I’d like to share an excerpt from my upcoming new book where I deal with a situation I faced upon taking over real estate development firm Terrace Investments Limited, the first parent company of the modern-era Ottawa Senators hockey team.
One of our partners was about to tumble into bankruptcy leaving Terrace, a small company at the time, in peril.
We had to face down a bankruptcy trustee, deal with a court proceeding, and fend off a large predatory real estate corporation about to devour a huge portfolio of valuable industrial and commercial properties including a half share of four buildings belonging to Terrace.
You know the old saying, “There are two chairs in heaven waiting for the first two partners to get there and still like each other.”
Perhaps the best number of partners anyone can have in business is… zero?
Here is the excerpt…
Fixing Terrace meant first dealing with an imminent bankruptcy. Admiralty Enterprises, run by irrepressible entrepreneur Lawrence Freedman, was about to declare bankruptcy.
Lawrence was the guy who wanted to build a national chain of roller rinks, but his real strength was in construction of industrial buildings.
He knew how to lock up great sites, secure easy credit (in the 1970s and 80s), pop up cheap buildings, and sign tenants.
What he didn’t know how to do was to control and manage his sprawling real estate empire, always a challenge to entrepreneurs who have the attention span of a minnow.
Four of his more than 80 industrial sites, were 50-50 co-ventures with Terrace Investments Limited. One of those was a roller rink.
Here’s the thing you need to know—in bankruptcy, trustees are gods. They have incredible power, and courts are not keen on overturning or second guessing them.
So if you put a trustee offside, you are not usually going to fair very well. That’s just as true for bankrupt companies or individuals as it is for their creditors.
In this case, Terrace wasn’t strictly a creditor; it was a joint venture partner on the ownership side.
When I visited the trustee, I told him, “We’d like to buy Lawrence’s half of these four buildings we own together.”
“I am not in a position to discuss this with you now. We are in the process of seizing control of all of his assets, his bank accounts, and notifying tenants that their rents are now to be paid to us. Just finding out what Mr Freedman actually owns is a challenge. Come back next month.”
I didn’t know it at the time, but the trustee was BS’ing me—he was already negotiating with Bob Campeau for the sale of the entire portfolio. This is what trustees do—look for the guy with the deepest pockets, and for the fastest exit.
Bob was a charismatic, angry, ambitious Franco-Ontarian from Sudbury who moved to Ottawa to become a major homebuilder in the 1960s and 70s. His homes were well-built and are still prized today in inner parts of the city.
His core team of executives was unusual in a small town like Ottawa—dynamic and dedicated, they loved their boss despite his mercurial personality.
They hunted and fished together in Robert’s private northern Quebec camp; they were a very tight and impressive team. They branched out in the 1970s and 1980s to commercial real estate in Ottawa and Toronto.
By the late 1980s, Campeau Corporation upon the advice of US-banker Bruce Wasserstein used junk bonds to do a leveraged buyout of Allied Stores and Federated Department Stores. They scooped up Bloomingdale’s, Abraham & Straus, Jordan Marsh and other beloved brands.
The problem was that while they knew how to run a real estate empire, they knew nothing about merchandising. It turns out that it greatly helps if you actually know something about the business you are in.
Department store sales along with the national economy stalled, costs were slashed but not fast enough, and cashflow declined. As a result, they were unable to pay punishing interest rates on their junk bonds and Campeau Corp teetered into bankruptcy themselves.
Campeau Corporation was in turn acquired by Olympia and York (owned by the Reichman brothers) which later went bankrupt too—after London’s Canary Wharf development proved to be their Waterloo.
So you are starting, I hope, to see a pattern.
Admiralty (successful real estate developer) → roller rinks → bankruptcy → Campeau (successful real estate developer) purchase of Admiralty → LBO Allied Stores and Federated Department Stores → bankruptcy → O+Y (successful real estate developer) purchase of Campeau → Canary Wharf → bankruptcy
Somewhere in there I could add:
Terrace (successful real estate developer) → NHL expansion franchise → bankruptcy
If there is a lesson in there, it’s this:
- Stick to what you know
- Debt is a powerful tool
- It can work for you
- It can work against you
- There is good debt (secured debt)
- There is bad debt (unsecured)
Secured debt is debt that is secured against an asset, against which you are hopefully not upside down on equity.
For example, you don’t have LTV (loan-to-value) ratios of 125% or more like so many of them did in those days (and would do again if their lenders, investors, and shareholders would let them get away with it)
Secured debt is supposed to go away when you sell the underlying assets.
Unsecured debt is like personal credit card debt—it is supported solely by your personal or corporate guarantee. If things go bad, this debt sticks to you as an individual or to your company.
The Reichman brothers had a clever scheme—they would tell lenders that they had no secured debt on a vast office tower in Toronto or New York; ie, no mortgage.
They could raise unsecured debt (eg, a line of credit) based on the fact that their assets were not pledged to anyone and with a promise made not to pledge it to anyone.
In this way, they could, in effect, “leverage” the same building over and over again, raising billions.
It’s perfectly legal, and ultimately deadly to your business if cashflow falters even for a quarter or two.
Former LA Kings owner, the charming Bruce McNall, did the same thing—he apparently pledged the same rare coin collections over and over again, only in his case, he didn’t use negative pledging.
He gave each of his lenders a collateral mortgage. It’d be like you having five or six first mortgages on your home. He was sentenced to 70 months in prison for fraud.
You might think that the Reichman’s London project was a logical extension of their multi-billion dollar commercial real estate portfolio in New York and Toronto, but you’d be wrong.
Real estate is a hyper local business. What works in the mainly English side of Ottawa (its west end) may not work in a more French Vanier or Orleans (in its east end) and vice versa.
London’s commercial property market is very different from anything the Reichman’s had seen before.
It’s very City-focused; it’s ultra conservative; it’s snobby and hidebound; it’s in a straight jacket of its own making—companies at the time signed 25-year leases.
No North American CEO would ever sign a 25-year deal, never. Things change far too fast in the local, national and international economy to ties your company to a physical plant for that long.
But it also meant lease-up took far too long at Canary Wharf—the Reichmans could not shake enough financial companies loose from their longterm commitments to the City.
The whole situation was made much worse by the fact that the tube did not (at that time) serve Canary Wharf.
So figure out what you are good at, and then stick with that. It works.
Later on with the Sens, we believed that core competencies were these—
- pro and amateur scouting
- hockey program
- player development
- relationships with key stakeholders
That’s the list. Everything else—like parking, food and beverage, security, cleaning—could be and should be done by someone else.
Anyway, here’s what a New York Times editorial had to say about Bob Campeau at that time: “It took the special genius of Robert Campeau, chairman of the Campeau Corporation, to figure out how to bankrupt more than 250 profitable department stores. The dramatic jolt to Bloomingdale’s, Abraham & Straus, Jordan Marsh and the other proud stores reflects his overreaching grasp and oversized ego.”
But before he cratered his career, there was still the matter (seven years earlier) of acquiring the Admiralty portfolio at 20₵ on the dollar.
Shortly after our first and only meeting, the trustee unceremoniously announced that Campeau Corp was the successful bidder for all Admiralty properties.
As far as I could tell, they were the only bidder. I never got a call back from the receiver, who also refused to take any calls from me.
So I did something I don’t usually do, I called a lawyer—Brian Hebert, a tough talking, funny, profane guy.
“Brian, I have this document signed by Admiralty and Terrace. It’s called a joint venture agreement. It seems to suggest that if either party decides to sell its interest, it may do so provided that the other party is given a right to match said offer. Is that right?”
“Bruce can you fax me a copy of that agreement?” Brian proudly responded.
Proudly I say because Brian and I were among early adopters of facsimile machines, which were a wonder in those days. Imagine being able to send someone something without having to call a car or bike courier, in just minutes!
So after Brian confirmed that Terrace did indeed have a first refusal right, I called the great man himself in Toronto. It was a civil conversation. But Bob was adamant. He would buy the whole Admiralty portfolio or nothing.
When I mentioned having consulted a lawyer about Terrace’s right of first refusal, the conversation derailed in a hurry.
I found out it’s never a good idea to mention lawyers, even casually, if you are trying to reach a settlement.
“Why don’t you want to be partners with the great and powerful Campeau Corporation?” he asked me in a scene taken from Dorothy’s first visit to see the wizard of Oz.
I didn’t want to tell him the truth. The fact is that when you are a small company, and you get into bed with a gorilla, you’ll be crushed.
You see if the larger company has, say, a 100,000 square foot warehouse that they own 100% of down the street from another 100,000 square foot warehouse they own 50% of and you own the other half, it’s profitable for them to take all the tenants from your building (since, guaranteed, they’ll insist on operating control) to fill their vacant space.
Then after a couple of years of humongous losses, the larger company will call you up, and ask you, “Gee, we lost $2 million operating your building. When can we expect you to send us your share?”
Finally, a few months after you fail to pay your $1 million half of those losses, you’ll get another call that’ll go something like this.
“We value your half of the building at around a ½ million. But here’s the thing. We’re friends, right? We’ll take your 50% ownership off your hands for nothing and call it even. OK?”
Instead I told Bob, “I think those buildings need local ownership, Mr Campeau. I’d like to try running them myself. Maybe see what I can do…”
He hung up on me.
The trustee was prepared to argue a concept in law apparently called the “greater good”. Somehow, society would be better served by granting all these properties to Campeau Corporation, ignoring any legal rights purportedly held by small firms like Terrace.
It was in the best interest of the court, they argued, to support Campeau Corporation’s all-or-nothing ultimatum.
“So how much do you really want, Bruce?” Campeau Corp VP Andrew Jacob asked me ten minutes before the court hearing was set to begin. Bob Campeau was watching us from about 15 feet away, not deigning to make an approach himself.
“$2.1 million for our half, Mr Jacob. Same as I’ve said for the last 60 days.”
“No, really? Come on, be reasonable.”
“I am. Look those four buildings are worth $4.2 million. You know it. I know it. So our half is worth 2.1. You got Admiralty’s half for $400,000, 20 cents on the dollar, Mr Jacob. If you pay us 2.1 and Lawrence 400, that means you get these four buildings for $2.5 million, that’s 60 cents on the dollar. It’s either that or I’m exercising our first right of refusal in ten minutes, and I’ll own these buildings 100% for $400k.”
“You can’t win, Bruce,” Andrew said to a 28-year old rookie developer.
“We’ll see you in court, Mr Jacob.”
At 2 minutes before the hour, after conferring with Mr Campeau, Andrew made an offer for our half at $2 million cash.
Right there and then, Brian Hebert made out a bill of sale by hand (in blue ink), which he had me and Mr Campeau sign (separately).
Then he walked into court and announced a settlement had been reached.
Terrace was on its way to a successful re-launch, thanks to Robert Campeau, the munificent.
The above is an excerpt from the upcoming new book, Don’t Back Down, the real story of the founding of the NHL’s Ottawa Senators and why big leagues matter.
You can get an advance copy from http://www.brucemfirestone.com/ottawa-senators/ for $9.95. It is due out December 6, 2015, which is the 25th anniversary of the grant of conditional franchise by the National Hockey League to Ottawa.
 Robert Campeau’s Special Genius, January 17, 1990