Kansas securities official files suit against Minnesota developers

Kansas Securities Commissioner Josh Ney said Monday that he has filed criminal charges against once-prominent downtown Wichita developers Michael Elzufon and David Lundberg in Sedgwick County District Court.

Elzufon and Lundberg – often called the “Minnesota Guys” because they were based in the Minneapolis-St. Paul area – bought or managed at least 14 aging downtown office buildings, pulling in a large group of local and out-of-town investors. They started acquiring property here in 2004.

But the duo, doing business as Real Development, eventually lost all the properties in a cluster of foreclosures and lawsuits.

According to a news release from the state, Elzufon and Lundberg were each charged with 61 felony counts under the Kansas Uniform Securities Act for alleged securities fraud and selling unregistered securities.

The complaint alleges that Elzufon and Lundberg committed securities fraud by defrauding at least one Kansas resident and an additional 59 residents from other states by offering and selling unregistered securities in their various businesses, which they said were for the rehabilitation of various downtown Wichita offices. The alleged losses by victims currently total more than $3.5 million, according to the release.

The commissioner’s office said the complaint, which contains more detail about the charges, is sealed until the developers make their first appearance in court, a date for which has not been set. A commission spokeswoman had no further comment on the case.

Messages left for Lundberg and Elzufon weren’t returned Monday.

Investing in Wichita

The response to Monday’s criminal charges from at least one person involved with Lundberg and Elzufon over the years was a lack of surprise.

Real estate broker Kirk Short said he represented the two as an agent, traveling to California to sell to investors, and even bought a building floor for himself. He later sued the two after he said he wasn’t paid a commission he was owed.

“I don’t think that they were out there intentionally trying to harm or mislead people,” Short said. “But I think things were probably done once the mortgage crisis hit that weren’t above par.

“They are being investigated and were caught, and now they will have to sit there and deal with the repercussions.”

Lundberg, a small-time commercial real estate investor and trader from suburban Minneapolis, had been to Wichita a few times in 2003 when he bought a shopping center in west Wichita. A Wichita real estate agent approached him at a commercial brokers conference a year later with a downtown Wichita building to sell.

Lundberg came to Wichita, toured the building and then looked at several others to judge the market. He was surprised at how low the prices were and was immediately excited by the possibilities.

Elzufon, who had a commercial carpet business, met Lundberg when he rented a warehouse Lundberg owned in Plymouth, Minn. Elzufon wanted to get into property investing, so Lundberg told him about Wichita.

They started with the renovation of a downtown warehouse into condominiums just north of what is now the arena, the Lofts at St. Francis. But they ran into cost overruns.

Then they tried to sell the units at prices higher than the Wichita market was prepared to pay, so they eventually had to drop the price of most of the condominiums below $200,000 and fit more of them into the building to try to break even.

Yet their plans for Wichita – fueled by depressed real estate prices and plentiful loans by out-of-town banks – kept getting bigger. At one point, they said they owned about 1 million square feet of office space in downtown office buildings – some of them vacant and others that were under-occupied. That was about a quarter of all downtown office space.

Some of the purchases were stunningly cheap. The Minnesota Guys eventually bought the vacant and rapidly decaying Exchange Place for $150,000, or less than $1 per square foot – the equivalent of buying an average house for less than $2,000.

They bought the former Commerce Bank building at 150 N. Main for $675,000, slightly more than $5 per square foot, another astounding bargain considering the building still had paying tenants.

Bubble pops

In 2006, they hit upon the strategy of legally splitting four of their buildings into floors and selling them to property investors in California looking to ride the property bubble to big riches.

Their finances were always complicated, with multiple mortgages, multiple investors, multiple companies, properties or rent pledged to secure other loans and with buildings sold to investors and operated by the Lundberg and Elzufon company, called Real Development.

The complexity only grew when the property bubble popped in 2008 and they could no longer constantly refinance the buildings at ever higher values to pull millions of dollars out to redevelop the property.

They turned to Wichita city government in an effort to keep the renovations going, and in 2010, they got the Wichita City Council to approve $10.2 million in tax funding to help fund the $60 million Exchange Place apartment project. But the project never got going – and the duo were dogged by a large number of foreclosed buildings and unpaid vendors.

Eventually, their activities ground to a halt in the midst of recriminations, foreclosures, lawsuits and lack of financing. They lost Wichita Executive Centre, 125 N. Market, to Security National Life Insurance Co., its largest creditor, and turned the Exchange Place project over to another group of developers.

In 2012 and again in 2014, the Kansas securities commissioner filed a securities violation complaint against Elzufon, Lundberg and their companies, alleging that loans the developers sought were actually unregistered promissory notes, a violation of Kansas law. The complaint wasn't a criminal case, and Elzufon and Lundberg faced no jail time.

This story was originally published February 23, 2015 at 12:10 PM with the headline "Kansas securities official files suit against Minnesota developers."