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Tarragon's Practices Leave Sour Taste

Nicholas Yulico

Tarragon Corp.(TARR Quote) is hoping to expand its recently formed condo-management business, but the division has already lost one management contract and more could follow because of unhappy residents in Florida.

Last week, the Montreux at Deerwood Lake condo community in Jacksonville, Fla., voted on a new property management company to replace Sage Residential, a division of Tarragon, TheStreet.com has learned.

A resident and board member at the community had threatened legal action against Tarragon over alleged self-dealing. Rather than face a lawsuit, Tarragon agreed to terminate Sage's management contract at Montreux, according to documents obtained by TheStreet.com.

While for most companies, losing a single community contract would be of little importance, for Tarragon it represents a relatively big piece of a small, newly formed business that the company hopes will become its focus. But right now, the condo management division would have no business were it not for Tarragon's development arm rewarding it no-bid contracts.

Tarragon is planning to split itself into two companies later this year in an effort to create value. One company will focus on homebuilding. The other, Sage Residential, will own apartment properties, while also providing management services to third-party apartment communities and homeowners associations at condo properties.

Tarragon's stock has been under pressure in recent months from short-sellers who say the company is facing a liquidity crunch. The company disclosed in a Securities and Exchange Commission filing last week that it was not in compliance with a debt-service coverage ratio covenant pertaining to its $125 million of outstanding unsecured bonds.

In the first quarter, Tarragon's homebuilding and apartment businesses each lost money, largely because of failed Florida condo-conversion projects.

Tarragon continues to be cash flow negative. In an investor presentation in late March, the company said it hopes to increase Sage Residential's cash flow through the expansion of revenue from management services.

In particular, Sage hopes to increase the number of condominium properties under management. In order to do that, Tarragon put it in charge of numerous communities that it is developing, even though Sage had little experience managing condos.

Tarragon created its condo-management division last year. In its March investor presentation, the company listed 12 condo properties currently under management. All are either new condo developments or condo conversion projects under development by the company.

For some of these contracts, Tarragon used its power as a developer to pull third-party condo management companies at several properties and replace them with Sage.

Last fall, Sage replaced Continental Group Inc., a division of FirstService(FSRV Quote), as the management company at seven Tarragon condo-conversion properties in Florida, including Montreux.

A similar process happened at the Lofts on Post Oak condo development in Houston, with a different management company being replaced by Sage, according to a resident there.

The switch left some owners fuming. Chris Dobbins, a board member and resident at Montreux in Jacksonville, threatened to file a lawsuit against Tarragon over the Sage contract. He and his attorney claim Tarragon forcefully implemented Sage as the management provider, in violation of the bylaws of the community's homeowners association.

"Tarragon had no right to remove the third-party management contract and to issue themselves a contract," Dobbins says. "As soon as Sage was put in place, almost all maintenance ceased. At Montreux, I can point to leaking roofs, sinking foundations, rotting siding, damaged fencing and degraded parking areas."

Officials from Tarragon could not be reached for comment.

According to Dobbins, Montreux's bylaws require a competitive bidding process for any management contract if the cost of services exceed 5% of the total annual budget of the association, which Dobbins says they did at the property.

Last Monday, a competitive bidding process, which Tarragon agreed to, was conducted, and Continental Group was put back in place as the manager of Montreux.

The battle has piqued the interest of residents at other properties Sage manages in Florida.

Fernando Dominguez, vice president of the Central Florida region for Continental Group, says he has already received interest in his company's services at the two other Jacksonville communities that Sage took over.

"The biggest problem with Sage is lack of experience," says Ernie Fordham, a board member and resident at Bishops Court, a Tarragon condo community in Jacksonville. "It was formed primarily from people who work for Tarragon development in their apartment-rental division. Very few of them have actual experience with managing a community association."

Fordham said his community is likely to put the management contract out for a competitive bid once the owners take control of the homeowners association. In Florida, developers retain control of a condo project until 90% of the homes are sold.