Downtown hotel-condo project is tangled in lawsuit limbo

Several buyers are demanding return of their deposits

The proposed partnership promised to be a grand one: a string of luxury boutique hotels rising in select cities throughout the western United States, Mexico and Hawaii.

Yet six months after signing a letter of intent to explore the venture, New York hotelier the Setai Group, which created Miami Beach's prominent The Setai, is locked in a legal battle with Steve Rebeil, a developer who hoped to make his 23-story San Diego hotel-condominium a West Coast flagship for the Setai brand.

In November, the Setai Group sued 5th Avenue Partners and its principal, Orange County developer Rebeil, alleging that the San Diego project is being falsely promoted as a Setai property under the name Setai San Diego.

Richard Burton, an attorney for the Setai Group, said his clients and 5th Avenue signed a letter of intent in May to explore a potential partnership. But the parties never came to terms and a final agreement was never forged, Burton said.

In a countersuit, 5th Avenue contends that it spent millions of dollars bringing the hotel-condominium project up to Setai standards and that the letter of intent is itself a binding contract, though final partnership documents were not signed.

Now the fate of the property, known as the Diegan before 5th Avenue announced the Setai name change in October, is uncertain. Meanwhile, some buyers who put deposits on the hotel's 185 rooms, suites and penthouses for condominium use want their money back.

One buyer, who asked not to be identified, said he demanded and received his full deposit this month, citing a termination clause in his Diegan contract that allows for a refund if a final report has not been issued by the California Department of Real Estate within six months after the date of a conditional report. The buyer said several other Diegan buyers have also been given their deposits.

In California, the sale or lease of five or more units falls under the jurisdiction of the Real Estate Department. Conditional reports permit developers to enter into binding contracts with buyers, subject to satisfying specified conditions of a project. All those conditions must be satisfied before a final report is issued and the developer can close escrow.

The department issued the Diegan a conditional report in October 2005. No final report has been issued, a department spokesman said.

5th Avenue Partners did not respond to questions about the Diegan or how many buyers have requested or received deposit returns.

Lee Millinax of Vertical Properties, the San Diego firm that handles sales for the property, said about 85 units at the Diegan have been sold for condominium use. Millinax said he has received from eight to 10 requests from buyers to have their deposits returned, which he forwarded to 5th Avenue.

John Vogt, an attorney for Rebeil and 5th Avenue, declined to answer specific questions about the disputed Setai joint venture. He said his clients have “a binding contract with Setai Group and we are proceeding full-bore in terms of man-hours, time and money on all fronts.”

“We are confident in the merits of our case, and we'll proceed through the court system to defend our rights,” Vogt said.

The Setai Group alleged that it was mislead by Rebeil about his past legal problems and his ability to bring other hotel properties to the proposed partnership.

Rebeil's past includes a 2004 tax-related felony conviction and subsequent incarceration, and the denial of a casino gaming license in 1997 after Nevada regulators deemed him to “lack good character, honesty and integrity.”

The Setai lawsuit claims that Rebeil's felony conviction, which Setai alleged was not properly disclosed, disqualifies Rebeil from having any ownership interest in a Setai project involving a casino or liquor license in Nevada or California.

Another point of contention was Rebeil's promise to deliver a prestigious Beverly Hills property to the proposed Setai partnership.

The building, owned by Hustler magazine publisher Larry Flynt, is a distinctive, curved 10-story structure at 8484 Wilshire Blvd. that the Setai Group hoped to transform into a five-star hotel.

Burton, Setai's attorney, said his client's chief interest in negotiating a potential joint venture was Rebeil's assertion that he could bring the Beverly Hills property into the deal.

“He represented that he had the rights to the Larry Flynt property, but we've never seen anything – no documents of agreement or an option obtained on a Beverly Hills property,” Burton said. “The thing that was the least concern for us was the Diegan. Our interest was more Beverly Hills, but the Diegan was the only thing we've ever seen any documents on.”

Joseph Manna, an attorney for Flynt, said neither Flynt nor any of Flynt's companies have any agreement with Rebeil or any of Rebeil's companies. Flynt himself is embroiled in a legal dispute with another developer, Ronald Stover, who alleged that his company has an option to buy the property from Flynt.

“Neither Rebeil, nor any of Rebeil's companies, have any interest in the 8484 Wilshire building through the owner of the building,” Manna said.

5th Avenue formally announced that the Setai Group would operate the Diegan as the Setai San Diego in an Oct. 18 news release, claiming that the San Diego property would be the first “five-star luxury condominium-hotel in the city as the result of a groundbreaking east coast-west coast partnership considered to be the first of its kind in the country.”

Within hours, the Setai Group's attorney informed 5th Avenue that talks were off and “improperly repudiated” the letter of intent, according to the 5th Avenue countersuit.

Burton said there was nothing improper about Setai pulling the plug. Final terms were never agreed on, so the proposed partnership never materialized, he said.

Burton said 5th Avenue repeatedly violated terms of the letter of intent, including issuing unauthorized news releases touting the partnership as a done deal and the Diegan name change to Setai San Diego.

One of several unresolved areas of contention was affixing the Setai name to the Diegan, Burton said. The Setai Group did not consider the Diegan to be of the required quality for a Setai property. For example, many of the rooms are too small to earn a five-star designation, Burton said.

If a partnership deal had been reached, Setai proposed to manage the Diegan as a Setai Rok or Setai Rox, a “younger” offshoot brand that Setai was planning, Burton said.

The Setai Group has developed the Setai Resort and Residences, a 40-story luxury hotel condominium in Miami Beach, as well as a 30-story luxury hotel-condominium in New York City.

Source : http://www.signonsandiego.com/