Speedway’s Wilshaw project facing more delays after developer fails to disclose SEC trouble

Town of Speedway leaders are pumping the brakes on a proposed $2.5 million loan to help pay for the long-delayed Wilshaw hotel project after learning that one of the companies involved wasn’t forthcoming about federal fines for past business dealings.

Scottsdale, Arizona-based Virtua Partners, which is working with Atlanta-based Hotel Equities Group on the $36 million hotel development at the southeast corner of 16th and Main streets, across from Indianapolis Motor Speedway, was fined more than $2 million in May 2022 by the U.S. Securities and Exchange Commission.

The fines stemmed from failures to disclose fees and conflicts of interest to investors in certain funds from 2017 to 2019—prior to it becoming involved in the Wilshaw project in late 2021—and for “breaching their fiduciary duty to multiple private investment funds,” the SEC said at the time. In its settlement, Virtua Partners did not admit or deny wrongdoing.

Speedway officials, who learned of the settlement from IBJ, said they plan to hold off on planned vote by the town council Monday night to provide a $2.5 million gap loan to the firm and its development partner, Hotel Equities.

The delay, town manager Grant Kleinhenz said, is intended to give town officials more time to vet the two companies, who are partners in Atlanta-based 33 Degrees, the firm behind loan recipient HE Speedway Owner LLC.

Plans for the 126-room Wilshaw hotel were first announced in December 2015 with an original expected opening date of 2018, but the project has encountered numerous delays.

33 Degrees was chosen to take over the Wilshaw project in November 2021 after previous developer Loftus Robinson encountered a litany of financing issues, including a $4.5 million lien from its construction manager for work on the project for which it had not been paid.

Loftus Robinson was the firm that suggested 33 Degrees as a partner, and handed the project off to the company through private agreements that the town says are not subject to public access laws.

Virtua Partners was cited by the SEC for advising clients to invest in fund pools with projects that were almost entirely managed by Virtua itself after giving the appearance that those investments would be sourced through the open market.

“The practice of investing fund assets nearly exclusively in affiliated projects presented significant undisclosed conflicts of interest that at times benefited” Virtua rather than its investors, the SEC said in its filing.

The company was also hit for moving money between various real estate funds to cover expenses, without telling investors, and for failing to disclose certain fees tied to its services.

Virtua was fined $1.7 million, including interest, while its founder and managing principal Quynh Palomino—who HE Speedway Owner LLC lists as its principal agent—and Chief Strategy Officer Jack Rose were fined $100,000 and $75,000, respectively. A third employee who is no longer with the company was fined $60,000.

Kleinhenz said it is too soon to say whether the company’s citation by the SEC—and the subsequent decision not to disclose that information to the town—will cause town officials to explore alternatives to working with the developer.

“I’m not sure we have all the information at this point, to answer that and say … that it would either derail it or that we would not be concerned about that,” Kleinhenz said. “We’re continuing to look into that, have those discussions, work through any issues, and understanding, so that we can make the best decisions possible.”

He said neither Palomino nor Rose are directly involved in the nuts-and-bolts of the Wilshaw project, but said they were part of the initial team that visited the town when 33 Degrees was considering taking on the project.

Speedway is working directly with an undisclosed financial firm that 33 Degrees has said would be its primary lender on the $36 million project, and on whose commitment to the development the town’s loan would be contingent.

If the town were to move forward with approving its loan, the developer would not receive the money directly. Rather, it would go into a fund that would be released directly to vendors. The loan would have to be paid back to the town within three years, at interest rates of 5% in the first year, 6.5% in the second year and 8% in an optional third year.

Kleinhenz said over the course of the standard due-diligence period—something that occurs in most commercial deals, before a loan is finalized—the SEC citation would have been uncovered.  But he also acknowledged the town was first informed of the matter by IBJ, who had learned of the violation from a real estate source.

A securities expert said that it’s a “bad look” for 33 Degrees, since it did not make the town aware of the matter immediately after the proceeding occurred, particularly given the particular violations for which they were cited.

“For this [SEC charge] to hit in May 2022, and for them not to step up and … disclose it to people, seems to me to be a little bit of the same thing they got cited for in the first place,” said former Indiana Securities Commissioner Mark Maddox, managing partner of Maddox Hargett & Caruso, a Fishers-based law firm that specializes in securities fraud.

“If I was on the Speedway Town Council, I would be concerned that the representatives from Virtua didn’t affirmatively disclose this … to the town, and it was just discovered by somebody else,” Maddox said. “You’ve got to think long and hard about whether you want to do business with somebody like that.”

During the Feb. 27 town council meeting, when the loan was first discussed publicly by town officials, Kleinhenz said that town personnel had rigorously vetted the project and 33 Degrees “to the point where we feel very confident they can get the financing they need” to complete the Wilshaw. However, he said later in the meeting that he wasn’t aware of all the firms involved in the 33 Degrees partnership aside from Hotel Equities.

According to the town, 33 Degrees has already spent more than $5 million on the Wilshaw project, first clearing a $4.5 million construction lien from FA Wilhelm, which had been in place for more than two years, and for various site studies, including one verifying the steel on the property—which has been exposed to the elements for more than three years—is still structurally sound.

And while Kleinhenz said there’s more that needs to be considered in determining whether the 33 Degrees will remain involved, the town remains committed to moving the project forward.

“If this deal doesn’t work, we will look for another way to figure out how to get that accomplished,” he said. “It could be with Hotel Equities, it could be with them and someone else. But we’re not going to throw the baby out with the bathwater at this point. I think we need to look through the issues to better understand how it impacts [the project], what the connections are.”

A representative for 33 Degrees did not return a phone call or an email requesting comment for this story.

Hotel Equities Group has a portfolio of more than 210 hotels in the United States and Canada, including 10 in Indiana. If completed, the Wilshaw is expected to carry the upscale Hilton Tapestry brand.