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Residents at the Velvet Cloak Inn rise up against property owners in legal fight that has ramifications for North Carolina

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It's hard to believe, but the Velvet Cloak Inn was once the most elegant accommodation in Raleigh. A special project of "Willie" York, the patriarch behind York Properties, it was named after the cloak Sir Walter Raleigh laid over a puddle for the Queen. The gothic, New Orleans-style structure with ornate, wrought-iron detailing once hosted sumptuous buffets around the tropically heated pool; the marble bathtubs had telephones, the lobby well-appointed with its grand piano and grandfather clock; there was even a classy basement burlesque called the Club of Eight Lords.

Bob Hope, Sally Ride, Marilyn Monroe and presidents Ford and Reagan stayed at the Velvet when they came to town, and the members of the General Assembly hashed out legislation within. Even after it became Raleigh's Chelsea Hotel, a specter of its bygone self, its walls emanated enough grandeur to attract David Sedaris, Marc Maron and the gubernatorial campaign headquarters of Pat McCrory.

Now there are no more galas or buffets or grandfather clocks or oil portraits of Sir Walter Raleigh. The gas lamps have been extinguished. The lobby is empty and a haphazard printout taped to the door reads "Closed." The formerly lush, tropical atrium looks like a scene from CSI: Special Victims Unit, the pool coated in green slime.

The pool, former site of wedding receptions 
and parties, is languishing. - PHOTO BY JUSTIN COOK
  • Photo by Justin Cook
  • The pool, former site of wedding receptions and parties, is languishing.

The place looks abandoned, but if you hang around long enough, you see people are still living here. They could easily be mistaken for squatters: an eccentric 83-year-old painter, an unemployed philosophy professor turned chocolatier, the son of a prominent Raleigh developer with grand theft and larceny charges, and a guy who says he does "security" and looks like he just stepped out of The Warriors.

They are, in fact, the last holdout property owners of the Velvet Cloak Villas Condominium Association, suspended in legal limbo, in what observers are calling a real estate case of first impression, with historic ramifications for North Carolina law.

In addition to a boatload of civil and damages lawsuits filed residents against the developer, the case has prompted investigations by The N.C. Commissioner of Banks and the N.C. Real Estate Commission.

"It's like trying to untangle Christmas lights. It's like how in the hell did it get this crazy," says John Austin, lawyer for many of the residents.

The string of events that led to the decline of the Velvet all trace back to a Raleigh family called the Smoots. David M. Smoot III, a 79-year-old real estate mogul behind a obfuscating array of Raleigh holding companies, partnerships, and LLCs, bought the decaying historic building in 2004 from a Hawaiian educational foundation.

In 2005, Smoot and his wife, Jeanne, a former Director of Academic Programs for the Reagan administration and current chair on the Women for [Thom] Tillis Coalition, set up the Velvet Cloak Villas Condominium Association, selling off rooms in the hotel as condos—for $80,000 a piece. The limited partnership they formed to purchase the Velvet Cloak, Progress Park LP, acted as a lender to finance mortgages. Their son Daniel, now 35, was tapped to be the general manager.

In late 2012, after years of selling shoddy condos in a historic building that they let fall into ruin, the Smoots began a campaign of buying back their "condo" units. "Condo" is in quotes because it is being debated whether the Velvet Cloak was ever a condominium association at all. The holdout residents, mostly elderly and infirm, argue that the Smoots set up a sham condo business, with a sham homeowner's association. These residents allege there were no annual budgets, no audits, no HOA meetings or elections, and that Progress Park LP was running the Velvet Cloak Inn on the back of commonly held condo association property.

The Smoots succeeded in getting back most of the units. Having essentially set up a residential hotel, feasting on the elderly and economically precarious, this was not difficult. When the Smoots succeeded in getting the majority of the units back and liquidated the homeowner's association on the last day of 2013, these last residents' deeds were transferred over to the Smoots. The residents are seeking to regain control of their property so that if the building was to be sold, they could at least negotiate the sale of their own property with the buyer, rather than be under the thumb of the Smoots.

The N.C. Commissioner of Banks confirmed that it is investigating Progress Park, but could not comment further. A consent order, in place for the duration of the investigation, states that Progress Park never had a license to finance mortgages, and mandates that the Smoots immediately cease "engaging in the mortgage business."

PHOTO BY JUSTIN COOK
  • Photo by Justin Cook

The N.C. Real Estate Commission also confirmed, through their regulatory affairs director, that their chief auditor is investigating Daniel and David Smoot. If wrongdoing is found, David Smoot could lose his Realtor's license.

The legal stalemate has larger ramifications. With Hillsborough Street a hotspot for new development, the Smoots are rumored to be in sale negotiations with AJ Capital Partners—a luxury resort company out of Chicago with upscale hotels in South Beach, Napa Valley, and Playa del Carmen.

But that sale to AJ Capital Partners has stalled out as the legal proceedings grind on. Two weeks ago, Superior Court judge Robert Hobgood refused the Smoots request to lift the lis pendens on the Velvet Cloak—shorthand for "buyer beware"—meaning that AJ Capital Partners probably won't move to purchase the property until after a jury trial in mid-March of next year.The Smoots, their lawyers, and AJ Capital Partners all declined to respond to repeated requests for comment on the allegations swirling around the Velvet Cloak.

Rod Serling might have described the Velvet Cloak as lying in a middle ground between light and shadow. Time seems to slow down and darken on the property. Crows swoop down out of nowhere and caw. Prowling around, I stumble on an open hotel room door. A hulking air conditioning unit lies broken outside on the veranda. Poking my head in, I find an elderly man reclining in front of a floor fan. It's hot inside and the Smoots have declined to fix his HVAC.

"I'm not afraid of hot weather," he laughs, "I grew up without air conditioning." The 250-square-foot room is cluttered with oil paintings and books on anatomy; there is an old, white piano buried under papers in the corner. With his bulbous nose, white hair and friendly demeanor, he has the look of the mage.

A painter, singer and eastern North Carolina native, Matthew Norman, 83 years old, bought Unit 254 for $80,000. He was looking for a place to peacefully eke out his last years, close to his grandchildren. From the start, there were problems. At closing, the Smoots charged him a $300 "Working Capital Assessment." One part of the residents suits is determining where this "working capital"—charged to every purchaser upon closing— has disappeared to. No documentation of such a fund has yet been produced.

Matthew Norman: The Smoots bought the Velvet Cloak "in bad condition and never brought it up to code." - PHOTO BY JUSTIN COOK
  • Photo by Justin Cook
  • Matthew Norman: The Smoots bought the Velvet Cloak "in bad condition and never brought it up to code."

Norman, an affable and genteel Southerner, says he tried to be neighborly. "When I moved in, I thought, 'This is where I'm living, this will be my family.' I even baked the Smoots a peach pie. I was trying to accommodate the assholes to be honest with you,"

One day in 2008, Norman came home to find the Velvet Cloak had been condemned by the fire marshal for various permitting violations and a malfunctioning master fire alarm system.

"They let it run down from the beginning," Norman says. "They bought it in bad shape and never brought it up to code."

Norman says David Smoot assured residents that it would all be sorted out in a couple of weeks. Smoot allegedly said that he would even reimburse residents for hotel expenses incurred while the building was closed.

The couple of weeks came and went and the Velvet Cloak was still not up to code. Norman ended up being displaced from his unit for over a year. During that time, he says he was required to pay his $150 a month HOA dues. He says Smoot never reimbursed his expenses.

"There was a period during that summer where I didn't even have a place to live." Norman ended up moving back into his still-condemned unit, with the complicity of David Smoot—who warned him when city inspectors would be swinging by.

A man of nearly 80 lived in a condemned unit he owned, dodging officials, with his furniture in the middle of the room.

Norman says David Smoot was personable, but describes Daniel, his young son and the Velvet's general manager, in darker terms. "Daniel showed his personality to my family. When my daughter came, she brought her dogs that she traveled with. The second time she came to visit, Daniel told her there would be a 50-dollar per night per dog charge. He told her she either had to pay or he would call the police. This is the daughter of one of his investors; this is the hospitality he shows to his guests."

In late 2012, having brought the building back up to code, understanding that they had to own the bulk of units to sell the property, the Smoots began a concerted campaign of buying back the "condo" units they had sold. According to affidavits, David Smoot repeatedly called and visited property owners, telling them that property values had nosedived.

He would then, according to affidavits, demand a $10,000–$15,000 "Special Assessment," and threaten legal action. If a resident couldn't pay this assessment, Smoot would allegedly offer to buy their unit from them for around $20,000—yes, a quarter of what they had paid; in 2012, in Raleigh's booming real estate market.

Norman claims that Daniel Smoot told him the building needed owners with "greater resources." When Norman told David Smoot that he could not pay, David Smoot allegedly said, "So what will you do when you get a knock on your door and you are served with a judgment?"

Most residents—precarious, elderly, unable to afford lawyers, terrified of a legal imbroglio—sold their units back to Smoot at a loss.

On Jan. 31, 2013, having allegedly obtained control of 80 percent of the units (this is in dispute) in the building, David, Jeanne and Daniel Smoot, acting as the self-appointed board of the Velvet Cloak Villas Homeowners Association, terminated the association. This is the first time a condo association has been terminated in this manner in North Carolina.

Conditions at the Velvet Cloak - PHOTO BY JUSTIN COOK
  • Photo by Justin Cook
  • Conditions at the Velvet Cloak

For the holdout residents, life became difficult. They no longer technically owned the property they had paid for or had mortgages on. The Smoots began closing the place down: The swimming pool and the lobby were shuttered. Concierge service and security disappeared; the mail stopped arriving and trash pick up was discontinued.

"They went through some soft soil with the other people. But after a while you're going to hit clay. That's where we're at right now," says Reginald Savage, a former N.C. State philosophy professor, now chocolatier, whom fellow residents describe as the ringleader of resistance.

The Smoots foreclosed on Savage's units, and he is currently staying in a friend's place in the Velvet Cloak. He has chosen to represent himself in the court proceedings. Savage now spends 8 to 10 hours a day holed up in the little room studying law, firing salvo-like e-mails out to the Smoots' lawyers.

"This is what you call a constructed eviction," says Emilio John Felicione, an 83-year-old veteran of the Vietnam and Korean wars. He bought a unit from David Smoot in 2007, paid in cash, to house his elderly ex-wife Lorraine. When the building was condemned in 2008, Lorraine was forced to live in a Super 8 (the cheapest hotel Felicione could find) for three months. Felicione says that David Smoot promised to reimburse him for hotel expenses, but he never did.

This year, as the building has decayed, "they cut the cable and hot water on her. She couldn't take a bath. They also got rid of trash service and her mail started going missing. I had to take her out of there, move her to a senior community." Felicione said that Smoot repeatedly offered to buy his unit for $20,000.

"I said, 'David, what are you smoking?'... I've got 22 years of service to this country and 28 years of service to the state of North Carolina—I bought this unit for my disabled wife and we're being kicked out. You know how they're going to have to evict me? With handcuffs."

In March, mysterious binders appeared at the doorsteps of remaining residents. They contained copies of Reginald Savage's and Andrew Debnam's criminal records. Residents say this was an attempt by the Smoots lawyers to break their solidarity. Debnam, a family member of some property owners, has felony and grand theft charges. Savage's binder featured an arrest when he was 22, a mugshot from a missed 2009 child support modification hearing, and some charges for a Reginald Savage in Alaska that he says were not his.

A former front desk clerk has also filed an affidavit stating that Daniel Smoot made her inspect residents' mail. She attests that Daniel had her mark a letter sent to Savage as "return to sender." Another lawsuit, being litigated by N.C. Legal Aid, alleges that Daniel Smoot illegally evicted George LaRoque, a paraplegic on food stamps, giving him an hour to leave his room. He had paid $7,800, a year's rent, in advance.

Smoot allegedly told LaRoque that the Velvet Cloak was "starting to look like a retirement home" and ordered him off the property. Laroque claims he was not allowed to retrieve his wheelchair and medications for more than two weeks.

PHOTO BY JUSTIN COOK
  • Photo by Justin Cook

In the absence of real security, Brian Walingsford, a middle-aged musician with an Afro and sunglasses, acts as the building's "security guard." An intimidating figure, he can be seen roving the premises. He stays on site in a room with his good friend, Mary Keef, a 63-year-old breast cancer survivor who has just been foreclosed on, with the help of the Smoots.

"I've met some beautiful people in my life, but Mary's the best. Daniel barges in around here and treats her badly. He treats everybody here like shit. How would you feel if someone treated your mother like that?"

Walingsford and I stood and talked in a darkened portico. He showed me where old blankets and tape had been used to fix up a broken pipe under the building. "I used to walk by this place and be so fascinated," he said, shaking his head, "I thought it was so beautiful. It's ironic to me that I'm one of the last people here."

This article appeared in print with the headline "Velvet revolution"

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