Bad Deal: The Reichmanns' attempt to build Canary Wharf (1987)
Good Deal, Bad Deal

Paul Reichmann's arrogance in dealing with bankers came back to haunt him when the family overextended itself in 1992.

What Went Wrong:
So great was the Reichamnn family reputation that bankers begged to loan the Reichmanns money. Paul Reichmann's arrogance in dealing with bankers came back to haunt him when the family overextended itself in 1992. The Canary Wharf project required massive amounts of debt and enormous cooperation form lenders. They provided it, but the Reichmanns did not reciprocate. When the project fell behind schedule and local economic conditions worsened, the lenders remembered this attitude, crushing the family's hopes for the project.

The Reichmann brothers - Paul, Albert, and Ralph - and their company, Olympia & York Developments, deserve inclusion in this book for their financial acument in becoming Manhattan's biggest landlord.

In the scope of the financial catastrophe that followed, however, based in part of what they did with their fortune, their earlier success and its fruits were swept up in a much larger business failure. In 1987, Paul Reichmann (the leader of the brothers' real estate ventures) purchased 71 acres on the Thames riverfront in London named the Isle of Dogs.

Christened Canary Wharf, Reichmann predicted that Prime Minister Margaret Thatcher would lift London back to its place as the financial center of Europe and the world's largest financial institutions would eventually bristle at the size and cost of accommodations in Long's financial fistrict a couple miles away.

Thus, he sunk somewhere between $2 and $3.6 billion of the family's fortune into developing a massive office complex. In total, the project would include construction of 21 buildings and would cost more than $10 billion. To finance even the first part of this monolith, the other properties of Olympia & York Developments had to be leveraged.

That Robert Campeau and Donald Trump were laid low by excessive debt surprised very few people. Although their high public profiles and lavish lifestyles had little to do with their financial problems, it was easy to imagine how bad judgments and adverse circumstances caught up with them. Such a thing was considered unthinkable with Paul Reichmann, his brothers, and their company.

The Reichmanns at least in appearance, were the embodiment of conservative lifestyles and financial responsibility. They were devoutly religious, shunned the press, and lived an insular, conservative lifestyle. But lifestyle and business do not always coincide. Although the Reichmanns made some very smart business deals, making billions in the process, they committed the same errors as their flashier compatriots. They took reckless risks and alienated people and institutions upon which their future depended. Their ambitions for Canary Wharf met the same end as their flamboyant counterparts.

The first phase of Canary Wharf was completed in September 1991. The Reichmanns had extended themselves to complete it, but it was clear that they would need even greater reserves. At opening, the first-phase buildings were only 57 percent leased. The timing was awful: London was going through its worst real estate recession since World War II. Vacancies in London's financial district were rising, and rents were coming down. It was a buyer's, and lessee's, market. For the Reichmanns, who built their fortune in Toronto and New York on purchasing properties during similar downturns, it did not bode well that they not only couldn't take advantage of this London downturn, but they were frozen in place as victims of it.

Slumps in the North American real estate market also hurt Olympia & York's cash flow. Its attempt to diversify beyond real estate cost it money better spent shorting up its properties. Its other investments - Gulf Canada Resources, Abitbi-Price (the world's largest producer of newsprint), and others - fared poorly as well. The family got a black eye, and took a loss of several hundred million dollars from its $700 million investment in Robert Campeau's disastrous takeovers. By the end of 1991, the Reichmann empire, built on $20 billion in debt, was threatening to collapse.

With the prime assets owned throughout the world by the Reichmanns, and Paul Reichmann's unquestioned integrity, the family could have saved most of its fortune through one of two steps: sale of some properties (at, unfortunately, depressed prices) or negotiation with lenders for forbearance of debt in exchange for some equity. Real estate workouts are complex - and this would have been the most complex one ever - but they happen all the time, and the Reichmanns had the savvy, the quality assets, and the integrity to emerge relatively prosperous.

Here Paul Reichmann committed his next, and most costly, gaffe. He refused to give in to his creditors. He would not give them equity, a voice in day-to-day operations, or even up-to-date financial information. So certain was he of his correctness that he practically dared the banks to throw Olympia & York into bankruptcy in the United States, Canada, Great Britain, and Japan. He did not think the bankers could handle the massive write-offs of a bankruptcy, or would take the blame for risking a chain reaction of negative impacts on the world's real estate, banking, and financial markets.

With the Reichmanns, the traditional banking relationship was turned on its head. Paul Reichmann, rather than being a supplicant eager to please banks in exchange for loans, had so much influence that he could raise tens, or even hundreds of millions of dollars without providing financial information of making any effort to be accountable. When the Reichmann family's financial situation worsened in March 1992 and it had to restructure or default on the original terms of its loans, Reichmann did not change his attitude towards his lenders. The restructuring plan he presented in nearly 100 banks provided little in the way of equity or financial information. All it really did was ask for forbearances - and more money, which was desperately needed to continue development of Canary Wharf.

In May 1992, creditors called his bluff and began foreclosing on collateral. Reichmann overestimated the strength of his hand. Because, in part, Olympia & York owed so many banks, and was indebted to all the world's largest financial institutions, those institutions were able to shoulder the blow, and no one bank had gone too far in lending to the Reichmanns. Olympia & York filed bankruptcy petitions around the world. When the dust settled, the family, according to one magazine, went from "super rich" to "very rich." The family's net worth, estimated by Forbes in 1991 at $7 billion, was less than a tenth of that my 1992. The Reichmanns lost their entire interest in Canary Wharf.

The story does not end there, though. in a stunning reversal of fortune, today Paul Reichmann is bank in charge of Canary Wharf. Immediately after being deposed from his position in 1992, he tried to form a group of investors to buy the development back from the banks who owned it in bankruptcy. Naturally, they turned him down.

In 1995, however, bringing in the Tisch famili, Michael Price, Edmund Safra, Saudi Prince Alwaleed bin Talal, and other investors, Reichmann reacquired Canary Wharf. This time, however, he owns only a small minority stake. That stake, however, originally valued at about $30 to $60 million, has increased significantly in value. London's long-promised transportation imporovements from downtown to the area - the Limehouse Link Tunnel and the Docklands light rail - have finally been completed. An upturn in the real estate market has jacked up rents and occupancy rates. A public offering reduced the debt on the project. Reichmann's stake, based on the market capitalization of the company in 1999, was worth between $200 and $400 million.

Michael Craig

3/19/07

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