Rick Aidekman and the Crazy World of NYC Landlords – Part 12

This entry is part 12 of 14 in the series Rick Aidekman and the crazy world of NYC Landlords

Rick Aidekman and the Crazy World of NYC Landlords-Part 12

It appears that I haven’t been numbering all of the posts, so I am numbering this based upon how many posts I have had in this series.   Some were numbered, some were not.

In my last post, I referred to a trip to Houston to advise an investor/friend on whether he should invest in a property in Houston.   Although this is not about a NYC Landlord, much of the story is similar to an experience I had with an NYC Landlord in 1986 when I first started in the business.  

On to Houston.   The object of the trip was for me, as an apartment building owner and operator, to advise on whether it appeared that the investment by my friend with this owner/operator (“Promoter”) would be a good one.   One thing I learned quickly was that Houston did not have zoning rules like New York.   In New York City there were restrictions on what you could build on any block.   Restrictions included the building use, the number of square feet you could build, its height, setbacks and more.   In Houston at the time, the early 2000s, you could basically build what you want, where you want.   This created an advantage to a developer, but also a disadvantage.   The advantage was if you had an existing piece of land, you could basically do what you wanted with it.    The disadvantage was that so could the person who owned the land next door.   Thus, to keep your occupancy high enough to make a profit, you had to keep up with the new developments that kept adding popular features.   We were looking at an existing, “underperforming” apartment building.    The Promoter claimed that the property, being 15 years old, not only needed a new operator that could run the property better, but capital to upgrade the apartments, add new amenities, including a pool and tennis courts and other upgrades to make the property more competitive.  

Sounded good, made sense.   Problem was that I knew nothing about the Houston apartment market, nor did I know what the costs in Houston vs New York were to do the work contemplated.    The Promoter had us tour a few of his properties, which appeared on their surface to be well run.   I advised my friend, as we could both see on the surface, that the properties were in good condition and appeared fully rented.    What was not apparent was that we were in the middle of an elaborate fraud, one that paralleled my experience 1986 (my next post).    Turned out that my friend was becoming the victim of a Ponzi scheme.    We were shown a couple of properties that were the crown jewels of the Promoter’s portfolio.    They looked great and he showed us rent rolls showing 95% plus occupancy, quite strong for Houston at that time.   We didn’t know until the crash of 2008, the extend of the fraud until well after my friend invested substantial sums with the Promoter.

How the Ponzi scheme fraud worked:    The Promoter brought unsuspecting investors into an investment into a property newly contracted for and soon to be closed    The property would be purchased at a decent price, but would, according to the Promoter, require a substantial investment in capital improvements.    What we didn’t know was that the capital improvement investment was highly inflated and most of the funds allocated for that purpose were never spent.   The Promoter made some improvements, but a portion of the money was siphoned off to him.   The bulk of the money was used to pay the owners a return on their investment, both on the new property and on previous investments.    Thus, the investors received a great return and were happy with the financial reports they were receiving, which were also inflated.    This scheme worked as long as the Promoter could add more properties to the portfolio (with more capital raised for phony capital improvements) with the investor group (and their friends) happy to invest.       Most of the investors were from areas far from Houston and Louisiana where other of the properties in the portfolio were located, so they rarely inspected, especially when the returns were great.

The collapse occurred when the financial world cratered in 2008 and the Promoter could not obtain financing for new deals, and his scheme was uncovered as the funds for “capital improvements” dried up and so did the distributions to the investors.    The Promoter was unmasked arrested and served time.    The investors got very little of their money back as the properties were disposed of at the bottom of the collapse of the real estate market and the collapse of the economy in 2008 and 2009.

Series Navigation<< The Crazy World of NYC Landlords-Individual Stories-Other Characters-Part 2Rick Aidekman and the Crazy World of NYC Landlords-Part 13 >>

Leave a Reply

Your email address will not be published. Required fields are marked *