Michael Elzufon and David Lundberg – the flamboyant Minnesota Guys development team who first began attempts to revitalize downtown Wichita in 2004 – allegedly violated state securities law, according to a petition filed Tuesday by the Kansas Securities Commissioner’s office.
One part of that petition centers on a state allegation that the two were trying to raise money to repay the city of Wichita approximately $24,000 that was holding up facade improvement funds for Real Development projects.
The state’s case alleges that the two men, their Real Development Corp. and Sutton MN LLC violated the Kansas Uniform Securities Act by selling unregistered securities, specifically promissory notes to raise capital for various downtown Wichita real estate projects. The state also alleges that the funds received from an investor were to be used to repay the city of Wichita, when in fact they were “diverted to pay back prior investors and for unrelated business expenses.”
The case is not a criminal allegation, said Jeff Kruske, general counsel for the state securities commissioner. However, Elzufon and Lundberg face substantial financial penalties in the case, plus a final order to stop selling unregistered securities and abide by the Kansas Uniform Securities Act, Kruske said.
Contacted Tuesday afternoon, Elzufon refuted the charges, saying he was unhappy the case went to the media before the partners and their counsel.
“I find it particularly interesting that the SEC has been able to share these charges with the newspaper without sharing it with us,” he said, “not to mention dropping the case at 2 p.m. on Christmas Eve.
“We didn’t sell promissory notes. We took a loan out, and a promissory note is used everywhere. I never understood you called the securities commission for a note between two willing and able parties.”
Lundberg did not return a message left on his cellphone, and a call to him at the Minnesota Real Development office rang twice before disconnecting.
The new case, dubbed an administrative case by the securities commissioner, results from the investigation that followed the Nov. 7, 2012, cease and desist order filed against the same defendants.
Wichita Mayor Carl Brewer wasn’t surprised by accusations the city lost money to the Minnesota Guys.
“My position remains the same: I’m through with that,” Brewer said. “It’s time for everyone to move on. Downtown will redevelop. Other people have interests in those properties downtown, and we’re going to be all right.”
Elzufon and Lundberg can request an evidentiary hearing in Topeka, Kruske said. There, they can refute the allegations, examine the state’s evidence and offer a defense. Or, they can ignore the state’s allegations and accept the state-imposed penalties.
“Because this appears to be a much larger scale problem than we had initially determined when we filed our earlier action a little over a year ago, we believe monetary penalties are called for,” Kruske said.
Starting in 2004, Lundberg and Elzufon – who hail from the Minneapolis, Minn., area – bought more than a dozen aging downtown office buildings, mostly with investors’ money. By 2007, they owned or managed nearly 1 million square feet of downtown office space, roughly a quarter of downtown's total.
Their plan was to buy buildings cheap, reinvest using borrowed money or sale proceeds, attract new tenants at higher rents, and then refinance at the new, higher value to pull out capital for further reinvesting and profit.
That worked fine at the height of the real estate lending boom, when getting money was easy and property values kept going up.
In at least four of their buildings, to make up for the lack of capital, they sold some of the floors to small investors, mainly from California, at markups of up to 1,000 percent.
But the 19-story, 213,000-square-foot Wichita Executive Centre was to be their “crown jewel,” as Elzufon said at the time.
At Wichita Executive Centre, they had success in bringing in new tenants. The tower was two-thirds full at one point, Lundberg told The Eagle.
But in 2008 credit froze up and investors disappeared because of the global financial crisis.
In a last gasp, the two persuaded the City Council in 2010 to give them $10.3 million in tax increment financing for the Exchange Place project, but only if they repaid the Wichita Executive Centre contractors.
But Elzufon and Lundberg largely ran out of cash needed for the upgrades. Their contractors stopped work in the middle of the job.
The pair searched nationwide for more money, and landed a $5 million loan from Security National Insurance of Salt Lake City. But they were never able to land the federal loan guarantee for the Exchange Place project, and their plans collapsed. This year, another developer took over the Exchange Place project and Security National this spring took over Wichita Executive Centre.
Elzufon and Lundberg still have ownership of a few floors of their office buildings, but generally only because their creditors don’t want to formally claim ownership.