Hundreds of investors in a troubled luxury student apartment building near the University of Texas at Austin are close to recouping much of the $ 75 million they committed to the project, with most of the bill footed by a management firm that has drawn complaints from tenants across the country.
Nelson Partners Student Housing will pay $ 50 million to the investor group that includes doctors, lawyers, teachers and engineers under a preliminary settlement approved by a Texas state judge. The deal or “liquidation plan” could require Nelson Partners to sell many of its nearly 20 properties to raise the money. The investors could also get several million dollars from a New York hedge fund that provided financing for the deal, following a Wednesday verdict from a jury in a related lawsuit.
The proposed settlement would resolve a bitter legal battle in which the investors in the Skyloft student housing complex claimed they were defrauded by the firm’s chief executive, Patrick Nelson, who aggressively bought up properties in the past four years.
But Mr. Nelson and his firm have encountered financial troubles and bankruptcies at several properties while student residents at different complexes complained about poor living conditions including broken elevators, darkened hallways, uncollected trash, insect infestation and algae-covered swimming pools.
The Skyloft settlement, which received preliminary approval from a Texas state judge late last month, would force Mr. Nelson to dramatically scale back his ambitions to become a major regional player in the $ 100 billion student housing industry. If the plan is given final approval, Mr. Nelson and his firm would have up to 18 months to raise the money for the fund, which will be overseen by the court.
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The San Clemente, Calif., Firm’s contributions will come from equity stakes in properties and controls in several states. Many of them were purchased using private investment deals similar to the Skyloft arrangement that Mr. Nelson and securities brokers had pitched to other investors.
Mr. Nelson did not respond to requests for comment.
The Skyloft investors could also receive millions more from Axonic Capital, the New York hedge fund that helped finance the purchase of the 18-story student building with a $ 30 million loan. After declaring Nelson Partners in default, Axonic seized the property in December 2020 and then quickly resold the building to a New York real estate firm.
A jury in Austin on Wednesday ruled that Axonic was liable for some of the losses and awarded the investors $ 17 million in damages. But it may be awhile before the investors see any of that money: The jury, when asked to apportion blame for the investors’ losses, attributed 75 percent of the fault to Nelson Partners.
Axonic, in a statement, said it believed it would only cost $ 4.25 million to investors.
“We firmly believe we were collateral damage to Nelson’s fraud in this case,” the company said.
Robert Brownlie and Doug Brothers, the lawyers for the investors, said they were pleased with the ruling.
Mr. Nelson has repeatedly blamed the Covid-19 pandemic for creating cash flow problems that forced him to stop paying dividends to investors in Skyloft and other properties. Since last July, he has put three other properties into bankruptcy.
In a recent news release, Mr. Nelson said the federal government’s “heavy handed” lockdowns during the pandemic problems created for his firm.
“Even as the government forbids owners from evicting nonpaying renters, it did nothing to protect businesses like Nelson Partners from their lenders,” said Mr. Nelson, whose firm received just over $ 1 million in aid from the federal Paycheck Protection Program.
Skyloft investors, in court papers and in interviews, claimed Mr. Nelson had diverted some of the $ 75 million he had raised from them to finance the operation of other properties. Mr. Nelson has denied those accusations.
Mr. Nelson began taking steps to sell off some of the properties managed by his firm before the settlement agreement. In January, Nelson Partners sold a high-rise student apartment building in Tempe, Ariz., For $ 36 million, and it has received several bids for an upscale student housing complex in Tucson.
Nelson Partners should have little trouble finding buyers. Student housing is seen by investors as a stable source of income because rents are often paid with student-loan dollars. Upscale off-campus housing has become popular in recent years as universities and colleges spend less money on building dormitories, and some students crave housing with extra amenities.
The student housing market recently got a big boost with Blackstone Group, the big private equity firm, announcing a deal to buy American Campus Communities, the country’s largest publicly traded student housing firm. The deal values American Campus at $ 13 billion.