Bank’s own appraisal questions Gearhart loan
July 1, 2008
By KAREN VELIE and DANIEL BLACKBURN
A million-dollar loan from Heritage Oaks Bank to North County developer Kelly Gearhart earlier this year was based on “erroneous” and questionable claims, according to the bank’s own appraisal.
That appraisal was not received by bank officials until nearly two months after the loan proceeds had been paid to Gearhart.
Gearhart secured the loan Jan. 16 for his Paso Robles Vista del Hombre golf course and mixed 32-lot development project east of downtown Paso Robles. The title report to the Vista del Hombre project lists the bank as a creditor. But the property’s current $27 million encumbrance is not listed on the bank’s appraisal report.
Relying on a Cuesta Title report, the appraisal claims the property is free and clear of all liens and encumbrances not listed in the report.
The bank appraiser’s report was submitted March 10. A copy of the lengthy document was obtained by UncoveredSLO.com.
Gearhart has said publicly in the past that the property, located near the Paso Robles Airport, is worth “$100 million to $150 million.” He repeated that claim recently on Dave Congalton’s Hometown radio show on 920KVEC.
The bank’s appraiser, Market Dynamics’ Dennis Greene, said in his report that the property is worth approximately $4.3 million.
Questions regarding Heritage Oaks Bank were referred to First Bank Senior Loan Officer Denise Sanford.
Asked why the loan payout predated the appraisal, Sanford replied, “It’s permitted, but it’s not our usual practice.”
Sanford declined further comment on the Gearhart loan, adding that no one at Heritage Oaks Bank with information on the loan was available for comment. Heritage Oaks Bank Assistant Vice President Greg Porter, whose name is listed on the appraisal as the bank’s contact for the proposed development, did not return a request for comment.
Gearhart also did not return phone calls from reporters.
According to the appraisal, Gearhart reported that lot 27 was listed for sale in the Multiple Listing System (MLS) and that one “Brandon Hinrichs” was the “sales specialist.” Hinrichs is an employee at the Links Golf Shack at Vista del Hombre.
Greene’s report to Heritage Oaks officials says, “… the property was not found to be listed in the North County MLS. On-site, a listing box indicated this property for sale by Central Coast Commercial Properties, with Jake Hinrichs, broker at 8300 Morro Road, and Brandon Hinrichs, sales specialist at 5151 Jardine Road. Investigation revealed no office at 8300 Morro Road, and Brandon Hinrichs said he has ‘no knowledge of this sale and received no commission from any sale.’
“Kelly Gearhart provided a copy of a recorded sale document to a Delaware LLC,” Greene wrote. “However, in checking with Department of Corporations [officials] in Delaware, they said principals of an LLC are not given to the public at large. The ‘M Way LLC’ address in Reseda, California, has no phone number. The appraiser is unable to confirm this sale from buyer or a broker.”
Shortly after receiving the bank loan, Gearhart stopped making interest payments to hundreds of private investors who had already put $27 million into the project through Hurst Financial during 2005 and 2007. Those investors now hold approximately 8,000 percent beneficial interest in the planned development and are positioned above Heritage Oaks Bank in case of a default.
The bank appraiser’s report noted several significant discrepancies in the properties loan documents.
Data provided to the appraiser from the bank included a “Lot 37” which does not exist.
While declining to discuss specifics of the Gearhart loan without permission of his client, Greene said he was willing to speak in general terms:
“The name of the game is to lie and give false information,” he told UncoveredSLO.com. “If I wanted to do a bogus sale, I would start an LLC in Delaware or one of those states with no disclosure requirements. Then [I’d] buy the property at an overvalued price through the LLC.”
Greene summarized data from seven comparable properties that sold in the east Paso Robles area within the past few years that provide an average square foot price of $107 for the Gearhart property, according to the appraisal report. An unverifiable $185 per-square-foot sale of a block and steel shell building that Gearhart erected on Vista Del Hombre’s lot 17, apparently helped pump up the property‘s reported value.
Despite its current valuation, wrote Greene, the property stands to increase in value if “an extraordinary assumption” is made that Gearhart will ever complete 32 commercial and residential buildings as proposed. In that instance, Greene reported, the estimated value would swell to $21.8 million.
Even though the appraisal claims all liens and encumbrances are listed on the report, due to information provided by Cuesta Title. The appraisal did not list the $27 million still owed to Hurst Financial investors.
“It [the encumbrance] should have shown,” said Cuesta Title officer Marcus Harmon. “I don’t know why it didn’t show.”
Commercial appraisals are time-consuming, expensive and detailed. In contrast to residential appraisals, which can be produced in a few hours and cost approximately $350, commercial appraisers spend about a month investigating and piecing together a report. That report typically costs between $3,000 and $7,000. Commercial appraisers sift through voluminous data to produce business and industrial property evaluations.