had bought the building in 1998 from the Norfolk-based Bank of the Commonwealth—for more than it was worth—and then left it to die. Funds appropriated for its renovation were used instead to pay off other loans and to cover other investments.
It was only one of many properties across the region that had been dark for years, entangled in an ongoing loan fraud scandal that eventually saw the Bank of the Commonwealth closed down, its top executives sent to prison and four local developers, including the Roethke’s owners, also sentenced to time in jail. The crime? Participating in a conspiracy to hide millions of dollars in losses from Federal regulators, shareholders and the BoC’s board of directors.
“The bad dealing really did hurt a lot of properties in downtown for quite a few years,” Frank “Buddy” Gadams, of the Norfolk-based Marathon Development Group, says.
For some, like Gadams, who now holds many of the more distinguished Norfolk properties once tied up in the bank fraud, the resale of these buildings has been a “perfect storm of good.”
“It has allowed someone to basically amass these different properties and buildings in one concentrated area,” he maintains, “and come back with something that can make a meaningful difference. Because if you are doing one project on one corner and there are five or six neighboring buildings that are vacant, that doesn’t do a lot of good.”
The kinds of properties that were intertwined with the BoC scandal ran the gamut, L. Taylor Harrell, vice president of the North Carolina-based Southern Bank and Trust, says. “There were office buildings, hotels, residential rental properties, apartment buildings, vacant land, commercial lots. It’s a little bit of everything.”
And no city felt the effects of this mess as much as Norfolk.
If you are one of those who think that banks have become “too big to fail,” the sordid tale of the Bank of the Commonwealth is a conspicuous anomaly.
In March of 2012, BoC executives, including president and CEO Edward Woodard, and Executive Vice President Stephen Fields, were indicted by a federal grand jury and sentenced to time at Fort Dix Correctional Institution in New Jersey. The CEO’s son, T. Brandon Woodard, a BoC executive, was also incarcerated. Local developers Eric Menden, George Hranowskyj, Tommy Arney and Dwight Etheridge were found guilty as well. This bunch’s collective deals, Federal regulators argued, led to the largest bank collapse in Virginia since the 2008 financial crisis.
In the case of Arney, the fraud was downright brazen. Regulators warned the BoC to cease loaning to the developer—who was actually given office space in the now-closed bank’s former Boush Street branch—but executives continued to green light millions in loans to him nevertheless.
Some of Arney’s plans for his properties raised eyebrows from Norfolk city hall and from the community at large. One building, at 2512 Granby, was being readied as a home base for a local chapter of the Hell’s Angels motorcycle club before the city shut it down. Another, at 251 Granby, was slated to be a go-go club. It was recently purchased by the Ciniva Web Agency, an internet design company, which will use part of the historic three-story building as its headquarters with plans to rent out the bottom floor to another business.
“The Bank of the Commonwealth’s high-risk lending practices resulted in soaring losses,” U.S. Attorney Neil MacBride said in a statement when the indictments were handed out. “For more than 30 years, this community put their trust—and their money—in the Bank of the Commonwealth. These charges portray a Bank leadership that betrayed that trust for their own profit at the detriment to their own Bank, its shareholders and the community it served.”
The BoC’s Woodard and Fields used scheme after scheme to conceal past-due loans and remove foreclosed property from the bank’s books, according to General Romero, special inspector for the federal government’s Troubled Asset Relief Program (TARP), in 2012. “Friends of the bank received sweetheart deals in return for helping mask the bank’s true financial position. And bank insiders personally benefited. This type of fraud contributed to the economic crisis and left Tidewater citizens, who depended on this TARP applicant bank, to deal with the bank’s collapse.”
Ironically, it was the bank’s application to seek bailout money from the government that eventually tripped it up. “BoC [applied] for $28 million in TARP funds in November of 2008, which is what triggered the fraud investigation by the Treasury,” says Dr. Larry “Chip” Filer, associate professor of Economics at Old Dominion University. “That’s the real ‘sexiness’ of this case. From a fraud standpoint, it was your average bad banker fraud. But the fact that they wanted to use this bailout money that was supposed to help save the banking system to perpetuate the fraud, that’s what puts this in the realm of a soap opera.”
Whether it happens on Wall Street or Granby Street, it’s still fraud, special inspector Romero had stated. And to this day, many properties across Coastal Virginia, and especially in Norfolk, are still feeling the after-effects of these bad dealings.
Following the guilty verdicts, Southern Bank and Trust entered into an agreement with the Federal Deposit Insurance Corporation (FDIC) to take over most of the Bank of the Commonwealth’s properties, liabilities and assets. “We acquired these properties from the FDIC because they shut down the former bank and we bid on the assets,” Harrell says. “They sold the assets to us, which includes these properties plus pretty much all of the loans that the Bank of the Commonwealth had on their books.”
When asked how many total properties were involved, Harrell says that the exact figure is “a moving target. There was an initial amount and we’ve sold some of those but more have been added to the pot [through foreclosure].”
This mass purchase was a first for Southern Bank, established in 1901. “Acquisitions happen all the time,” Harrell says. “Banks buy other banks. But it becomes more complicated when you purchase the assets of a failed bank from the FDIC. There’s a loss share agreement with the FDIC where the FDIC agrees to cover a percentage of the losses that occur. That protects the healthy bank. And that loss share is where everything kind of gets complicated.”’
(To illustrate, the banking executive passes along a link to an online FDIC video that explains the loss share process. He’s right: it is very complicated, capable of making a layman’s head throb. Make yourself a strong drink and view it at http://www.fdic.gov/bank/individual/failed/lossshare/index.html.)
Many of the buildings auctioned by Southern Bank have already found new use, like the properties acquired by Balance Builders, a Virginia Beach-based contractor. A formerly vacant storefront in the city’s new arts district, at 763 Granby Street, formerly controlled by Arney, will soon reopen as a stage for the comedy group the Pushers; plans are for the space next door at 765 Granby to become a restaurant.
But downtown seems to be where the real action is, thanks largely to developer Buddy Gadams. The former BoC-affiliated properties that his Marathon Development firm acquired—including the historic Madison Hotel on the corner of Granby and Freemason—will make him downtown Norfolk’s largest landlord, controlling more than 700 apartment spaces. “There were hundreds of people hurt by [the scandal],” he says. “Mainly borrowers because there were very uncertain times at the bank. These borrowers were pretty much in limbo and trying to figure things out.”
He adds that the city’s reputation took a bit of a hit too. “Downtown was somewhat red-lined to where other banks didn’t want to loan money,” he states. “And that’s because there were all of these troubled assets. Now that’s changing. Still, most of my downtown projects were [financed] with out of town banks or Stellar One Bank, which was just coming into town. Most of the local banks didn’t want to touch anything downtown when I originally approached them. They told me that they just weren’t interested.”
Gadams is currently in the process of turning the Hotel into 77 apartments and four retail/office spaces, with hopes to rebrand the iconic boutique hotel as The James. “We’ll start moving people in by August 1 of this year,” he says. “We don’t like to let things grow under our feet.” The spaces will run anywhere from $1000 to $2000 a month; 70 percent will be one-bedroom apartments, 20 percent studios and the rest two bedrooms.
The renovation has been anything but easy, he says. “Menden and Hranowskyj bought it in 2005, and the bank gave them financing on it. They wanted to turn it into office space.”
But because the developers, in cahoots with the bank, were doing, according to Gadams, “lots of fraudulent activities in many different respects,” they only attracted a handful of tenants and never even finished the build out on the property. “It was only about 25 percent complete,” he says. “I just decided that office space wasn’t the highest and best use of that property. I’m not in the hotel business, I’m more in the apartment business.” He says that, once completed, Marathon Development will have made a $12 million investment in the renovation.
The Madison, built in 1905, was a highly desirable property when it came back on the market, but Gadams says that the title was “pretty messed up. It had historic tax credit issues, it had a non-disturbance agreement that said you couldn’t do residential … I had to go to court to clean all of that up. I don’t think [Southern Bank] wanted to go through that mess so they got it appraised and basically I made an offer, they accepted it, and I bought the note and closed on the property. I think it would have taken years to unwind that thing if the bank had done it.”
Gadams also purchased The Wainwright Building, an office complex on Bute Street. “We totally gutted it out and turned it into 126 apartments,” he says. “It took 10 months to construct and only took 4 and a half months to lease up 126 apartments, and we’re now at 99 percent [occupancy].”
The former Franklin Condominiums at 220 West Brambleton was another former BoC property that Gadams purchased at auction. “It was an unfinished building that they wanted to turn into 19 high-end condominiums with two retail spaces in it.” Purchased last June and finished at the end of last year, Gadams’ company put the renamed 220 West on the market in February. “I think in the next 12 months we’ll be completely sold out. The condos range from $300,000 to $800,000. Our vision is to have them be the most upscale condos in Hampton Roads.”
The burning question may be: Who is going to live in all of these new apartment spaces? “We have gotten a lot of inquiries,” says Turner of Luna Developments. Fort Tar Lofts isn’t in the application process yet so there isn’t demographic data yet. “I think that there’s a lot more people who want to live near the downtown area. With the tolls going up in the tunnels, if you work in Norfolk you might want to migrate to Norfolk instead of using the tunnels every day. There seems to be a high enough demand in this area to warrant making more apartments available for those who don’t want to buy a home.”
Gadams concurs. “I’m finding 50 percent of the people are from out of town, which is great. We don’t want to just reshuffle the deck, we want new people, and that’s exactly what’s happening. What’s really helped us is the fact that not a lot of people don’t want to own anymore,” he says. “They’d rather rent, at least the folks in their 20s and early 30s, so that’s created a much deeper bench in the market for us, to where we can offer these rentals.”
Some developers, like Gadams, are clearly reaping the benefits from what has been referred to as a fire sale. Southern Bank is not complaining either. “The deal has worked out very well for us,” L. Taylor Harrell says. “We’ve had a significant amount of issues to deal with, but overall the results from the portfolio we acquired have been better than we expected.”
The FDIC estimated that the Bank of the Commonwealth’s shutdown cost the federal government more than $268 million. But people shouldn’t misunderstand how the process works, Harrell says. “Some assume that the taxpayers are footing the bill for this, for the failure. But the FDIC is really an insurance corporation, and they collect premiums from all of the banks and they use those premiums to cover losses when a bank fails. It’s really the healthy banks that are footing the bill for the banks that fail.”
Some say that the real tragedy with the Bank of the Commonwealth is what happened to shareholders and borrowers, and to the properties. “You have a lot of buildings around town that were usable but empty for so long,” Turner says. “All they were doing was becoming damaged. [The former owners] allowed these buildings, many of them historic, to deteriorate. For years, they were just sitting there.”
But while some companies, like Luna and Marathon, are in the process of redeveloping these “lost” spaces, new owners in other parts of town are still waiting for their perfect storm of good.
“We’ve had almost zero movement,” says Michael Myers of S.L. Nusbaum Realty, currently marketing a long-dark space at 717 Granby Street in the city’s new arts district, acquired at auction by the family of the late attorney Pete Decker. “It’s not like we’ve gotten an insulting number we’ve had to respond to, it’s that we’ve had almost no showings and no offers.”
While the realtor is optimistic that it will happen eventually, he says that successful redevelopment of many of the former BoC properties has been slow in the area of Norfolk’s new arts district. “I really can’t blame it on the Bank of the Commonwealth,” he says. “That left a bad taste in a lot of people’s mouths, but I think most people are over it now and moving forward.”
“Right now, though, this is an area that is still in limbo.”