A developer’s nightmare in paradise
SOME ECONOMISTS believe they can spot a global economic nosedive looming when a developer breaks ground on what will become the new tallest building in the world. Here’s a local corollary: When buyers are paying record prices for condos that don’t even exist, in Revere, things are about to turn ugly. And they’re going to turn ugly quickly.
That’s what happened four years ago at the Ocean Club, a 242-unit condo project that promised buyers Miami beach style in the shadow of Kelly’s Roast Beef. The market’s frothy peak brought in deposits on obscenely priced units, and the crash that followed shortly thereafter relegated the project to a scrap heap overflowing with speculative projects long on ambition and short on cash.
But what happened next made the Ocean Club different than the dozens of other ruined condo projects around town: The project’s developer, Steven Fustolo, didn’t quit when the banks told him they’d suddenly decided to stop pushing luxury condos into an already overcrowded pipeline. Fustolo, an accountant by trade piloting his first big-time development, kept pushing forward, scrapping for cash. He traded offer sheets with a broke lender and another who just pled guilty to fraud. Now his lenders are trying to seize his Revere Beach construction site, he’s fighting for his life in bankruptcy court, and he’s personally on the hook for a sum that could ruin him. He dreamed big, and the payoff is looking to be a brutal fall.
Things started off nicely enough. Fustolo launched his sales effort in 2006 with a beach party on the roof of the Ritz-Carlton that landed him in the society pages. Promises to remake Revere into Miami’s South Beach netted pre-sales deposits for 40 percent of the project’s units. One penthouse unit went for $3.25 million, and another was snapped up at $1.5 million. Previously, no one had ever paid $1 million for a condo in Revere.
The problem was, Fustolo’s proposition was ambitious even when there was a bottomless pool of buyers drooling over super-luxury condos, and Fustolo was selling his 242-unit dream on the wrong end of the housing bubble. The project needed a construction loan north of $100 million, and no lender would touch that deal, according to Fustolo’s filings in federal bankruptcy court.
The luxury bubble popped, croaked the Ocean Club, and left Fustolo with little more than some nice architectural drawings and a few acres of undeveloped land on the beach, according to the bankruptcy filing. It also stuck him with a $13.6 million pre-development loan he had no way of paying off, and $2.4 million in unpaid legal costs, architecture fees, and consulting bills. The project went from being appraised at $82 million, to $3 million, in less than two years, according to appraisals filed with bankruptcy court.
When banks — even banks that wound up getting ruined by construction loans on overly ambitious projects in marginal areas — turned down the Ocean Club, Fustolo turned to Providence Funding. He thought he had a $139 million construction loan lined up with Providence. All the lender needed was a $150,000 advance fee, according to the bankruptcy filing. Fustolo paid, and the cash disappeared. The feds now allege that Providence’s leader, who pled guilty to federal fraud charges in Indiana in March, swindled $2.7 million in advance fees from developers like Fustolo — desperate to build into a sinking market, but unable to find banks to take that trip with them.
Fustolo claims he was swindled again months later, when, he alleges in a suit he filed in federal court in Massachusetts, a Minnesota finance firm walked away with $1 million of his cash. In federal court filings, the Minnesota company blames a Georgia lender, who denies everything. But a Southborough-based real estate investor is now suing Fustolo, claiming in a Suffolk Superior Court case that the $1 million is part of $2.3 million in bridge loans it made to Fustolo to keep the Ocean Club alive. Naturally, it’s been unable to recoup any of that cash.
Toward the end of 2008, Fustolo believed he had an exit plan that would’ve allowed him to pay off the disgruntled Southborough investor, and one from Weston to whom he owed $2.5 million, and the Connecticut lenders who provided the $13.6 pre-development loan. He’d found a lender who was not only willing to fund a condo project in the midst of a global credit collapse, but was willing to top Providence’s loan and kick in $160 million. The lender was Prosperity International. It signed a loan agreement but never released money, according to filings in the Suffolk case. Prosperity International later got semi-famous, as faceless finance organizations go, for having backed off from another ambitious local project, Plymouth Rock Studios, as previously reported in the Globe. Calls to Fustolo’s lawyer went unanswered.
Real estate investors across the country are now walking away from failed bets they made during the boom. They’re tossing back the keys to properties now worth far less than the mortgages on them. Not Steve Fustolo. The Burlington accountant personally guaranteed much of the Ocean Club’s debt, according to filings in the Suffolk court case. It’s likely that a judge will soon order the Ocean Club site sold at auction, and it will sell for pennies, possibly leaving Fustolo on the hook for more than $20 million.
That’s the reward for dreaming big in Revere.
Paul McMorrow, a guest columnist, is a staff writer for Banker & Tradesman.