Auraria Student Lofts, maligned by tenants and subject to numerous Denver Fire Department compliance orders, filed for Chapter 11 bankruptcy on June 9, less than an hour before the property went up for auction during of a sale with seizure.
Tenants described various problems at the property, from broken elevators to management’s refusal to return security deposits. The property even hounded former tenant Elliot Liveoak to collect more rent, despite documents showing that Liveoak had fulfilled its financial obligation to the building.
But then Patrick Nelson, a businessman who owns Nelson Partners and 5280 Auraria (the company he used to buy Auraria Student Lofts), apparently needed every dollar he could get.
According to a petition filed by DB Auraria, the company that oversaw Nelson’s $46.5 million loan on the property, the balance of that loan is now over $51 million: Nelson never made a payment on principal or interest coverage after incurring the loan in 2019. DB Auraria acquired the loan in November 2021 and Nelson defaulted on December 9, 2021 when the loan matured.
At this point, DB Auraria asked the Denver District Court to appoint a receiver for the property, saying Nelson Partners had mismanaged it so badly that the company should no longer be in charge of its management. The court agreed and named Michael Staheli responsible for the property. Staheli hired Cardinal Group Management to help, which tenants discovered when they found notes on their doors in early February.
That makes this bankruptcy different from a typical Chapter 11 proceeding, according to Adam Stein-Sapir of Pioneer Funding Group, a New York-based bankruptcy debt buyer.
In a typical bankruptcy, the first step is to replace the old management with a receiver who tries to improve the conditions. In this case, the receiver had already been appointed but is still legally bound to relinquish control of the business. This could benefit Nelson, Stein-Sapir says, because Nelson could have the option of regaining control of the property if the court declines to appoint another trustee to replace Staheli, returning control to Nelson Partners.
In an effort to prevent that from happening, DB Auraria filed a motion for Staheli to stay on June 13.
“Right now there will be a fight over who’s running it: Nelson, [DB Auraria’s] choose, the old receiver or someone new,” says Stein-Sapir, adding that someone new most likely is. But DB Auraria might be able to keep Staheli because “it’s not easy to get a receiver appointed before bankruptcy, so the fact that DB Auraria was able to go to court…means there has to be irrefutable evidence,” notes Stein-Sapir.
And there’s a lot of evidence in the motion. DB Auraria claims that Nelson would not allow Cardinal Group to access bank records or the property’s computer system. (Residents were told they couldn’t make online payments the first month Cardinal Group took over.)
Once Staheli, who declined to comment through his lawyer, obtained these bank documents, he discovered other problems at Auraria Student Lofts, including a lack of maintenance of the building’s facade and pipes. sewers in laundry rooms that hadn’t been cleaned in years. He also found the reason the elevators were often out of service: Nelson hadn’t paid the elevator service company nearly $99,000 to fix and upgrade the equipment.
“Due to [Nelson’s] non-payment issues, the elevator service company provided only minimal ongoing elevator service and maintenance and had yet to repair the broken elevator,” the motion reads. “These elevator issues have created operational challenges and reputational damage that have affected the property’s ability to attract new tenants.”
When Staheli and Cardinal Group took over, the building had an occupancy rate of 63%; according to the motion, similar properties have an occupancy rate of 83-98%. And Denver’s vacancy rate was just 4.3% in May.
“It’s hard enough to find an apartment, and this building had dozens of them, so that tells you something,” Stein-Sapir says.
The building owed more than $150,000 to other organizations and had not returned more than $57,000 in security deposits to former tenants, according to the petition, which notes that 5280 Auraria failed to return $100,000 in security deposits from current residents to DB Auraria.
Elise Esmond, who has lived at Auraria Student Lofts for years, says the place has improved under the management of Cardinal Group. “Communication has increased, work orders are completed – or at least processed – within 24 hours,” she says. “No surprise water cuts or anything like that, and they did a lot to fix and maintain the property.” The washers and dryers have all been replaced, she adds, while two of the previously broken elevators are now fully functional and the pool is undergoing maintenance.
“Whether [Nelson] have been authorized to regain control of the Property, [DB Auraria] believes that the valuable improvements and management gains achieved by [Staheli] would quickly evaporate, all to the detriment of the estate,” the motion concludes, arguing that Staheli remain in charge and that leadership not be returned to Nelson.
According to the petition, Nelson has attempted to file for Chapter 11 bankruptcy protection to avoid foreclosure four times in the past; each time, the reorganization was deemed impossible by the court.
Nelson will have eighteen months from June 9 to submit a plan showing that a reorganization is possible this time around.
Neither his attorney nor DB Auraria’s attorneys responded to requests for comment.