A Sinking Student Housing Empire

Between the busted elevators, the malfunctioning fire alarms and the utilities being shut off for weeks at a time, the students at a half-dozen off-campus housing complexes across the country say they’re not getting what they paid for.

The investors in some of those properties, who may be out tens of millions of dollars, say the same thing.

And they all blame Patrick Nelson, a would-be real estate mogul whose nascent student housing empire is teetering.

“Sometimes the hallways are dark,” said Ashley Kubacki, 22, a senior at Purdue University who pays $965 a month for a one-bedroom apartment in The Fairway housing complex just off campus. “It is pitch black and it can be scary. Someone could get hurt.”

Three years ago, Mr. Nelson’s firm, Nelson Partners Student Housing, began rapidly collecting upscale apartment buildings to grab a share of a market worth an estimated $100 billion, according to CoStar, a real estate data firm. But legal fights are playing out in courtrooms in Texas and California that threaten to unravel the business.

Mr. Nelson has been accused of diverting investor money to shore up other projects, officials in states from Colorado to Mississippi have investigated his properties for health and safety violations, and students who work in his buildings say they’re missing pay. Lenders including Fannie Mae, the government mortgage finance firm, are seeking to foreclose on some of the properties. And hundreds of investors, ranging from wealthy retirees to doctors and lawyers, are suing Mr. Nelson in hopes of getting their money back.

Mr. Nelson has denied any wrongdoing. Campus shutdowns during the pandemic cost his firm $20 million in revenue and triggered his financial woes, he said.

Ashley Kubacki, a senior at Purdue University, lives at The Fairway apartments. She started a petition to try to get problems at the complex addressed.Credit…Lyndon French for The New York Times

Ms. Kubacki worries about an unidentified substance on the wall in her closet.Credit…Lyndon French for The New York Times
Ms. Kubacki’s neighbor had a hole in her ceiling.Credit…Ashley Kubacki

“Covid crushed the student housing market,” said Mr. Nelson, 49, whose firm took just over $1 million in aid from the Paycheck Protection Program. “I am just a business guy trying to fight my way through it. We just need more time.”

But former employees and business associates offer up another explanation for what went wrong at Nelson Properties: Mr. Nelson’s grandiose ambitions, perhaps fueled by sibling rivalry.

In 2007, Mr. Nelson launched an earlier student housing operation called Nelson Brothers Property Management with his younger brother, Brian. Business was good: Inc. magazine put Nelson Brothers on its 2017 list of fastest growing private companies.

Not long after, the brothers split and struck out on their own, their firms separated by about 15 miles in Orange County, Calif. They sometimes pitch deals for student housing to the same pool of investors; Patrick Nelson called his brother his “biggest competitor.”

“I haven’t spoken to my brother in three years,” he said. “I may never speak to him again.”

Brian Nelson said he’s not sure why his brother is so upset with him. “I don’t understand all the animosity,” he said. He added that their parting was largely the result of a disagreement in business strategy: His brother wanted to expand the business more quickly than he did.

In the three years since they split, Patrick Nelsonfounded his own business, Nelson Partners, and raised about $100 million from roughly 400 investors, according to filings and Mr. Nelson.Today, it manages two dozen student housing complexes — just a sliver of an industry with roughly 4,500 such facilities. But unlike most firms its size, Nelson Partners has established a 10-state footprint more akin to that of the big real estate firms that dominate the industry.

Shane Stone, a former chief financial officer for Nelson Partners, said Mr. Nelson seemed determined to “make a big splash” after the partnership with his younger brother came apart. That meant focusing on larger properties than he’d targeted previously, he said.

“Patrick had said he wanted to put the company on the map and become a player in the industry,” said Mr. Stone, who said he was dismissed in spring 2019 without warning.

Patrick Nelson started Nelson Partners Student Housing after a partnership with his brother split apart.Credit…Business Wire

Problems have sprouted up across the country at properties that promised posh off-campus living with proximity to class. University of Northern Colorado students griped about piles of trash and malfunctioning fire alarms. University of Mississippi students said their complex had disconnected utilities and a filthy pool. University of Arizona students didn’t have air conditioning at the height of summer. And some students at the Community College of Denver said they were stuck without elevators — in a 30-story high-rise.

Lindsey Riordan, 21, a student at the University of Arizona, and others have taken to posting negative reviews about the firm on Yelp and other sites. Ms. Riordan said that when she moved into Mr. Nelson’s Tucson property, Sol Y Luna, in October 2020 there was a security guard posted at the front door, but there hasn’t been one for several months.

Trash often piles up, Ms. Riordan said, the elevators don’t always work and the pool is “always very gross” in a complex where one-bedroom apartments are listed for $1,500 or more.

Scott MacKinnon was an investor in Sol Y Luna, one of Patrick Nelson’s off-campus student housing properties in Tucson, Ariz.Credit…Margaret Brinson Wright for The New York Times

One of the investors in Sol Y Luna, Scott MacKinnon sunk $150,000 into the deal, expecting to get back regular payments — but he and others say they’re not getting paid anymore.

“Everything is a mess,” said Mr. MacKinnon, 55. “I got two dividend payments and then everything stopped. It was supposed to be a pretty safe deal.”

Like many others, Mr. MacKinnon invested in the Nelson Partners deals through what are called private placements, a kind of unregulated offering that is often pitched to well-off individual investors by securities brokers. The arrangements — which generated millions of dollars in fees for Mr. Nelson’s firm and the brokers that set up the deals — were popular with investors because they could take advantage of a provision in the federal tax code called a 1031 exchange. That allowed them to defer paying capital gains on the proceeds from the sale of one property by rolling them into a new real estate project.

Nelson Partners’ financial troubles came to a head with Skyloft Austin, a luxury high-rise near the University of Texas that the firm bought in 2019 for $124 million. More than 200 lawyers, accountants, doctors, retirees and others each invested between $100,000 and $500,000 in the deal — but they weren’t alone. A hedge fund, Axonic Capital, gave Nelson Partners $35 million in additional financing to close the sale, according to court documents.

Last year, Axonic, which specializes in commercial real estate transactions, declared Nelson Partners to be in default and moved to seize the property. Investors say Mr. Nelson never told them about the dispute and simply stopped paying dividends, telling them that the firm had to conserve cash during the pandemic.

Mr. Nelson, who said he did nothing wrong and did not misuse investor money, faces three lawsuits over the Skyloft deal. One potential class action was dismissed in September on procedural grounds, but the investors are appealing.

The problems at other properties have escalated in the meantime. Nelson Partners delayed construction on a new housing facility near Utah State University, where Mr. Nelson received a master’s degree in business, forcing more than 100 students who had signed leases for the fall semester to scramble for somewhere else to live.

And Mr. Nelson put three other properties — near the University of Mississippi, Texas Christian University and the University of Houston — into bankruptcy to stave off foreclosure attempts by other lenders.

It didn’t work for the Taylor Bend apartments in Mississippi; a bankruptcy judge allowed North American Savings Bank to take control of the property after he heard testimony about the poor conditions there.

For the property near T.C.U., Fannie Mae is seeking control in what Mr. Nelson said in court papers was a bid to “disenfranchise creditors and investors” using “destructive COVID-era governmental regulations.” A hearing on the matter was continued until next week.

On the whole, real estate analysts said, the off-campus housing market has fared better than other segments of the economy during the pandemic, according to analysts at Trepp, a commercial real estate data firm. That is in part because rents are usually paid with reliable money from student loans, and more students than expected remained in their apartments. Lenders were also quite liberal in granting forbearance agreements to property managers.

Mr. Nelson said he has done what he could, including paying dividends to investors in “properties where there are current revenues sufficient to pay them.” For the financially imperiled properties, he has argued that the complexes could have been saved if investors had kicked in more cash. Mr. Nelson also described his lenders as “vultures” and suggested that former employees who question his actions have a vendetta against him.

But the main problem, he said, was the pandemic. “Every problem I have is 100 percent from Covid in terms of operations,” he said.

Investors said they are tired of that excuse.

Monica Hickson and her late fiancé invested in Nelson Partners.Credit…Nick Hagen for The New York Times

Monica Hickson, a Ypsilanti, Mich., resident, said her fiancé, David Reed, had added her name as an investor in one of the bankrupt Texas properties before he died of Covid in April 2020. Ms. Hickson said she didn’t know much about the investment until after his death and it’s been hard getting information from Mr. Nelson’s firm.

“I see how much he had put into this investment, and I am so hurt that he was not able to get that investment to work out for him,” Ms. Hickson said.

She took umbrage at Mr. Nelson blaming his problems on the pandemic that had already cost her so much.

“Using Covid as an excuse — it’s just gut-wrenching,” said Ms. Hickson, 51, a diversity, equity and inclusion facilitator for the University of Michigan.

Students have few options until their leases run out.

Lindsey Riordan, a senior at the University of Arizona who lives at Sol Y Luna, had no air conditioning for at least a week in July, and no hot water or water pressure for a month.Credit…Rebecca Noble for The New York Times
Paint is wrinkled and stretched from a neglected water leak in Ms. Riordan’s living room. She says the building’s trash chute is often filled to overflowing.Credit…Rebecca Noble for The New York Times

Chloe Clay, a University of Northern Colorado student, said she’s paying $925 a month for a studio at the University Flats complex in Greeley, where maintenance problems abound. Local officials have issued a number of citations against Nelson Partners for uncollected trash and outstanding fire code violations. They also hired a private security service to monitor the building until the fire system was repaired. Mr. Nelson has yet to respond to the citations.

“They feel they can take advantage of us because we are students,” said Ms. Clay, 21. “Everyone knows what is going on.”

Sheelagh McNeill contributed reporting.

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