Tom Scott is tired of dodging punches.
The CEO of Chicago-based multifamily developer CA Ventures — which claims to have assets around the world valued at $10 billion — has been locked in a bout with investors who seek the regular cash deposits they enjoyed prior to the pandemic, but which stopped two years ago.
Scott’s slight frame sizes up to that of a middleweight fighter, and so far he’s proven adept at ducking any knockout accusations from investors who have a stake in his firm, as well as former employees who feel they were unfairly compensated through equity share agreements.
“There are times we wished we would not have hitched our wagon to CA Ventures,” said Jeff Krol, a Chicago-based money manager for an entity called SC/CA Ventures.
SC/CA Ventures raised capital from a group of investors referred to as “friends and family.” The group backed CA Ventures projects with cash and debt alongside institutions such as Goldman Sachs, Cottonwood Multifamily, QuadReal Property Group, Chicago-based commercial brokerage and investment firm Bradford Allen and others, some of which Scott and his firm are fighting in court.
Scott, 63, built his business on a strategy of pursuing lots of ground-up development projects simultaneously, stabilizing assets quickly and selling them within three to five years.
“Every part of that has been disrupted as a result of what has gone on in the last three or four years,” said David Schultz, a partner with Krol in the SC/CA Ventures investment vehicle.
Now Scott is facing contenders in higher weight classes, such as QuadReal, and he’s ready to talk rather than duke it out in order to get institutional partners back in his corner. This includes repairing CA Ventures’ reputation, which has been impacted by multiple lawsuits, a revolving door of executives and worse-than-forecast results.
“I’m actually pretty invigorated by the challenge of fixing stuff,” Scott told The Real Deal from atop CA Ventures’ 26-story Chicago apartment tower at 8 East Huron Street.
“We’ll get through this reputational damage that has been done.”
Niche to rich
Scott and CA Ventures haven’t always been the source of worrisome drama for their financial partners.
Scott founded CA Ventures in 2004. As it grew, it turned student housing into a lucrative real estate niche. By 2012, Scott’s company sold a portfolio of 15 student housing properties with more than 6,500 beds for $627 million to American Campus Communities. Blackstone bought American Campus last year for nearly $13 billion.
In the meantime, Scott began to diversify his firm.
While still developing big student housing communities near college campuses across the country, he also launched divisions focused on offices, industrial, standard multifamily and senior housing properties. The firm even made a life sciences push, although this past spring it killed a plan to build a 14-story biotech development in the San Francisco Bay Area.
“For a period of years, we did a lot of partnerships with CA Ventures, and we made a lot of money between 2004 and 2018 or 2019,” Krol said. “Anything they touched made money.”
Sometime in the last six years, however, Scott took swings that CA Ventures executives advised him to hold back, former employees said.
20/20 hindsight
Over the past three years, Scott has grown accustomed to explaining away the reasons investors aren’t getting the results he projected.
This fall, he switched his perspective on the potential benefits of a deal to buy out QuadReal’s 50 percent interest in a large student housing portfolio his company built. The transaction fell apart this summer, leading to QuadReal’s noncash takeover of CA Ventures’ stakes in nearly four dozen properties. Scott has since suggested his firm might be better off without the assets — even though he planned to use the revenue from the full portfolio to restart distributions to his friends-and-family investors.
He also changed his stance on the termination of CA Ventures’ former COO J.J. Smith, who is suing Scott and numerous affiliates. Smith is one of multiple high-level executives Scott brought on and later infuriated, dismissed and disparaged when they were terminated or left the firm on their own.
Scott recently tightened his own belt, too. This fall, he sold a jet he had owned for several years and didn’t need anymore. He likely sold it for around $25 million, an aircraft expert told TRD. This happened while his firm faced a crunch for cash and far fewer development starts than the 50 or 60 construction projects it had going simultaneously in years past.
Still, Scott thinks his company is in position to emerge from the era of surging interest rates leaner and more ready to pursue new development. He’s right that it will be a challenge.
Personnel and personal
The developer has been thinning its staff. In addition, CA Ventures owners, including Scott, have put more than $30 million of their own money into the company to cover its costs in the last two years, and a third of that has gone into projects backed by the friends-and-family investors in order to protect their assets as the investors grow increasingly concerned with the firm’s health, according to confidential company communications obtained by TRD.
When Scott was asked exactly how much of his own money he put up, his only response was “a lot.”
But some of the investors and ex-employees who still own stakes in CA Ventures entities feel Scott’s business practices are the problem, according to multiple people familiar with the company and numerous lawsuits it’s named in as a defendant.
“Lawsuits don’t mean you are guilty but are a leverage point to resolve.”
“At an executive level, we all knew Tom’s game,” a former high-ranking employee of CA Ventures said. “He would put people he thought were qualified in charge. The moment they were starting to have some success where they could challenge him, he would remove them. It was either that they were challenging his ego, or it was time to pay them.”
Scott and CA Ventures CIO John Diedrich noted that certain profit-sharing units in business lines held by employees haven’t been valued because there haven’t been liquidity events that would trigger their distribution.
At least some of the blame for CA Ventures’ recent difficulties, Scott implied, lies with the managers beneath him, who operated their respective asset classes independently. Scott denied that he changed his behavior in the past few years, and said many other developers are hurting in the current economy.
“These were all individual businesses run by various presidents,” Scott said. “Ultimately, it’s my responsibility and fault.”
With a chuckle as he hunched over a conference room table, the embattled CEO said that he wishes he had sold “everything” in 2021, when the multifamily sector was still humming, before interest rate increases took hold of the market.
He plans to sell a lot more. The firm’s overall portfolio is “pretty low-leverage” and holds enough equity to sell properties and deliver returns for investors, according to Diedrich.
“We’re in a deleverage mode,” Scott said.
Now he’s selling multifamily assets he and the firm own on Chicago’s North Side to generate revenue. The firm is also considering a deal to sell the 8 East Huron high-rise to an investor that will offer the company an option to buy it back in a few years.
CA Ventures exited a Nashville apartment project with a profit in 2021 and had a deal to sell an Atlanta property for $200 million in early 2022, but that fell apart. The asset ended up trading to another buyer for $180 million after interest rate hikes began spooking the market. And in November, it sold a 197-unit property in Fort Collins, Colorado, for $65 million in a deal that brought a profit for investors, despite Scott and Diedrich acknowledging that it’s not a good market for sales.
Pain management
Multiple CA Ventures executives warned Scott not to commit to a string of investments, known as the Springbank projects, that aimed to build suburban Chicago apartments.
Some of the projects encountered various delays and fizzled out. Investors are concerned that they haven’t been offered the option to get their money back. Instead, the cash was rolled over into other projects that Springbank was pursuing, they said. Some investors aren’t happy about where their money has ended up.
“We have put a lot of money in that’s been lost in particular on [Springbank],” Scott said. However, he noted that investors signed agreements when they decided to back the projects that give their managers some latitude to make moves.
The firm’s senior housing portfolio, a large chunk of which was financially backed by Goldman Sachs, has also been a sore spot for the company because of the pandemic cutting into leasing volume and demand for such properties, plus rising labor costs, Scott said.
While increasing revenue from the other half of QuadReal’s student housing portfolio would have enabled CA Ventures to resume paying investors, losing the deal and properties wasn’t all bad, according to Scott and Diedrich.
“Not having a student portfolio and starting over, we’ll have this new underwriting, which is new cap rates, new yields, new interest rates and should have a better shot at hitting the plan, generating profits,” Diedrich said.
To be sure, CA Ventures would have preferred to close the deal to refinance the QuadReal stake in the student housing assets to gain more time to sell its other properties, he said. But pursuing sales rather than bringing in a new investor or debt means there’s less risk for the company.
“It’s easier to sell assets than rely on new groups,” Diedrich said.
Judges’ decision
Sale efforts will play out alongside multiple messy legal squabbles.
In September, QuadReal sued the landlord of 448 North LaSalle Street in Chicago, claiming that Scott held a stake in the property and improperly arranged a deal that left QuadReal on the hook to pay for an entire five-floor lease in the 172,000-square-foot office building. CA Ventures planned on making the property its global headquarters but never moved in, and QuadReal’s student living unit never wanted more than a single floor.
Scott said he previously owned the building but traded the equity to its landlord and co-developer Jaime “Jay” Javors, with whom CA Ventures has also sparred in court this year over eviction complaints tied to office leases. Scott believes QuadReal’s complaint will be settled.
“Lawsuits don’t mean you are guilty, but are a leverage point to resolve,” he said.
This year, investors in CA Ventures who loaned the company a collective $10 million sued the firm and Scott — who personally guaranteed repayment of the debts — when they weren’t made whole after multiple extensions. The failure to satisfy those loans is a result of the broken deal that was going to fund CA Ventures’ takeover of QuadReal’s student housing, according to Scott.
In addition, in August, Bradford Allen also filed a lawsuit against CA Ventures, this one over a deal that went wrong in Iowa City, Iowa, where CA Ventures built student housing and a hotel with the help of a mezzanine loan from Bradford.
Meanwhile, Smith, the former COO of CA Ventures, is advancing a lawsuit against Scott and various company affiliates alleging that he was lowballed when he tried to cash out equity in the business he had been awarded over the years. Smith’s claim echoes similar allegations, both in court and private conversations, that Scott has avoided compensating employees who built up equity in the business.
Scott no longer contends that Smith was terminated with cause in 2020, despite his previous statements to the contrary. However, Scott claims in court filings that Smith is responsible for $30 million in construction cost overages during his tenure.
Even some legal issues that Scott appeared to be wrapping up have resurfaced. Chicago-based Coyote Logistics sued CA Ventures when the firm stopped paying for its share of a luxury spectator’s box at the United Center the companies had split. They came to a settlement agreement, but in November, Coyote told a Cook County court it hadn’t received money by the initial due date and asked for a $325,000 judgment, court records show.
Scott, however, called it a “timing issue” that will be resolved soon.
Through everything, Scott and CA Ventures are still standing and he remains confident, perhaps because he recognizes he’s not the only one in the ring taking blows.
“It’s been a tumultuous two years,” he said. “It’s tough on everybody in the real estate world, everybody. And anybody that owns lots of real estate, no matter what they say, they’re worried about their portfolio.”