Some Q Burke contractors struggling to survive

Rob Conrad is owed nearly $250,000 for his work on the Q Burke Hotel and Conference Center in East Burke. He has no idea if or when he'll be paid.

Conrad is one of 28 subcontractors who are collectively owed nearly $3.7 million for their work on the $50 million hotel, now called Burke Mountain Lodge.

Payment is in doubt after resort owner Ariel Quiros and his partner Bill Stenger were accused of fraud by the U.S. Securities and Exchange Commission and the Vermont Department of Financial Regulation. Both agencies accuse Quiros and Stenger of mishandling some $200 million raised from foreign nationals through the federal government's EB-5 program. Quiros is accused of stealing an additional $50 million for himself. Both Quiros and Stenger deny the charges.

The EB-5 program offers green cards to foreigners who invest $500,000 each in development projects in economically depressed areas of the country that create a minimum of 10 jobs per investment.

With Quiros' assets in the Northeast Kingdom frozen by the SEC, the subcontractors — and general contractor Peak CM of Winooski — have no way to get paid until those assets are sold and their liens can be satisfied.

The subcontractors contacted by the Burlington Free Press all said the State of Vermont has not made them a priority, and has done little to help them.

Conrad and others say they think the state and the federal government have focused their concern on the foreign investors whose investments and green cards are at risk as a result of the alleged fraud.

"The State of Vermont hung us out to dry," Conrad said.

Vermont Secretary of Commerce Pat Moulton, while sympathetic to Conrad’s perception of the state’s role in his difficulties, said the problem is not with the state, but with the alleged fraud.

“I have absolutely no doubt these contractors are hurting badly,” Moulton said. “It may seem like our concern is for investors, but clearly we’re concerned about the contractors. There is no easy way to get these debts paid off. This is the painful part of fraud. These are Vermonters trying to make a living, doing hard work. My heart bleeds for them.”

Moulton announced Thursday that she plans to leave her post in September to become interim president at Vermont Technical College.

Attempts by the Burlington Free Press to reach the governor’s office regarding the plight of the subcontractors went unanswered.

Half-finished hotel

Conrad blames the state for his financial woes, saying the state should have halted construction earlier when it suspected there was a problem with the project's finances.

In an interview with the Free Press in April, Gov. Peter Shumlin said he decided to involve the Department of Financial Regulation in monitoring the state's EB-5 program in summer 2014.

Department of Financial Regulation Commissioner Susan Donegan told the Free Press that by January 2015, her department went into a "deep dive" looking at the Jay Peak and Q Burke projects, and AnC Bio, a proposed biomedical research facility in Newport.

"The State of Vermont knew there wasn't enough money to finish the (Q Burke Hotel) and let us continue anyway, which to me is as fraudulent as taking money from investors," Conrad said. "Theft of services is what I call it. They let us finish the project, then informed us we weren't getting paid."

In the April interview, Shumlin said the Q Burke Hotel was about "half-finished" when Donegan allowed Stenger to resume raising money for the project in July 2015. Donegan had required Stenger to place all the money he was raising into escrow while her department conducted a financial review of his operations.

"We had an ongoing project. It was best for all involved, including investors, to have that project finished," Shumlin said. "A half-finished hotel does no good."

Donegan said in the same interview that by September 2015 her department realized they were dealing with fraud in the case of Quiros and Stenger. Construction on the Q Burke Hotel was completed in January 2016, five months later. Conrad said he was working until January to complete his portion of the project — installing the roof and siding, along with windows and doors.

Shumlin finished the interview in April by saying there were a number of people he wanted to protect in the coming months, but "first are the Vermonters who have good jobs at Jay Peak, at the resorts. There are hundreds of them."

Second on Shumlin's list of people he wanted to protect were the investors in the project, who needed to keep their green cards and continue to have their assets perform "positively."

Pat Moulton said despite Rob Conrad’s perception, the state did not know in advance that there was not enough money to finish Q Burke.

Moulton also echoed Gov. Shumlin’s point regarding the necessity of finishing Q Burke, saying, “I can appreciate the frustration Conrad must feel, but the opportunity for him to get paid the full amount he’s owed is much better if the asset is complete than incomplete.”

Conrad said as far as he's concerned, contractors don't make the list of people the state wants to protect. He refers to the investors in Q Burke Hotel as "speculators."

"I don't understand why the speculators deserve more protection than the working man, the citizen of Vermont," Conrad said. "I have a real problem with that. That's not right."

Starting over

Conrad took out a second mortgage on his house to pay his employees and suppliers, leaving him without the ability to bid on big jobs like the one at Q Burke.

"I'm left holding the bag and financing against my house, so I now have two mortgage payments for a hotel I'm not able to use," he said.

Conrad explained that in order to bid for bigger jobs, he needs the capital to cover the costs of materials and employees until he's paid by the owner or customer, usually on a 45 to 60-day cycle. Now that capital is gone, tied up in his unpaid debt from Q Burke.

"I can't go out to contracts that require capital," Conrad said. "I'm working small jobs, kind of like starting over, scratching a new business out of the dirt. It took me 10 years to build up the capital to go after projects of this size, only to get burned on the final payment."

Q Burke represented the amount of work in one job that Conrad normally would get in a year. Last summer he had 32 men working for him. This year he has a crew of eight.

Mike Pappalardo of MEI Electrical Contractors, Inc., in Jay — formerly Mike's Electric —  credits Quiros and Stenger with singlehandedly propping up the economy in the Northeast Kingdom through their EB-5 projects.

"I went from 25 guys to 78 guys in the six years I worked for EB-5," Pappalardo said. "It was great. These guys did it. Six years ago nobody had work. We were dying up here. Without these guys we wouldn't have made it."

Despite the state and federal allegations against Quiros and Stenger, Pappalardo blames the State of Vermont for the bind he's in as a result of being owed $640,000 for his work at Q Burke, Jay Peak and AnC Bio. Unlike Jay Peak and Burke Mountain, AnC Bio never got out of the ground before it was shut down by the fraud allegations.

Pappalardo signed a $500,000 loan from the Vermont Economic Development Authority this month. When the state announced the loan program on June 27, it was described as a way to help contractors "bridge their way to a robust 2016 construction season," by VEDA CEO Jo Bradley.

Pappalardo sees the loan as more of a last resort. He is dealing with the same problem as Conrad, desperate for capital to finance new work.

"I don't have a choice because no bank will give me a loan on a lien," he said.

Pappalardo had to sign over all of his assets to get the loan from the state, because VEDA required $1.2 million in assets to cover his $500,000 loan, he said.

"They have the lien, which is $640,000, they also have two of my rental houses, worth another half million," Pappalardo said. "It's not VEDA's fault. They're a bank. I'm lucky these guys are working with me."

That doesn't mean Pappalardo is happy about the situation he finds himself in.

"They took our cash flow, now they're going to charge us 4 percent for it," he said.

Rob Conrad decided against a VEDA loan for that very reason.

"Making payments on the money I'm owed is not any kind of solution," Conrad said. "I'm already doing that. I'm already making finance payments."

For now, Conrad said, his bank is allowing him to make interest-only payments on the second mortgage on his house.

Commerce Secretary Pat Moulton expressed her sympathy for the subcontractors, acknowledging that the loan program is “just a stop gap to at least find a source for some cash for those whose cash flow was getting too tight.”

The state, Moulton said, instituted the loan program to avoid layoffs, and buy the subcontractors some time for the Quiros/Stenger EB-5 project assets to be sold, which would then allow them to be paid.

“VEDA is allowing for interest-only payments for a year,” she said. “Hopefully within that year some of the assets will be liquidated.”

Moulton said federal receiver Michael Goldberg “keeps talking like Burke Mountain Lodge will be one of the first assets to get sold.”

“My hope and expectation is those subcontractors can then be paid,” she said.

Moulton said Jay Peak Resort is likely to take much longer to sell because it is a much larger and more valuable property.

“I wish we had some other way to do this,” Moulton said. “Goldberg has been very clear the subcontractors are first priority. They will be paid before the investors. That’s what Goldberg has pledged.”

Michael Goldberg did not return calls for comment from the Free Press.

Unexpected risk

Jeff Hutchins of J. Hutchins, Inc., in Richmond is owed nearly $400,000 for the excavation and infrastructure work at Q Burke. He said it's the most money he's ever been owed in his 30 years of business in Vermont — by far. And he said he has seen no evidence that contractors are being given priority by anyone.

Asked how he would deal with the shortfall in cash flow, Hutchins said, "I'll have to tap into personal funds and have my line of credit maxed out and hope the year goes decent and I don't need my line for anything else."

Hutchins shares Conrad's frustration with how the state and federal receiver Goldberg, handled the crisis.

"Their focus on this whole thing has been the EB-5 investors, who to me made an at-risk investment and they get a green card," Hutchins said. "There's still no talk from the state or receiver that contractors should be paid first. All the focus seems to be on the poor investors who invested $500,000 of life savings. So did we at this point, except I didn't choose to do it at risk."

Hutchins is taking a look at getting a VEDA loan, but has his doubts, given the lengthy application, business plan and collateral required.

"Again the level of frustration here is that the state wants to say how helpful they're being, but if we actually dig into it, they want us to pledge more assets to guarantee the money," Hutchins said. "It's 4 percent interest to me. They're not taking any risks."

VHV Company in Winooski, which did all the mechanical systems for Q Burke, including plumbing, heating, ventilating and air conditioning, is owed nearly $800,000.

Owner Dave Brown said his total contract was for about $7 million.

"$800,000 for any Vermont contractor is pretty significant," Brown said. "For some companies it would be devastating. Fortunately we're fairly strong financially, so it's not going to kill us, but it definitely hurts."

Brown said he has had to dip into his line of credit to cover the loss, and "there's a cost associated with that." Like all of the contractors the Free Press talked to, Brown was blindsided by the federal action in April, freezing Quiros' assets.

"To be honest with you, the information is minimal," Brown said. "I'm not being told anything by anybody, and it's extremely frustrating. All I know is that our best chance of getting paid is when they sell the facility, and that's an unknown. Six months, nine months a year from now or longer, I have no idea."

http://www.burlingtonfreepress.com/story/money/2016/07/17/some-q-burke-contractors-struggling-survive/86858922/

Mentions

• Vermont EB5 Regional Center
• Jay Peak - AnC Bio Vermont
• Jay Peak - Q Burke Mountain Resort, Hotel and Conference Center L.P.
• UNITED STATES SECURITIES AND EXCHANGE COMMISSION
• Ariel Quiros
• Bill Stenger
• Peter Shumlin

Litigation Cases

• State of Vermont vs Bill Stenger & Ariel Quiros
• UNITED STATES SECURITIES AND EXCHANGE COMMISSION vs Ariel Quiros & Bill Stenger

States

• Vermont