Riley Clubs ATRS With $11.5 Million Default

If Arkansas Teachers Retirement System had any doubt about how rough-and-tumble real estate lending can be, Pat Riley Sr. has helped school them otherwise.

The Little Rock businessman defaulted on a $11.5 million loan a year ago and negotiated a settlement this summer that allowed him to walk away from a personal guarantee backing the debt.

“I’m satisfied with the way it went and given the circumstances, I think it was very fair to me,” Riley said. “At one time, I had a good deal more equity in the business, but as time went on I didn’t have much equity.”

And now ATRS is the owner of two nursing homes (Riley’s Oak Hill Manors in Little Rock and North Little Rock), a retirement center (Woodland Heights in Little Rock) and the 27,000-SF Riley Building at 620 W. Third St. in downtown Little Rock.

All are marginally profitable at best or losing money, according to an ATRS assessment of theproperties.

And in the case of his namesake office building, Riley transferred an additional debt obligation of more than $1.1 million to the pension fund. The mortgage is held by yet another state pension fund, the Arkansas Public Employees Retirement System.

The ATRS loan was secured by Riley’s Oak Hill Manor South at 8701 Riley Drive in west Little Rock and Riley’s Oak Hill Manor North at 251 John Ashley Drive in North Little Rock.

Undergirding it was the personal guarantee of the 77-year-old president of Riley’s Inc.

That pledge, backed with Riley’s stated net worth of $28 million in 1999, was envisioned as a financial safeguard to protect ATRS should the loan become troubled.

Reality proved otherwise.

Riley’s net worth total was boosted by generous appraisals of his holdings. It also included properties that ATRS officials discovered to be problematic.

Bill Shirron, executive director of the $7.2 billion pension fund, was surprised to learn that Riley claimed no ownership of his family’s Riley’s Health & Fitness Centers Inc.

The corporation owns the 3,500-member Little Rock Athletic Club at 4610 Sam Peck Road and the 850-member North Little Rock Athletic Club at 3804 McCain Park Drive. It also manages the 275-member Downtown Athletic Club.

Shirron said Riley’s personal financial statements indicated he did have an ownership interest in the athletic club ventures, which factored into his net worth.

ATRS advisers viewed this discrepancy as an opening to successfully force Riley to pay up through a foreclosure action.

“That was one of the things that our attorneys thought we could win in court,” Shirron said. “But when we decided to go with a settlement, we decided not to look into it further.”

Did Riley provide inaccurate financial information to ATRS?

“They wondered if I had done something [wrong] late in the game,” he said. “But they decided I hadn’t, so they didn’t pursue it.”

“There was a danger of him taking personal bankruptcy and deteriorating the assets further,” said Frank White, state bank commissioner and a member of the ATRS board.

But what about the safety net of Riley’s supposed substantial net worth backing his personal guarantee?

“That was our question,” White said. “What happened to it?”

For now, Shirron seems content to let sleeping dogs lie.

“It was at least a three-week process of discussing the offer,” he said. “We discussed at length on foreclosing on the properties and suing him for the rest of it.

“We would’ve had to challenge [Riley’s claim that he didn’t have an ownership interest in the athletic clubs] because that was a substantial part of his net worth. The attorneys felt like we had a good chance at success.”

But instead of pursuing money from Riley to cover his bad debt, ATRS accepted the two nursing homes pledged as security for the loan. In return for releasing his personal liability, Riley also gave the pension fund Woodland Heights at 8700 Riley Drive and the Riley Building.

ATRS took possession of the properties on Aug. 10.

New Responsibilities

Now ATRS will have to operate the projects in an effort to recoup its $11.5 million — actually $12.6 million counting the pending pay-off of Riley’s debt on the Riley Building.

The pension fund also has authorization to spend another $1.5 million to make needed improvements to the properties.

“We’re still trying to work them out,” Shirron said. “Woodland Heights and the [Oak Hill Manor] South facility are in pretty good shape, and occupancy is picking up.

“The [Oak Hill Manor] North, we’re making progress toward reopening it and hopefully in the next two weeks we’ll be able to take residents.”

The North Little Rock facility was closed down by the state Department of Human Services’ Office of Long Term Care for repeatedly failing to comply with state quality of care standards.

The losing battle with state regulators was preceded by the death of an Oak Hill North resident, Wayne Boydston, on July 23, 1998.

The cause of death first was labeled “natural causes” but later was ruled accidental after the body was exhumed. An autopsy indicated Boydston died of asphyxiation after he became wedged in his bedrails while tied to his bed.

A lawsuit by Boydston’s family claiming negligence against Riley’s operation recently was settled out of court.

Riley first ran afoul of the pension fund last year when he failed to supply financial statements for fiscal year 1999, constituting a default.

A Nov. 7, 2000, letter sent to Riley also asked him to certify that he had not triggered two other default provisions. The first was failing to maintain regulatory compliance for nursing home operations.

The second was failing to notify the pension fund of “any material adverse change in circumstances (financial or otherwise) of the borrower, the guarantor or of the project.”

Riley quit making loan payments to ATRS in May.