Perkins Rowe is unlike anything Baton Rouge has seen before. With its palm-lined flagstone streets of trendy boutiques, restaurants and condominiums, and its traditional town square complete with a fountain and park benches, it emulates a revitalized warehouse district that looks like Dallas and feels like Disney.
But while the $200 million development wins raves for bringing a new definition of “mixed use” to Baton Rouge, it has been plagued by problems almost from its conception. It ran behind schedule, was stung by post-Hurricane Katrina construction costs and was impacted by the credit crunch.
It also has found itself at the center of more than 40 lawsuits and liens that collectively seek somewhere in the neighborhood of $30 million. The suits allege Perkins Rowe—and its developer, Tommy Spinosa—didn’t pay its bills, a situation Spinosa’s attorneys consistently attribute in court records to defective workmanship.
Recently, however, and perhaps more troubling, allegations have surfaced that suggest the problems have less to do with unfavorable market conditions or sloppy subcontractors than with a premeditated scheme to defraud lenders and builders alike. In sworn testimony, a former Perkins Rowe construction manager paints a picture of a project that was upside-down before it ever got started and covered its tracks by intentionally shortchanging contractors and lying to the bank.
What happens to the remainder of the project is among the many questions surrounding Perkins Rowe. Another is the effect, if any, the problems at Perkins Rowe might have on Spinosa’s next big project, Rouzan, a 120-acre traditional neighborhood development that has already generated more than its share of controversy.
“We’ve had concerns all along,” says Angela Angelloz, a board member of the Southside Civic Association, which opposed Rouzan. “Now that all this is coming out in lawsuits about Perkins Rowe, others are becoming aware of what we were trying to say.”
Plenty of positives
Spinosa declined to be interviewed on the advice of his attorneys. But were he to talk publicly about the development, he might point out some of the positives—of which there are plenty.
Since its opening in October 2007, Baton Rougeans have flocked to Perkins Rowe. On Sunday afternoons, they crowd the town square, which plays host to an art show and live music. Cinemark’s 16-screen theater is packed, and several of the restaurant chains have broken first-year attendance records within their franchise groups. Anecdotal evidence also suggests retailers are doing well despite the recession.
“Some days there are a lot of shoppers, and some days there are a lot of window shoppers,” says the owner of one local boutique, who asked not to be identified. “But overall we’re pretty good.”
Nearly 75% of the 138 apartments are leased, and 60% of the 87 condos in Phase One are sold or under contract. About 5% of the work remains on Phase One, which is running behind schedule, but plans are under way for construction to begin next year on Phase II. Construction is also slated to begin later this year on a 165-room Hilton Garden Inn.
“It’s not as bad a situation as everyone says,” real estate appraiser Tom Cook says. “Spinosa’s been extremely creative, and he’s brought to Baton Rouge what is a great project.”
What went wrong?
Even those who wouldn’t characterize Perkins Rowe as a great project would have to award points for its novelty and creativity. When it was first proposed, it made good financial sense, too.
Spinosa started acquiring property for the development in the early 2000s, at a time when the economy was on a seemingly endless upward trajectory. He was able to get the land for relatively cheap, paying just $1.4 million for the 29-acre tract he purchased from Jimmy Swaggart Ministries in 2000.
By 2003, plans were under way for a 1 million-square-foot, mixed-use development the likes of which Baton Rouge had never seen. Development Design Group of Baltimore, one of the biggest design firms in the country, came up with the plans. Later, EMJ, one of the nation’s largest construction companies, was selected as the general contractor.
But there were problems almost from the get-go. Hurricane Katrina hit southeast Louisiana on Aug. 29, 2005, before construction had really started. Almost overnight, the price of Baton Rouge real estate went through the roof. More important, as far as Perkins Rowe was concerned, the price of construction skyrocketed, too.
Though Spinosa won’t discuss the specific impact Katrina had on cost projections, those in the industry say construction costs increased about 20%—and in some instances as much as 50%—in the aftermath of the storm.
A silver lining in the post-Katrina frenzy was the creation of GO Zone legislation, which allowed business owners and developers to borrow capital through tax-exempt financing for construction projects. Spinosa hoped to take advantage of the new program. But in the push to meet the timetable for GO Zone financing, Perkins Rowe was placed on an accelerated schedule. According to those who worked on the project in 2006, the deadlines were ambitious at best and, more often, completely unrealistic.
That contributed to costs that were already escalating. Most of the subcontractors, especially the smaller ones, were working solely on the basis of time and materials and had never submitted bids or price quotes. In their hurry to meet the stepped-up deadlines, they worked double shifts and didn’t worry about the cost of their materials. When they finally came up for air, their numbers far exceeded what anyone had anticipated.
Then the banks became squirrely and stopped giving draws. There are a couple of theories as to why. Some say the credit markets started freezing up long before most people realize. Others say the main lender on the project, Ohio-based Key Bank, became nervous after Spinosa had a falling out with EMJ and brought in his own construction company, Echelon, to finish the project. The bank cannot comment, but what’s clear is that cash was tight as far back as early 2007.
“The project was going at an extremely fast pace and the time frame was almost impossible,” says a former Echelon employee who worked as a project superintendent. “The schedules were crazy. When they finally got their bills together and submitted them everybody said, ‘Whoa, hang on, we gotta make some changes.’”
“Every day around there all you’d hear is, ‘The bank this and the bank that … the bank’s holding up the financing,’” says another former Echelon employee, who worked at the project in 2006 and 2007. “The banks got real scared when EMJ left. It was going so fast, and it was hard to get their hands around the control.”
The problems really came to a head when angry contractors and their subs took their grievances to court seeking money they say they are owed for their work on the project.
The biggest of these suits—and the one from which many of the smaller suits and liens stem—was filed by the original contractor, EMJ, which claims it is owed more than $14 million. Attorneys for EMJ, a Chattanooga, Tenn.-based company with a national reputation and more than 40 years’ experience in the industry, would not comment on the case. But in legal documents, they allege Perkins Rowe brought them on board “because it needed EMJ’s bonding capacity to get financing for the project … and intended all along to either drive EMJ off the job or wrongfully terminate them.”
As it turns out, EMJ was driven off the job, though the reason is at issue in the courts. The company started work in late 2005 with the promise it would be given a contract for the entire project, according to court documents. But in mid-2006, Perkins Rowe scaled back the scope of the work it awarded to EMJ, then later pared it down even more. In early 2007, Perkins Rowe stopped paying EMJ, which prompted the company to cut back its work crews. That spring, the company was fired.
In its own court filings, attorneys for Perkins Rowe argue that EMJ’s performance was substandard and its work was defective—so defective that Perkins Rowe had to start handing off the work to other contractors to correct the mistakes and correctly finish the job. Perkins Rowe also accuses EMJ of abandoning the project, which created problems for the development with its subcontractors that it’s still battling in the courts.
“If the whole EMJ thing hadn’t happened, this project would have been finished before the recession hit,” says Jeff Wright, a spokesman for the project. “It would be a whole different scenario.”
Several liens and lawsuits were filed against Perkins Rowe as a result of the EMJ suit, namely because when Perkins Rowe stopped paying EMJ, EMJ stopped paying its subs. But the majority of the liens and lawsuits have been filed against Echelon, Spinosa’s own construction company, which took over the job in 2007. Some of the suits are relatively small; others seek in the hundreds of thousands and even millions of dollars. Among them:
• ThornCo, $2.3 million for labor and material related to metal stud walls, exterior cladding and drywall;
• Cinemark, $1.3 million for expenses Perkins Rowe was supposed to pay when the theater relocated from its 10-screen Tinseltown in Marketplace Siegen Lane;
• Fisk Electric, $1 million for electrical work;
• Postel International, nearly $700,000 for general construction;
• Coburn Supply, more than $360,000 for plumbing fixtures;
• Fantastic Fountains, nearly $300,000 for the fountain in the town square;
• ThyssenKrupp, $274,360 for elevator work on five buildings.
In virtually every case where attorneys for Perkins Rowe have filed a legal answer, their response has been the same—the subs either didn’t live up to the terms of the contract or they did a bad job. Attorneys for the plaintiffs note that argument starts to wear thin after it’s used as the defense in one case after another.
“That’s the standard MO,” one local attorney says. “They have to find something to dispute, so they use that in order to have a basis for their defense.”
Granted, many of the subs didn’t have contracts to begin with, so it might be tricky for a court to decide whether their work was defective or not. According to sources familiar with the project, most of the subcontractors started working on the project before getting anything in writing and, in many cases, didn’t follow through until it was too late.
One local attorney says that still mystifies him.
“My client didn’t have anything in writing,” the lawyer says. “I don’t understand it. He’ll never admit that publicly, but it’s true. It was all done with a smile and a handshake.”
Deposition allegations
Whether there were contracts or not, at least one former insider now alleges that defective workmanship had nothing to do with the reason Perkins Rowe wasn’t paying its bills.
In two related depositions taken in Texas and Baton Rouge as part of a lawsuit involving EMJ, a former Perkins Rowe project manager, Walt Shepard, alleges Spinosa didn’t pay contractors and subs because the project was over budget before it began—a fact Shepard testified Spinosa withheld from his lenders.
According to a transcript of a deposition taken last December in Baton Rouge, Shepard told EMJ’s attorneys, “We had two sets of books, one for construction and one that he used for his business development.” He went on to testify that Spinosa showed the banks one set of books with costs that were substantially lower than was actually budgeted.
“In other words, you’ve got a budget for a building that you’re telling the bank it’s going to cost $15 million to build, but in fact it’s going to cost $20 million?” Dallas attorney John Slates asked Shepard.
“Correct,” Shepard replied.
“Did he tell you not to tell anyone he was keeping two sets of books?” Slates later asked Shepard.
“Yes,” Shepard said.
Shepard went on to testify that only a handful of employees involved in the project knew about the dual accounting records. He also testified that Spinosa kept fake books because the project was already more than $20 million over budget before it got started, a figure that grew over time.
“Did there come a point in time where Mr. Spinosa simply didn’t have money to pay the people that were working on the job?” Slates asked.
“Yes,” Shepard said.
“Did there come a point in time where people who were working on the job were getting short-checked?” Slates asked.
“Yes,” Shepard said.
“And is the reason that these folks were being paid less than owed that Mr. Spinosa simply didn’t have the money to pay them?” Slates asked.
“That’s my understanding,” Shepard said.
Shepard also alleges Spinosa directed him to withhold information from EMJ to intentionally mislead the construction firm and to apply a stricter standard to work performed by EMJ than to that done by Echelon.
Though Spinosa declined to be interviewed, his spokesperson gave a brief response when asked specifically about the allegations the company kept two sets of books.
“The attorneys believe the individual in the deposition was confused,” Wright says. “There was a set of books for Echelon, and a set of books for Perkins Rowe. One was for the client and one was for the contractor, and this individual didn’t have access to both. We think there was some confusion because of that.”
Wright also points out that Shepard has only been deposed by one side in the case.
“We didn’t have an opportunity to question the individual, and the attorneys are looking forward to having an opportunity to question him on their own,” he says.
A trial date in the case between EMJ and Perkins Rowe will be scheduled later this summer.
Managing cash flow
While Shepard’s testimony might be the most detailed, his allegations are not the only ones. Another former Echelon employee says it was standard to withhold payments to subcontractors as a way of managing cash flow.
“The subs would get a little bit of money and they would do a little more work, but they would never get paid the balance of what they were due,” says the former employee, who worked for the company in 2006 and 2007. “They were promised a check, but they would never get it.”
An attorney for Florida-based Wackenhut Security has also produced records in his client’s case that suggest construction managers on the project knew they had to pay their bills—and only came up with excuses after the fact. Wackenhut is suing Perkins Rowe in federal court for nearly $100,000 it is owed for providing security services. In court records Perkins Rowe attorneys have argued that Wackenhut “failed to perform its obligations.”
But an e-mail from project manager Paul Carlson to Spinosa clearly states there was no problem with the corporation’s job performance back in early 2008.
“We just met with Wackenhut Security and we have serious issues with their outstanding balance,” Carlson wrote in a Feb. 18, 2008, e-mail to Spinosa. “I advised them that the balances are not in dispute and they will be paid, in full, eventually. Can we send them some amount of money in the next week … we’ve got to show good faith … If they bail out on us, we’re screwed!”
Those lawsuits suggest a pattern of Spinosa’s business methods that also is evident in other areas. For example, a suit filed by Borders Inc. has been making its way through federal court for more than three years. The bookstore chain claims Spinosa double-crossed them by putting Barnes & Noble in the development after he signed three letters of intent. Spinosa’s attorneys have a different version of events that blame Borders for backing out of a preliminary deal; Borders ultimately opened its first Baton Rouge location in the Mall of Louisiana’s lifestyle center, The Boulevard.
Then there are Perkins Rowe residents who have their own list of grievances. Chief among them is that they’re paying fees for amenities they’re not receiving because of the various construction issues. Condo owners have no access to an unfinished pool on top of Barnes & Noble, and renters are still waiting for their terrace to open.
“It was supposed to be ready last December,” says a tenant, who pays $1,550 a month for his two-bedroom unit. “They’re still working on it, but we’ve been paying for it all along.”
Atypical experience
Given the magnitude of the project, it’s not surprising that so many liens and lawsuits have been filed, or so says the party line at Perkins Rowe. Large developments always have that kind of exposure, a Spinosa spokesman says. It’s just part of doing business in the big leagues.
“If you go look at developments of this size around the country, you see the same amounts of liens,” Wright says.
But experts in other parts of the country beg to differ. They say the Perkins Rowe experience is not typical.
Gerald Divaris is an international expert in mixed-use development. Among the feathers in the cap of his Virginia-based Divaris Real Estate is a project that dwarfs Perkins Rowe—the $850 million Town Center of Virginia Beach. Not one lawsuit has been filed in connection with that project for nonpayment.
“We’re involved in mixed-use developments all over the country, including Tampa, Charlotte and Richmond, and we don’t have lawsuits against us in any of them,” Divaris says. “If there’s a problem like that, it means there’s something wrong with the developer.”
Other experts agree.
“This is not typical for any project,” says Clint Lovell, managing partner at Rainmaker Consultants in Houston, a firm that conducts due diligence, feasibility studies and business plans for commercial real estate developers. “There’s a problem. It sounds like other projects that were in deep trouble and finally went bust.”
But is Perkins Rowe in that kind of trouble? That’s a question that no one but Spinosa can answer with any certainty. Sources say he was scheduled to meet with key lenders late last month, but the meeting was postponed. Observers speculate he’s trying to buy more time, something that might be running out.
“Credit markets are still frozen, and whatever anyone is telling you it’s a million times worse than you’re hearing,” says one local commercial real estate developer. “I don’t see that letting up any time soon—certainly not before next year.”
Others say bankruptcy is being discussed as a very real possibility, but only as a reorganization strategy. Sources familiar with the project say Spinosa doesn’t want to let it go, and the banks likely don’t want it anyway.
“Bankers don’t know what to do with it, and they know they don’t know what to do with it,” says a local real estate expert who is familiar with the project.
But to get Perkins Rowe out from under its current obligations, lenders will have to come forward with something. Sources close to Spinosa say bankers like the project and have been impressed by the crowds they’ve noticed during weekend or nighttime visits. But to ultimately resolve the issues, Spinosa will have to come up with more cash—and so will the banks.
Impact on Rouzan
Another big question mark is the impact the Perkins Rowe financial and legal troubles will have on Spinosa’s latest big development, Rouzan. The TND, scheduled to be built on the south side of Perkins Road between Glasgow Avenue and Pollard Parkway, promises to be another first for Baton Rouge, with its mixed use of residential and community services in the heart of Southdowns.
The project was bitterly opposed by many in the neighborhood, who fought it throughout much of 2007 and 2008. Some people believe the bad feelings that fight created have spilled over into Spinosa’s current woes at Perkins Rowe.
“If he were not running into controversy because of Rouzan, all the liens wouldn’t be as big a deal,” says one local real estate observer. “Some of it is backlash from Rouzan. I guarantee that’s having an impact.”
Lenders who are familiar with the specifics of Rouzan say financing for the project is already partially in place, and they doubt there will be any long-term repercussions from Perkins Rowe.
“Really it’s night and day,” says one local bank executive involved with Rouzan. “It’s not the same people, it’s not the same project and it’s not the same credit situation.”
But other people say it might not be that easy. Still, they think Rouzan will go forward because lenders ultimately won’t be able to resist what, on paper, looks to be the kind of development that can’t go wrong.
But those people who have been opposed to Rouzan are more worried than ever, given the problems that have arisen at Perkins Rowe. They point out that when the Planning Commission and Metro Council agreed to change the zoning in their neighborhood to make way for Rouzan, they were ultimately placing a tremendous amount of trust in the project’s developer.
“All along we’ve been told to trust because it’s for the good of the city and the good of the community, and now I’m watching lawsuit after lawsuit against this person that we’ve been asked to trust,” says Angelloz, the Southside Civic Association board member. “Now I wonder how much can we trust?”
