Jet Debt Casts Cloud on Pinnacle Partners

Steel is still rising at Pinnacle Hills, but Starbucks is shutting its doors in March.

Seen through by a collection of visionary local and national developers, Pinnacle Hills remains the premier destination in Northwest Arkansas and the burgeoning sales tax base it has brought to Rogers is the envy of the region.

In just more than a decade, the development has grown from bare pastures to include more than 2 million SF of shopping, 1 million SF of office space, 1,000 hotel rooms and 2,000 restaurant seats.

All news was once good news from Pinnacle Hills, but now it is hard to ignore the dichotomy of a 106,000-SF building going up while the neighborhood’s only purveyor of espresso closes down.

The two happenings reflect at once both the struggles of the national economy and the continued drawing power of Northwest Arkansas for investment by companies who serve Wal-Mart Stores Inc. like Johnson & Johnson, which will be the major tenant in the $8.78 million Pinnacle Center 4 when it opens in June.

Following the August 2007 split of the powerhouse Pinnacle Group, though, problems much bigger than retrofitting a single-tenant building like Starbucks have cast a cloud of litigation and uncertainty over former partners once considered a can’t-miss collection of Midases.

That bulletproof image shattered in July 2008, when current Pinnacle Group principals Johnelle Hunt and Tim Graham sued their former partners Bill Schwyhart and Robert Thornton along with Chicago billionaire bond trader John Calamos over a $110 million air charter merger gone wrong.

As it stands now with claims and counter-claims flying, Hunt and Graham remain on the hook for more than $30 million in liabilities.

Schwyhart and Thornton, who formed Pinnacle Investments following the split, are guarantors of more than $80 million in loans related to jets owned by now-defunct Aspen-Jetride, which was originally known as Pinnacle Air and was shut down by Calamos on Nov. 7.

The company filed Chapter 7 bankruptcy on Feb. 6.

(To see an inventory of Jet Ride, click here.)

One thing the four former partners agree upon in their lawsuits is that Calamos — who took two-thirds controlling interest in Jetride on Dec. 5, 2007, as part of its merger with his own bankrupted Aspen Executive Air — failed or refused to use his clout as promised to refinance the airplane debt and remove Hunt and Graham from their liabilities.

More than four months after a March 2008 deadline passed for refinancing the $106 million in debt, Hunt and Graham took the dispute to court.

While Hunt, the widow of Pinnacle Group partner J.B. Hunt and a billionaire herself, is financially strong enough to weather even a deal gone as sour as the failed Aspen-Jetride merger, the debt load of Schwyhart and Thornton clearly puts them in a more precarious position.

Evidence of that is clear as multiple planes with debt guaranteed by Schwyhart and Thornton are repossessed and loan foreclosures filed while Hunt continues to service the debt for which she’s liable even as she sues Calamos to recover the money.

“Anything she has her name on, she doesn’t ever want to go into foreclosure,” Pinnacle Group spokesman John George said of Hunt. “That’s her policy and her word on things. If there are things she’s involved in, she will fulfill her obligations.”

Schwyhart said he’s not making any new real estate deals until the charter litigation is resolved.

“It’s not prudent for myself or my wife to get involved in any new business ventures from an investment standpoint or debt,” he said. “Whenever you’re dealing with a bank, it gets more difficult when you have those clouds over your head.”

Schwyhart said it’s “very frustrating” being handcuffed from his passion of making deals because of an investment in which he was a 16 percent owner.

“But I can’t change it,” he said. “I can’t let it get me down and I’m not going to. We’re very optimistic and what’s right is right.”

The Schwyhart-Thornton partnership owns the largest office space footprint at Pinnacle Hills, controlling 325,000 SF with some of the highest lease rates in the region at the Pinnacle Point Corporate Park subdivision distinguished by the matching glass cubes of Corporate Towers I and II.

Schwyhart said he and Thornton’s properties have the highest occupancy and retention rates in the Northwest Arkansas Class A market.

Schwyhart said he has been in constant contact with his local lenders, which include Metropolitan National Bank, Chambers Bank of North Arkansas and Great Southern Bank of Springfield, Mo.

“We have fortified our lenders’ positions,” Schwyhart said. “We want to make sure that our lenders are secured the best they can be. The lenders have enough problems, they don’t want anything I’m associated with to contribute to those ills.

“On our real estate, we’ve tried to insulate all our real estate lenders from the airplane litigation.”

Schwyhart and Thornton have a total debt load of around $100 million, Schwyhart said, all secured by performing properties. At least $44 million in mortgages mature late this year, but the principle on a $38 million loan from Metropolitan was recently reduced by about 10 percent when the “Alltel” building at Corporate Park sold for close to its list price of $6.5 million to an out-of-state buyer.

Two other PI properties, the Walsh Building and Corporate Park Building H, are listed for sale at $8.8 million and $4 million, respectively.

Schwyhart said those buildings are not being listed because of the air service litigation and that “everything we have is for sale.”

“We have plenty of land to build new buildings,” he said.

Pinnacle Investments is going forward with the development of the 85-acre District at Pinnacle Hills near the Perry Road exit, about a mile south, which will be anchored by a prototype Wal-Mart Neighborhood Market on 6 acres PI sold to the Bentonville retailer last fall and is currently under construction.

Schwyhart is very bullish on that development, which figures to benefit nicely from the new interchange off Interstate 540.

“We have several deals that we’re laying out and in negotiations on,” Schwyhart said. “Companies are still coming in — very cautiously I might add, because of the national situation — but this is a place they want to be.

“It [the Neighborhood Market] is going to be a fabulous store, unlike anything else they have. That’s going to be a big draw for traffic and we have a lot of people who want to be around that.”

Airing Grievances

On paper, the merger between wholesale charter service Jetride and retail provider Aspen Executive Air made perfect sense by combining Jetride’s global reach and the name brand and high net worth clients held by AEX.

“We all drank the Kool-Aid on the deal,” Schwyhart said. “Everyone, all the partners involved, was excited about its future.”

In their counterclaim against Calamos filed Nov. 17, 2008, Schwyhart and Thornton accuse the Chicago billionaire of intending to defraud them from the beginning of their dealings in the late summer of 2007 following the Pinnacle Group split.

According to the investment agreement signed Dec. 5, 2007, Calamos was to pay Schwyhart and Thornton $7.5 million for Pinnacle-Jetride, and they would use part of that money to purchase the post-bankruptcy assets of AEX. Calamos was then, as majority owner, to use his considerable wealth to arrange refinancing for the debt on 19 planes.

Hunt and Graham were to be relieved of their obligations and Thornton and Schwyhart were to be liable for no more than $15 million. Schwyhart and Thornton allege Calamos stopped them from consummating the required refinancing, and that he always intended to defraud them by getting them to save AEX while he did nothing to assume debt held by Pinnacle-Jetride.

Calamos, not surprisingly, makes nearly identical charges against Schwyhart and Thornton. He alleges that it was they who approached him with a proposal to rescue AEX from bankruptcy, and that they attempted to use his high net worth to salvage their real estate deals and relieve their debts to Hunt and Graham.

Calamos, in his counterclaim against Thornton and Schwyhart filed on Jan. 9, alleges that he contributed more than $28 million to the operations of Aspen-Jetride and that Schwyhart and Thornton did not continue to make required capital infusions to the company.

He also alleges the two did not pay for their personal use of aircraft — $220,000 worth of time by Schwyhart and $42,000 by Thornton — and that Schwyhart overstated the loans and net worth on the 19 aircraft in order to obtain more capital for his other real estate businesses.

The original proposal by Schwyhart, according to Calamos, was to refinance $106 million in debt on the jets. The total amount reflected the loan value or “fair market” value of the planes, however Calamos said he discovered after the deal was consummated that the planes may be only worth $92 million to $95 million.

Wells Fargo, which was working with Schwyhart on the loan facility prior to the investment agreement being signed, would not agree to a loan on the terms Schwyhart represented according to Calamos’ suit:

“The Schwyhart defendants sought to induce Calamos into investing in Pinnacle Air knowing that Wells Fargo would seek additional credit support from Calamos above and beyond what was required under the terms of the Investment Agreement and beyond what the Schwyhart defendants represented was required.”

Calamos goes on to make further allegations against Schwyhart, namely that he fraudulently refinanced a Falcon 50 jet in October for $10.03 million (a loan for which the first payment was missed and is now in foreclosure) and that the Pinnacle Group split occurred because, “Hunt [and] Graham sought to extricate themselves from their numerous business dealings … because of concerns that Schwyhart was mismanaging and misusing these joint ventures and their assets to help support his highly leveraged personal real estate deals.”

George said he was not aware of how Calamos characterized the Pinnacle split in his claim, or that Calamos alleged Graham fraudulently vouched for Schwyhart’s standing in the business community.

George didn’t have a comment on Calamos’ allegations other than to call them “interesting.”

Schwyhart and Thornton are involved in one other sticky lawsuit. Thornhart Capital LLC, a joint venture, and Thornton individually, are suing Vision Technologies Inc. Both allege non-payment of loans ($290,000 and $1 million, respectively), which matured in 2007. The suits were filed in late 2007.

VTI is a military-grade camera technology company based in Rogers and both Schwyhart and Thornton were investors in the company.

Schwyhart said he cannot comment on the specifics of ongoing litigation, but did say that he’s “learned a lot” in the last year.

“I had this drilled home: just because one has wealth doesn’t mean they have integrity,” he said. “That was a hard lesson for me after growing up with nothing. I always assumed people with wealth and affluence had a high level of integrity, but as I’ve learned over the last year, there isn’t a correlation.

“There are a lot of great people who control lots of wealth — and a lot of those people are here — but a lot of the values we cherish in Northwest Arkansas aren’t readily embraced in other parts of the country.”

In December 2008, shares in Calamos Asset Management were down around 90 percent year-to-date, and his personal stock holdings in the company had lost around $2.5 billion in value.

Business Never Personal

For the record, neither Schwyhart nor George characterized the Pinnacle Group split as anything other than “amicable.”

Schwyhart said things changed after J.B. Hunt’s death in December 2006, a month after the deal closed for Pinnacle Air to acquire Columbus, Ohio-based Jetride for $41 million.

“I learned great things from the man and we all miss him very much,” Schwyhart said. “Johnelle is a dear friend of our family.

“Mr. Hunt was my partner. When we lost him, he was replaced by attorneys and accountants and they had a lot to deal with. Bob Thornton and I decided that we needed to be doing our own stuff. We all agreed on that.

“The current split was largely proposed by them. That was fine. I didn’t have the wherewithal to swing the whole deal. I was one of Mr. Hunt’s larger partners, but I certainly recognized that they had the controlling interest.”

Schwyhart and Thornton took most of the Pinnacle Point Corporate Park area, with the exception of a few single-tenant buildings such as Kimberly Clark, and the Pinnacle Group retained the Shoppes at Pinnacle Hills and the Arkansas World Trade Center. Schwyhart and Thornton retained the acreage south of the Pauline Whitaker Parkway, the Pinnacle Group kept acres north of it.

George said that after the completion of the $100 million Promenade at Pinnacle Hills shopping center in 2006, the synergies of the group changed.

“As any partnership or people grow in the profession they’re in, people want to spread wings and do their own things occasionally,” George said. “There was a desire to do a lot of things here at Pinnacle Hills that made the synergy more appropriate for a single party or a couple partners rather than a partnership of four.”

George agreed the personal relationships remain amicable.

“There’s personal and there’s business,” he said. “Personally, we are still on an amicable basis, but whether agreements were adhered to or not speaks for itself.”

Schwyhart, for his part, retains a big picture perspective.

“It’s certainly my dark cloud, but you know what?” he said, pausing for a brief, emotional moment as he talked about attending the funeral of a seven-year employee who recently passed away from complications of breast cancer.

“As I sat there … I don’t have any problems. We are blessed. We are healthy. I have a great family and we’re going to get through it. This whole region will get through this. We have so much to be thankful for in Northwest Arkansas with our economy and our people and our jobs and our quality of life. There are people and places in America that are literally fighting for their survival.

“We’re excited about the opportunities ahead of us. We’re not going to quit doing good things in Northwest Arkansas just because we had a bad deal.”

(Assistant Editor Susannah Patton contributed to this report.)

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