'Winning Again'

'Winning Again'

By David R. Corder

Associate Editor

No matter where Bill Harkins does business these days it seems the Florida condominium developer just can't shake the skeptics. It's all about the lingering suspicion that he fronts a real estate operation that acts as an alter ego of Bill Lilly, a convicted Massachusetts real estate developer who now resides in Boca Raton.

That is the same skepticism Harkins has faced over the past nine years as his Bay Communities real estate operation has established strong revenue growth through condo conversion developments along Florida's East Coast from Palm Beach to St. Johns counties.

Those were the same doubts he faced again last year as affiliates of the Palm Coast-based company expanded into Fort Myers with the purchase of 320 rental apartments and 380 more units in Naples. So it was no surprise to him this summer when more questions emerged in the wake of the company's purchases of 452 rental units in Brandon and 315 more in North Tampa.

"You know, it's out there, and it's consistent," says Harkins, Bay Communities' president and CEO, about the skepticism that hangs over Lilly. "But it's now 15 years old. Bill paid his debt to society; he paid his debt physically to the government."

Fourteen years ago this July a federal jury in Boston convicted Lilly, the self-proclaimed "Condo King," of bank fraud. The jury found him guilty on 31 counts that he swindled two banks out of millions of dollars in connection with his Massachusetts condominium development work. Among the charges, Lilly doctored mortgage documents for condo buyers who lacked financial wherewithal and subsequently defaulted on their loans.

The schemes earned Lilly a severe rebuke. U.S. District Judge William Young, a published critic of mandatory federal sentencing guidelines, ordered Lilly to serve five years in federal prison and five years supervised probation. The judge also ordered Lilly to pay $5 million in taxpayer restitution to the Federal Deposit Insurance Corp. (FDIC).

Over the next five years, Lilly served his sentence in the Allenwood Federal Correctional Complex. Forbes magazine once described the Pennsylvania prison as "the nastiest place for a federal nonviolent criminal to be sent."

On the surface, it seemed Lilly's real estate career had come to a tumultuous end. Not so.

In expectation of a probable prison sentence, federal prosecutors claim, Lilly devised an elaborate business plan. They say Lilly enlisted his common law wife, Valerie Kaan, to shield his real estate assets. Then while in prison, Lilly built a real estate empire with the aid of Kaan, Harkins and others.

Those accusations emerged in 2000, when Assistant U.S. Attorney Chris Alberto filed a civil action against Lilly in the Boston federal court. The complaint claims Lilly built Bay Communities into a multimillion-dollar real estate operation, and yet he was paying only $1,500 a month on the $5 million in taxpayer restitution owed to the FDIC, an amount agreed to in his probationary hearings. But federal prosecutors, after learning of Lilly's jailhouse business dealings, sought to compel Lilly to pay his full restitution even though Lilly claimed he was earning a nominal annual salary.

"To shield his control and ownership interest, Lilly arranged for Valerie Kaan, Lilly's former fitness-aerobics instructor and current girlfriend, to be the nominal owner of Bay Communities," Alberto argued.

To bolster his claim, Alberto documented Lilly's prison telephone use. Over a 10-month period in 1996, Lilly made 10,000 telephone calls. About of third of those were to Kaan's home or mobile phones. He received hundreds of U.S. Mail and FedEx packages that contained "proposed purchase and sale agreements, signed purchase and sale agreements, checklists of renovation work to be completed," among other work-related documents.

Exhibits submitted with the complaint also contain transcripts of hours of prison-recorded telephone conversations between Lilly, Kaan, Harkins and others. The transcripts describe detailed business operations, including arranging through a go-between the acquisition of condominiums in Boston and checking on the progress of subcontractors' work.

The transcripts describe an instance in 1996 when Boston attorney Robert G. Kline warned Lilly that he "was juggling too many real estate deals at once."

"I don't mind," Kline said to Lilly, "but, Bill, when you do 23 closings, then you got a major deal going on in New Jersey, and you got a sub-deal within the framework here, and you got to put, you know, it just compresses things. You're trying to put a quart of water into a pint bottle. Something's got to happen. You just hope the things that happen can be lived with."

Testimony in the civil action included statements of a former nanny, who cared for Lilly and Kaan's two children, about their discussions over placing his assets in Kaan's name. Her testimony described the couple's plan to hide his Rolls Royce in Florida.

" 'If it's in her name, they can't touch it,' " Lisa Miller, Kaan's nanny at the time, testified as to one of Lilly's comments.

Because of his suspicions, Alberto asked the Boston federal court to appoint a receiver to oversee the assets of Bay Communities and its numerous affiliates. He rejected Kaan's testimony that she built Bay Communities into the multimillion-dollar operation.

"Kaan's lack of knowledge during the deposition regarding some of the major issues and aspects of various real estate transactions buttresses the government's theory that Lilly coordinates, directs and manages Bay Communities," Alberto's memorandum for receivership states.

Throughout the civil prosecution, Lilly, Kaan and Harkins argued that Lilly was nothing more than an employee of Bay Communities.

Asked whether he placed assets in secret ownership, Lilly asserted his Fifth Amendment rights under the U.S. Constitution. Asked a similar question, Harkins, too, responded with a Fifth Amendment assertion.

Two years later, Kaan through her attorneys negotiated a settlement to accelerate Lilly's restitution payments. According to documents, Lilly has paid slightly more than $3 million of the total amount owed.

Nothing has changed the minds of federal authorities, however, about who exactly controls Bay Communities.

"It was our position that Lilly was the prime moving force behind Bay Communities," Alberto tells GCBR. "And that position hasn't changed. However, there is no reason to pursue the civil action since they've agreed to pay 100% restitution to the victim, the taxpayer."

Meanwhile, Bay Communities has flourished in Florida. Last year, the company and its affiliates produced about $150 million in annual sales, Harkins says. This year he expects revenue of between $300 million and $400 million.

Without any hesitation, Harkins, who is based in Palm Coast, attributes at least part of Bay Communities' success to Lilly's contributions as a consultant. "William Lilly has no ownership in any way shape or form," Harkins tells GCBR. "He's a very intelligent man, and not to use his intelligence would be foolish.

"He's an idea guy," adds Harkins, Lilly's associate for nearly 20 years. "But most of the work gets done by my office. Valerie takes care of the financing. Most of the acquisitions are done by me personally."

Neither Lilly nor Kaan was available for comment. Harkins says Kaan was on vacation in Europe.

Since entering the Florida market, Harkins says, Bay Communities has assembled around 2,000 rental units for conversion to condos. It owns five condo conversion properties in Palm Coast, north of Daytona Beach, and three of them have sold out.

In Fort Myers, public records show the company's Shera Development LLC affiliate relied on a diverse source of financing last year to offset the $30 million price it paid for the 320 rental units at the Gardens at Beachwalk. The affiliate obtained nearly $10 million in financing from a pool of individual lenders, Home Federal Bank of Hollywood, Florida Community Bank and OptimumBank.com. Harkins could not readily recall the remainder of the financing details.

In Naples, the firm's TRG Wildwood Ltd. affiliate relied on Charlotte-based Mountain Funding LLC to finance the acquisition last year of the 380-unit Enclave at Naples rental community. The private lender financed mortgages of $41.5 million and $6 million.

In Tampa, Mountain Funding backed the firm's Bay Tampa LLC affiliate in the $51.5 million acquisition of the 452 units at the Crosswynde rental units in Brandon. The lender financed $48 million of that sale.

"If reservations mean anything, we made the right move with Crosswynde," Harkins says. "We haven't done any advertising, except to put signs out, and we've got 140 reservations. We haven't even opened it up to the public. Those are reservations with deposits."

The Charlotte-based lender also backed the firm's Bay Hamptons LLC affiliate in the $54.6 million acquisition of 315 rental units at the Hamptons at Tampa Palms in North Tampa. The lender financed two mortgages of $50.5 million and $5 million on the luxury, gated apartment community.

"We've looked at other property (in the Tampa Bay area) and have passed on them," Harkins says. "We don't buy properties that need major rehabilitation. That's just not our model. We would rather pay more to buy more."

Those four Bay Communities projects just may be the beginning of the company's extended foray into the West-Central and Southwest Florida markets, Harkins acknowledges. He is particularly bullish on the Tampa Bay area.

"Tampa, I think, was lagging in the market for condo conversions," he says. "Now, not only ourselves, but other developers see Tampa as an strong, up-and-coming area not only for conversions but all kinds of real estate. Tampa is the place people want to be.

"It's not the only place we're looking at," Harkins adds. "We won't shy away from it. That market is going to be strong for at least the next couple of years."

Lilly's past not forgotten

Despite Bay Communities' success in Florida and elsewhere, the past of Bill Lilly still shadows the firm's activities.

Three years ago, Stewart Title Guaranty Co., the Houston-based national title closing service, issued an alert on Bay Communities, Valerie Kaan, Bill Harkins, Lilly and related entities. The firm ordered all policy-issuing agents to refer to its national legal department all requests for transaction services from Bay Communities and the others.

Except to say the alert still remains in effect, officials at the national title services company won't say why Bay Communities and the others are listed in the alert. It perplexes Harkins, too.

"We had our attorneys talk with them about it," Harkins says. "Their answer is they're a private company and can do what they want. It's ridiculous, and they can't even give us a good idea why (the alert) came out. Sure, it's troubling from our perspective, because we never do anything but conduct ourselves in the best of manner."

The only explanation Harkins can offer for the alert is the competitive nature of the condo development market. "Business is tough as you know," he says. "Not everybody is your friend."

Still, Harkins says, Stewart Title's alert "has not affected our business."