The Housing Chronicles Blog: Bernard Madoff: Reason #1 golf courses not the best place to make deals

Thursday, December 18, 2008

Bernard Madoff: Reason #1 golf courses not the best place to make deals

Ok, I'll admit it: I'm too impatient to learn golf. When I was in high school a friend -- and a very poor teacher -- so incompetently coached me on the game that as I got older it never revived any interest. Good wine and food? Now you're talking.

I only mention this because apparently many real estate developers and their projects are also imperiled with the demise of the Ponzi King Bernard Madoff (and what a great name for a financial villain: "Made Off," as in with $50 billion). Even Hollywood couldn't write this stuff because they probably figured -- incorrectly, it would seem -- that it was simply too far-fetched to be true.

And where did they make these deals which required few questions but great trust? Golf courses. Country clubs. And all sorts of other places where objective analysis and due diligence had no place at the table, because to ask questions was -- what? Rude. Discourteous. And, ultimately, honest. Why was that so scary?

There's a lesson here: DON'T MAKE FINAL DEALS ON A GOLF COURSE. Preliminary deals, sure. Expressing interest? Absolutely. But please do things like check references, ask for work samples and check out the competition. Because if you don't? Potential financial ruin.

From a New York Times story (hat tip:

Almost no segment of New York City’s real estate industry was spared in the Madoff scandal, which may be history’s largest Ponzi scheme: commercial brokers large and small, little-known developers and prominent families like the Wilpons and Rechlers all lost money to Bernard L. Madoff, industry executives say. The outsize impact on the industry may have resulted largely because Mr. Madoff (pronounced MAY-doff) managed his funds much the way that real estate leaders have operated successfully for decades: He provided little information and demanded a lot of trust... Across the city, industry executives said deals had been scuttled or jeopardized because of the scandal. Residential brokers are taking calls from Madoff investors who have had to put their apartments on the market. Many developers had pledged their investments with Mr. Madoff as collateral for projects, and are now worried that their banks will call in their loans... Jerry Reisman, a lawyer based in Garden City, N.Y., said he was representing six commercial real estate investors and developers in the area who lost a total of $150 million to Mr. Madoff. They met Mr. Madoff through contacts at country clubs in the tristate area, he said.

“They knew him from golfing in the Hamptons. They knew him from the locker rooms,” Mr. Reisman said. “He was considered a wizard.”

Mr. Reisman said his clients were especially concerned because they counted on Madoff investments to complete some of their real estate projects, pledging their investments as collateral for projects. Those developers fear that when their banks realize that their investments with Mr. Madoff have disappeared, they will demand new collateral from other sources, Mr. Reisman said.

Finding those alternative lenders will be difficult given the financial crisis — and given that many other real estate investors have been hurt by the Madoff case.

“Many of these developers, their resources are all with Madoff,” Mr. Reisman said.
However, there is a schadenfreude moment:

Some members of the real estate industry are receiving the news with a mix of schadenfreude and sadness for their peers. Jeffrey R. Gural, chairman of Newmark Knight Frank, the brokerage firm, said Mr. Madoff had turned his family down as investors about eight years ago because they would not invest at least $20 million. For years, he said, colleagues introduced to Mr. Madoff through relatives or country club friends had sung his praises.

“People used to brag how they were getting these great returns when everybody else was struggling,” he said. “They thought Bernie Madoff was a genius, and anybody who didn’t give them their money was a fool.”

The impact is already spreading to the residential real estate business. Brad Friedman, a lawyer representing about 100 investors primarily in New York and Florida, said several clients have already said they plan to put their apartments on the market. They depended on their Madoff investments to pay their mortgages and co-op fees.

“With that source of money frozen, they’ve got no cash,” Mr. Friedman said. “They can’t pay the electric bill. They can’t pay the mortgage.”

Click here for full story.

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