Watchworld Welcomes "The Key Noter" to Honor Roll of Links With Latest on Cay Clubs

Key Noter's Top Story from Few Days Ago: "Investors Sue Cay Clubs"

I was trying to access another link online from the Key West Citizen with no luck when I thought, "Isn't there another voice for Keys news online?"

So I googled news for the Florida Keys and got a link to a paper I've never read, "The Keynoter".

I've seen Key Noters in newstands, but I never bought one as I thought it was like some kind of once a week paper. However, after I opened the link on Google, I discovered "The Keynoter" online was not only covering stories the Citizen was covering, but "The Keynoter" online was also offering those stories in their entirety and in a chronicled (by date) order with no monkey business of links not opening, top headlines not appearing in the list of archived stories, etc.

So, to introduce mainlanders and Key West residents to another Keys Newspaper, here is a top story from "The Keynoter" online posted late Tuesday 28 September 07.

The story is titled . . .

Investors sue Cay Clubs

By Sam Nissen snissen@keynoter.comPosted-Tuesday, August 28, 2007 5:57 PM EDT

Nineteen owners of condominiums at Sombrero Cay Club Resort and Marina in Marathon have sued the resort owners and others, alleging multiple counts of fraud.

The owners say Cay Clubs and affiliated companies misrepresented what it owned, what was offered, the company's future plans and how much owners stood to make by investing in the Marathon property.

In the suit filed Aug. 22 in Monroe County Circuit Court, owners allege Cay Clubs utilized their money as an investment, which real estate agents are banned from doing. The suit also lists three appraisal companies the plaintiffs believe inappropriately valued the property based on projected worth tied to promised renovations.

Rock's note: Here we go again. More bad news about Cay Clubs from the claims of disgruntled investors and their lawyers.

Before we get going on this one, let me point what I've read so far:

• The buyers of these condos at Sombrero Beach (called owners) bought these condos as investments.
• These owners are claiming Cay Clubs took their money and "invested it".
• These owners claim Cay Clubs (and affiliated companies) misrepresented what it owned, what was offered, the company's future plans and how much owners stood to make by investing in the Marathon property.

This befuddles me.

These "owners" were "investing" to "make money" off the rentals of their condos, right? Exactly what are they saying Cay Clubs inappropriately invested their money in? (I'm hoping the article will explain all this)

Onward.

In the suit filed Aug. 22 in Monroe County Circuit Court, owners allege Cay Clubs utilized their money as an investment, which real estate agents are banned from doing. The suit also lists three appraisal companies the plaintiffs believe inappropriately valued the property based on projected worth tied to promised renovations.

“I don't know how you could perform an appraisal for something that doesn't exist,” said Tom Wright, a Marathon attorney who specializes in real estate law.

Cay Clubs spokesman Chris Brown said the company had not been served with the complaint and therefore could not comment on it. A lawyer for some of the plaintiffs said Cay Clubs would be served by the end of today.

The owners say they were told Sombrero Resort, then a moderate-end hotel, would be upgraded to a “world-class” facility. But the only upgrades performed on the property were new coats of paint, the owners allege.

“The idea of it being a world-class resort and marina - I don't think many people would characterize it as such,” Wright said. “If you saw these units, I don't think anyone would pay this much except based on representations of improvements.”

All right, now we are getting somewhere.

Attorney Wright has a beef with three appraisal companies contracted by Cay Clubs to assign a true value of the condos after they were renovated.

Wright says, “I don't know how you could perform an appraisal for something that doesn't exist,” said Tom Wright, a Marathon attorney who specializes in real estate law.

To which I will defend Cay Clubs by saying this: they used three appraisers, not one. Appraisers are similar to stock market analysts. Using forward looking models of stocks's compounded annual growth, balance sheets, income statements, and cashflow statements, analyst constantly try to project future stock values.

You know when you hear "Analyst Joe Schmo gives Amazon and new target of $150"? That analyst has just appraised the future worth of the stock 12 months or 18 months down the road based on what he believes future revenues and income will be.

I don't know how a lawsuit can sue appraisers who were basing their assumptions on the data given to them by Cay Club executives. Secondly, that Cay Clubs used three appraisers to guess future value shows a modicum of good faith by them to assign a true future value after renovations were done.

On the other hand, Attorney Wright has got one thing right when he said, "If you saw these units, I don't think anyone would pay this much except based on representations of improvements."

I say this as my ex-wife's aunt owns a condo just down from the Sombrero Resort.

The last time I saw Sombrero Resort, it looked like a Days Inn or Comfort Inn. Nothing special to look at. It didn't give off any air of "exclusivity" with its boring boxy look. (Although I will say the old Sombrero Resort has more charm than the monstrosities Spottswood has built to replace the old Holiday Inn Beachside.)

Why anyone would want to buy a boxy looking, un-renovated, hotel suite called "condo" is beyond me . . . unless . . . of course . . . they were sold on the idea of making this income producer pay for itself.

So how much were these rooms . . . units, suites, whatever . . . going for back in the day when all was well with Real Estate?

Units sold for between $600,000 and $800,000 in late 2005.

Yikes.

I hope those un-renovated boxes came with a slip out front for the boat.

Man, even by 2005 money, there is no way in hell I would have ever paid that much money for a Sombero Resort room . . . unlesss, of course . . . I had a written contract showing the room and building were to have a major, major facelift with loads of new extras injected into each property.

So, how's the renovation going? How fast is Cay Clubs moving to upgrade the Sombrero Resort?

The Keynoter answers with more tidbits from the lawsuit:

Cay Clubs also has not applied for building permits to begin renovations, the suit alleges. The property is far from being world-class, some owners allege.

“When the Cay Clubs Defendants failed to renew their leaseback agreement for the second year, [Scott] Rathbun and [Stanley] Ahn retained an independent rental agency,” according to the lawsuit. “Upon inspection of the property, the independent agency declared the unit un-rentable.

“All previously included furniture was missing, the old mattresses were pushed up against the walls and the bathroom was severely dilapidated and damaged,” according to the lawsuit.

Owners say they were told they could save money by purchasing the property for a reduced price and that Cay Clubs would give them 8 percent of their investment back over the next year, with payments continuing monthly until upgrades were completed - also described as the leaseback program.

Rock's note: I am assuming Scott Rathburn and Stanley Ahn are owners of one sorely lacking unit. I am also bemused that they hired an outside rental agency to rent their unit after the first year of their Cay Clubs "leaseback program" ended.

Obviously there is some baaaaaaaaaaad blood between these two and Cay Clubs if their room was cleaned out of furniture and other belongings and they were never notified of this.

I know that if I had bought a condo on future projections, that the furniture, fridge, etc., were all included in the price (and here, I am assuming they were), that I would certainly expect those furnishings to remain in my condo every time a renter vacated my unit.

So somebody somewhere, either renters or Cay Clubs, made this unit of Ahn's and Rathburn's "unrentable". Whoever is at fault, you can bet the law will be on the side of Anh and Rathburn in this slice of the lawsuit.

One more thought: why didn't Rathburn and Ahn simply take money generated by the Cay Clubs leaseback program and plow it back into a plane ticket or two to see how their supposed renovations were coming along?

Some litigants allege payments came late or not at all, while others complain Cay Clubs stopped paying even though renovations were never completed.

Oh, that might be why. I forgot about the 140 people in the Cay Clubs leaseback programs not receiving any payment or getting small "stop-gap" payments owed to them.

At least some of those other owners have upgraded units not needing renovation.

Next, we read why litigants are claiming Cay Clubs took their money and invested it improperly:

The Sombrero owners allege the sales tactic amounts to a security or an investment, a type of transaction which must be registered with the state Department of Banking and Finance. According to the suit, salesmen Ricky Stokes and Barry Graham are accused of using fraudulent sales and investing tactics.

Hold on. I don't get that.

Selling condos as an investment is strictly a Real Estate proposition in my mind.

Are you telling me time shares are registered by the Department of Banking and Finance too?

So why is Cay Clubs supposed to be in the wrong selling condos as "an investment" in Real Estate?

I don't understand how "owners" can be howling about Cay Clubs "investing" their money. I must be missing something here.

To me, this sounds like more speculators wanting a bailout because they didn't do their due diligence before they purchased.

Real Estate, like stocks, like cattle futures, like betting on a Heat/Lakers game, is no slam dunk.

Where are the adults?

Cay Clubs is a corporation which has to use any revenue it can scrounge to stay solvent.

Salaries must be paid.

Leaseback stop-gap payments are being paid. (At least Cay Clubs is making that attempt as we read in the Miami Herald story.)

Everything we read in the Miami Herald and Key West Citizen (and now Keynoter) paints a picture of a company which is on the ropes because inventory is exploding, prices are dropping and most importantly the credit crunch has dried up the liquidity builders and developers need to tide them over.

Sombrero Cay Clubs is neither the first or last condotel project to run into the Housing Crash. Just last year, Islamorada's Holiday Isle's major renovation into a condotel project was canceled by new owners just a few weeks after it was announced.

I know these owners of Sombrero Beach condos want to seek redress of their problems, and I would to. But I also have to point out to these owners the following: they could possibly force the company out of business if they win a lawsuit and force a sale of Cay Clubs assets.

We've seen this before in NYSE and NASDAQ listed companies, big and small, where shareholder lawsuits seeking redress for share value loss simply helped to speed up the bankruptcy of a company which might have fought its way out from behind the 8 Ball had shareholders been more patient.

I once asked a bankrupted shareholder who partook in a fruitless shareholder suit, "What did you expect to do? Squeeze blood from a steamrolled turnip?" He gave me crap for being so cold. I shoved it back in his face and said, "You know, you can't get even 1% of Zero. One-percent of something is better than nothing.

You know who makes out the best in shareholder lawsuits? Lawyers. Then the vultures who descend on the carcass of a bankrupted company or near bankrupted company.

I learned this lesson the hard way staying invested in Sirius Satellite Radio stock way back in 2001. The company almost went bankrupt. Meaning my holdings would be worthless. However, Lehman brothers did a debt for equity swap, Lehman suddenly became 93% owner of Sirius, and I and all the other shareholders were left holding 7% of the company with our newly devalued shares.

Trust me. The $700 I had left over was better than nothing.

So was the education I received at the hands of unstoppable market forces.

Sombrero Beach Owners Should Chill, then Meet with Cay Clubs Execs

All I'm suggesting here is this: Sombrero Beach owners of condos might want to sit down with company officials without going to court and see if they can work things out. Because if Cay Clubs goes bankrupt, what good does it do for these owners who won't ever see any renovations of their rooms, who will have to wait for a vulture to buy the empty units in their building for pennies on the dollar, and so on and so forth?

You think this looks complicated now? Go ahead, help bankrupt the Sombrero with a lawsuit and see how fast the bankruptcy lawyers and judge get to the true remaining value of assets left to liquidate. This will take years.

I mean, yeah, maybe a judge will make Sombrero owners first in line for liquidated assets, but then again, being first in line might mean a few pennies on the dollar. But that's probably even wishful thinking as it is usually bigger lenders such as banks, bondholders, preferred shareholders, etc., who are always paid back first after a bankruptcy . . . it there's anything left over to payback.

If owners of these condos are pissed about low values now, wait until the words "bankrupt" are attached to their building. Condo values will fall 50% or more.

So, were I a Sombrero Beach condo owner, I'd think long and hard about this lawsuit.

I'd advise them to sit all 19 of the plaintiffs and company execs in a big room and then have a civil give and take and see where they can get from there.

That would be my first choice.

Think of it as a divorce. The best divorce happens when both sides don't contest the divorce, they simply have an amicable workout of who gets what, knowing that a long drawn out divorce proceeding doesn't allow either party to get on with their lives while divorce lawyers keep hitting them with growing bills.

Hell, maybe you can think of it as marriage counseling too. Maybe the owners of the condos and Cay Clubs can work out some kind of agreement where renovations start as long as the company can meet certain metrics, such as payments to leaseback operators.

Who knows? Maybe the company execs can have members of the other company attempting to merge with them sit in on a meeting and explain to condo owners, "Look, the reason this merger is so important is we will be supplying much needed capital to Cay Clubs in return for a big hunk of ownership. If you guys will call off the lawsuits and give us til the end of the year to ram this merger through, we promise to start an impressive renovation on your units on such and such a date."

I'd call this a win/win/win situation.

Lastly, the last few paragraphs about the management team at Cay Clubs makes me scratch my head:

Stokes heads Cay Clubs Wholesale, which Brown said is a wholly separate company from Cay Clubs, but has a working relationship. But Stokes billed himself as the National Director of Cay Clubs International, a defendant in the suit, in a presentation last summer not involving Sombrero Resort.

Calls to Stokes are directed to Brown. Graham is a principal officer of the main Cay Clubs brand, according to documents filed with the U.S. Securities and Exchange Commission.

Lawyers who specialize in condominium and securities law said previous offers made by Stokes for different properties and in other states exist in a legally gray area between real estate law and securities law, and some of the promises made cross recommend guidelines for avoiding legal problems.

Stokes did not return messages by press time.

The defendants listed in the suit are DC 709 JV, LLC, a company owned by Cay Clubs owners Dave Clark and David Schwarz; Cay Clubs International LLC; Benchmark Appraisal Services Inc.; Pelican Appraisals Inc.; Rosendale Appraisers Inc.; and Cristal Clear Realty LLC, a company also owned by Clark and Schwarz.

To which I will say, "Hey Keynoter, you got your next story right there. How about digging up what all these different companies do, how they are structured in the scheme of things, and give us a diagram or two?"

Where are these LLCs incorporated?

And how about explaining LLCs to the common day reader who never picks up a Wall Street Journal?

p.s. Keynoter, welcome to the Watchworld's Honor Roll of Links. Thank you for not making your main headlines and stories inaccessible to those who wanna be in the know. May your online marketing work for you and allow your stories to be mass distributed with no fuss.

Now if only the Key West Citizen would take your lead . . .