Edgemere’s landlord is firing back against a lawsuit accusing it of trying to torpedo the Dallas luxury retirement community’s business, describing the high-end home in a new court filing as a “sinking ship” that’s “on the verge of complete financial collapse.”
InterCity Investments, which has owned the land Edgemere sits on since 1948, leveled its accusation Sunday night in a response objecting to Edgemere’s bankruptcy reorganization plan. It also said Edgemere’s financial plan doesn’t include a rent payment due May 1 and suggested the community of over 400 residents “may already be or will likely soon be administratively insolvent.”
Edgemere has less than $420,000 in cash and investments and has been losing $2 million a month to operate the 1.55-million-square-foot facility, InterCity Investments said in court documents. It said the monthly loss doesn’t include Edgemere’s $350,000 rent payment or the $930,000 it’s accruing in restructuring-related expenses.
“Put bluntly, the Edgemere is a sinking ship, taking on water faster than it will ever be able to bail it out,” said the filing from InterCity, a Dallas real estate investment company with a portfolio that includes The Shoppes on Lovers, Travis Walk shopping district in Uptown, Terrace House apartments in Uptown and Miracle Mile Mall in Minnesota.
Citing declining revenue from the COVID-19 pandemic and last year’s Texas freeze, Edgemere last week filed for Chapter 11 bankruptcy protection and simultaneously sued InterCity and private equity firm Kong Capital. It claimed in court documents that the two entities had been working together to terminate a 55-year ground lease in order to take back the property in one of Dallas’ most desirable neighborhoods and “make a windfall profit” off of a new endeavor.
InterCity describes the lawsuit as “Edgemere’s last-ditch effort to distract … from the incontrovertible fact that [it] has experienced years of substantial and mounting losses, together with financial mismanagement, and has quite frankly run out of funds, by trying to pin blame on the landlord after the fact.”
Edgemere will be unable to make payroll next week for its 283 employees without an emergency $2 million debtor-in-possession loan, InterCity said in its response.
In response to InterCity’s accusations, Edgemere spokeswoman Rachel Chesley said: “The assertions from our landlord are without merit and an attempt to distract from our ongoing litigation” that alleges breach of contract and civil conspiracy, among other things.
A peaceful relationship sours
InterCity’s filing said Edgemere made timely rent payments for 22 years with “very little communication” between the entities.
The first indication InterCity said it had of trouble brewing at Edgemere was when it was asked to attend a meeting last summer to discuss the facility’s financial difficulties. Edgemere proposed modifying the lease or letting the facility buy the property, according to InterCity.
Following the meeting, InterCity said it received a call from an Edgemere principal and its former counsel claiming that the lease was “illegal.”
The lease says that upon termination, the property and all improvements, which would include Edgemere’s buildings, would go back to InterCity. In a filing last week, Edgemere said that wouldn’t be legal because InterCity isn’t certified to own or operate a continuing care retirement community in Texas.
“Edgemere appears to have now belatedly realized that it entered into a lease that may not work with its chosen business model,” said a court filing from InterCity, which doesn’t lease any of its other properties to continuing care or other senior living facilities.
Edgemere’s continuing care model allows seniors to age into different levels of care without moving, but requires hefty entrance fees from new residents. The projects are capital-intensive, requiring large amounts of debt at the start. Edgemere was originally funded by tax-exempt bonds, which were refinanced in 2015 and 2017.
The Dallas Morning News first reported on Edgemere’s financial woes in February, following the expiration of an agreement that allowed the company to delay monthly rent payments to Intercity as well as interest and principal on its $109 million of outstanding debt.
Edgemere lost $30 million in 2021 and defaulted on both its lease and bond obligations. Days before the ground lease would have automatically expired in March, Edgemere was bailed out by bond trustee UMB Bank, which covered its payment defaults, including rent owed to InterCity.
Were new residents misled?
InterCity claims a disclosure statement Edgemere provided to new residents for a five-month period from late 2021 to early 2022 contained false information about the lease terms, as well as “stale and potentially inaccurate information” about its financial situation.
Edgemere’s disclosure statement was modified sometime in 2021 to include the following information: “The ground lease is for a term of 55 years and at the end of the stated term, in November 2054, Inter-City has the contractual right, but not the contractual obligation, to purchase the Edgemere’s building and improvements for then fair market value.”
InterCity said the unmodified lease stated that the “building and the non-movable improvements” revert back to InterCity upon lease termination without a purchase needed.
The modified sentence gave new residents “a false sense of security” about Edgemere’s finances and a potential payout of millions of dollars when the lease ends, InterCity claimed.
InterCity raised concerns about the disclosure statement and, on Feb. 4, Edgemere updated the language to say “the ground lease is for a term of 55 years and at the end of the stated term, in November 2054, all buildings and improvements will transfer to InterCity.” An updated disclosure from Feb. 17 stated that “the 2019 financials do not accurately reflect the financial condition of Edgemere” and that the company was working to complete its 2020 audited financials.
InterCity said in its filing that some new Edgemere residents signed contracts and provided deposits under the previously false disclosure statement, which was used for about five months.
In response to InterCity’s claims about the previous disclosure language, Chesley said, “reports and disclosures are updated and/or revised based on changing facts, circumstances, and information available at the time of the reporting, but always with accuracy and transparency at the forefront.”
The Texas Department of Insurance is the state’s main regulatory arm for continuing care retirement communities and it places an emphasis on accurate disclosure statements, said Katherine Pearson, a professor of elder law at Penn State’s Dickinson Law School and a leading expert on retirement communities like Edgemere.
Pearson said TDI uses a disclosure-based regulation system that requires continuing care communities to disclose accurate information to consumers about how they operate, what their contracts provide and how they handle finances.
TDI reviews disclosure and financial statements filed annually by continuing care communities, the agency’s spokesman Ben Gonzales told The News. When asked about Edgemere’s disclosure language, Gonzalez said he couldn’t comment on specific entities TDI regulates.
The state attorney general is TDI’s enforcement arm. When asked if it was investigating Edgemere, spokeswoman Patty Ramon said, “Our office has been communicating with the Texas Department of Insurance on this matter, as they are the regulatory authority in this particular case. As a long-standing agency-wide policy, we do not comment on active investigations.”