"Debt-Free" Woodland Heights bears $3.7 million baggage.

ARKANSAS TEACHER Retirement System officials knew Woodland Heights had financial liabilities when they agreed to take over the 63-unit project two years ago.

But they were surprised to learn exactly how big that obligation was.

At last count, the pension fund is on the hook for about $3.7 million.

The money represents refundable deposits owed to residents renting apartments in the west Little Rock highrise. The refunds are due when a resident dies or moves out.

When ATRS took ownership, there were no funds at Woodland Heights to cover the deposits. Pat Riley Sr., who developed and owned the retirement center, had spent the money.

Instead of putting the funds in an escrow account, Riley used the deposits he collected over the years to repay debt on the project and help fund operations at two nursing homes.

The 222-bed Riley's Oak Hill Manor South, which adjoins Woodland Heights, is now called Woodland Hills Rehabilitation and Health Care Center.

Riley's Oak Hill Manor North in North Little Rock is now known as Northridge Rehabilitation and Health Care Center. The 224-bed facility was closed by regulators under Riley's ownership but reopened with 112 beds after ATRS entered the ownership picture.

Riley forfeited the nursing homes after defaulting on an $11.5 million loan from the pension fund. He also transferred ownership of Woodland Heights to ATRS as part of a settlement.

That agreement relieved him of a personal guaranty on the loan and helped him avoid criminal charges for loan fraud.

In addition to the nursing homes, Riley's ownership of his fitness centers was listed as collateral for the ATRS loan. However, Riley had transferred ownership of the fitness centers to family members without approval from the pension fund.

"The property was deeded to his son, which is illegal as far as I know," said Paul Fair, a member of the ATRS board of trustees. "If the pension fund pursued criminal charges, Riley threatened to declare bankruptcy and tie the properties up in court.

"We were faced with making the best we could of a bad situation."

There was no bank loan on Woodland Heights when Riley transferred ownership to ATRS. There was debt from the contingent liability associated with the deposits, however.

"When ATRS came into the picture, Pat Riley owed a bunch of people money for their deposits," said Tom Ferstl, the pension fund's real estate adviser. The pension fund made good on those debts and shouldered the responsibility for the remaining deposits as well.

The liability represented by the deposits has been a sticking point in working out a sales agreement for Woodland Heights.

The pension fund initially wanted to sell the project in a package with the two nursing homes in hopes of recouping the money owed by Riley. Now ATRS is considering several options for Woodland Heights that include adding a planned, but never built, second tower that would double the number of units to 126.

"One of the inefficiencies of the project is that it has a common area, pool and kitchen designed to handle twice the number of people," Ferstl said.

He is gathering an estimate for that project, which was priced at $7.5 million more than 10 years ago.

The ATRS board will then decide whether to build it and continue operating an expanded Woodland Heights or market it to sell. The board could also choose to run the project as is, with the possibility of a sale.

"We've had some inquiries about buying it over the past several months, locally as well as from different parts of the country," Ferstl said.

One name that surfaced is Capital Senior Living Corp. of Dallas, a public company that owns/operates 43 projects in 20 states with a total capacity of about 6,900 residents.

Its only Arkansas holding is the 130-unit West Shores Retirement Community at 2607 Albert Pike Road in Hot Springs.

Another lead came from Riley.

"I told them I knew some people that might be interested in buying the property," Riley said. "I haven't offered to broker a deal, but I wanted to be helpful to them."

Confirming what Arkansas Business reported in early July, the pension fund formally announced last week that it had ended long-running negotiations to sell Woodland Heights and the two nursing homes to Cornerstone Health Care of Rogers, led by Alan Kilgore.

The board hired Ferstl's Affiliated Management Co. LLC in July to replace Cornerstone as property manager of Woodland Heights.

As of Aug. 26, 12 out of the 63 units were vacant. "That's one of our first goals, to rent the vacant units," Ferstl said.

Toward that end, Woodland Heights is operating under a new program regarding the deposits.

The original deposit structure under Riley ran as high as $100,000. With a stay of four years or longer, residents were entitled to collect a refund of two-thirds of the deposit if they moved out.

Higher percentages were collected by the residents if they moved during the first three years of a lease. In the event of death, the deposit was to go to their estate.

The large deposit was designed as a financial screen that appealed to a wealthier clientele. The fat retainer was designed as a financial boost to the project's revenue stream.

These days, new residents are required to pay a nonrefundable deposit of $4,000-$10,000, depending on the size of the unit.

There is even some discussion about converting Woodland Heights to a conventional apartment project geared toward retirement-aged tenants. That would involve doing away with the kitchen operation.

Number Crunching 

The relationship between Kilgore and Woodland Heights residents deteriorated during 2002. Things reached the boiling point when he proposed raising the 2003 rental rates by 15 percent to get the project to break even.

Ferstl agreed with Kilgore's analysis that the rates were below market. However, a one-year increase of that size was deemed too large. The ATRS board opted for a 5 percent increase instead.

"We're basically charged with getting everything quieted down," Ferstl said. "And of course, we'll set up separate accounting to get good numbers."

According to figures compiled by Cornerstone, Woodland Heights lost $346,328 during 2002.

Ferstl isn't sure if that number is accurate because bookkeeping at Woodland Heights and the two nursing homes has proven to be an accounting nightmare.

That situation began with the records inherited from Riley and continued with Health Systems of Arkansas LLC, led by Ed Holman.

Kilgore's Cornerstone Health Care took over the management in March 2002 after Holman and ATRS had a financial fallout. That dispute generated a lawsuit and countersuit that was settled earlier this summer.

Ferstl said Cornerstone's management was an improvement, but accurate accounting for the individual projects was still lacking.

"Money from all three properties has been funneled into one account and commingled," he said. "Maybe an accountant can break down all the numbers, but I can't."

One red flag is an unusual amount of overtime pay recorded at Woodland Heights. Ferstl is concerned that some employees took advantage of the management chaos.

Ferstl is analyzing various upgrades, including replacing much of the kitchen equipment and appliances. A volunteer consultant is coming in to examine food costs and recommend any actions that might save money without causing a drop in quality.

"The No. 1 item residents consider is food," Ferstl said. "There aren't a lot of complaints about the food, but we want to keep the quality up."

He said ATRS also is looking at investing $100,000 to spruce up the facility.

Ferstl hopes Woodland Heights will at least prove to be a break-even deal for ATRS in the end.