The Art of the Deal
“Conscience is the inner voice that warns us somebody may be looking.” — H.L. Mencken
Restlessly nursing his scotch, Roy sat opposite Ken waiting for his future to unfold. An enormous marble coffee table created an awkward distance between them. Ken seemed either not to notice or not to care. He was eager to begin an explanation of his company’s situation in Buxton. For Roy, it wasn’t the first time others would be instrumental in dealing the cards he would ultimately have to play.
“Alan assures me you’re financially sophisticated, Roy—and your background certainly implies it—but if something doesn’t sound right, say so.”
“I’m not shy, Ken. And we both know if you thought that I couldn’t follow whatever it is you’re about to propose I wouldn’t be here.”
Ken nodded as he watched Roy fidget in his chair.
“You seem uneasy Roy. Are you?”
“It’d be understandable if you were. This isn’t your run-of-the-mill proposal and you have been told almost nothing about it. I could have had Alan prep you, but I preferred to do that myself. So you’re fine?”
“I’m fine, Ken. Just curious.”
“Good. Maybe you’re afraid you’ll like what you hear.”
“Maybe.” Roy laughed.
Finishing his scotch quickly, Roy set his glass on the table. Unsure what to make of Ken, he nevertheless decided to give him the benefit of the doubt. Ken was, after all, a friend of Alan’s. That didn’t mean Roy didn’t have concerns. He had been surprised to learn that Alan had had more substantial financial dealings with Ken than he’d realized. That wasn’t exactly a problem, but it again raised the specter that Alan—by arranging the meeting—was, first and foremost, doing Ken’s bidding. Roy’s friendship with Alan dated from their college days, so he trusted him. He would hear Ken out. But contrary to Ken’s comment, he wasn’t expecting to like what he heard. He suspected he was being set up.
To his credit, Alan had tried to prepare Roy for the meeting; not the easiest of tasks as Roy wasn’t the best listener. Ken, Alan told him, was a shrewd, experienced businessman and an expert negotiator. Don’t try to be smart. You’ll only look foolish. Just pay attention and make sure you understand the implications of the deal. Alan did, however, assure Roy that Ken had no desire to deceive him. He needed a willing partner.
“My turn to ask a favor,” Ken said.
“Hear me out before you decide if you like what I have to offer.”
“Not a problem,” Roy said, although he’d already half made up his mind.”
Before launching into his proposal, Ken got up to refresh his drink. He offered to do the same for Roy, but Roy declined. He was already at a disadvantage; no need to make it worse.
“My company owns property in Buxton, North Carolina and it’s become a problem. I wish we didn’t own it anymore, but we do. I need someone smart, someone with a reasonable amount of financial acumen to get involved. But I also need someone who’s not afraid to bend the rules and who doesn’t see everything as either black or white.” Ken paused and looked directly at Roy. “And, of course, someone who needs money.”
“Sounds like the introduction to a bribe,” Roy joked. Unfortunately, his attempt at humor fell flat. Ken wasn’t amused.
“Let’s not get off to a bad start, Roy There’s an opportunity here for you if you want to hear it. If you don’t, that’s fine, too.”
“No, I do. Otherwise I wouldn’t have come today.” That wasn’t exactly true. He’d come, in large part, to get Alan off his back. But Roy also didn’t want to have made the trip for nothing. “I’m suspicious by nature. ‘Bending the rules’ opens up a lot of possibilities.”
Ken grew silent. He looked for a moment as if he were considering ending the conversation.
“You know, Roy, you’re welcome to leave at any time. No hard feelings. Alan’s job was to get you here; mine is to keep you here, if I can. There’s nothing I’m about to tell you that’s so privileged that it would present a problem for me if you chose not to participate.”
Ken paused, waiting for Roy to respond. He didn’t.
“I’ll continue then?”
“Yeah, sure.” But there was uncertainty in Roy’s voice. Part of him did want to leave.
“The property is on the Outer Banks. I acquired it somewhat by accident fifteen years ago. It’s directly on the ocean. There are twenty-five high-end bungalows, scattered over more than sixty acres. They’re almost exclusively seasonal rentals and they’re not cheap. Not even close.”
“Seventy-five hundred a month. Each unit is more than twenty-five hundred square feet spread over two levels with large outdoor porches and easy access to the beach. They were constructed in the 1950s. An enterprising local architect modified, without permission, a Frank Lloyd Wright design. They were built to last and have been meticulously maintained over the years. Considered architectural gems, they’re well-appointed and extremely comfortable living spaces—thus the price. But there’s a problem.”
“They could easily not be there in another ten or twenty years. They’re too close to the water. Erosion wasn’t a big issue when they were built, but it is now. I acquired them as a favor to another developer. He needed cash. I didn’t really want to own land in North Carolina, but this guy was an up-and-comer in New York at the time, so I made an investment in him as much as in the property. There wasn’t any downside I could see at the time; clearly, I was short-sighted.”
“You mean they’re going to be worthless at some point.”
“At some point, they’re not going to exist. But the problem is actually larger and more immediate than that.”
“Really,” Roy said, vaguely entertained by Ken’s dilemma.
Ken leaned back and lit a cigarette, offering one to Roy. He declined.
“The value of the property—on our company’s books—is close to fifty million dollars. That was true once, but no longer. It’s now more like twenty million. Of course, I didn’t pay anywhere near that much, but still. Currently, The Bungalows generate almost two million in annual revenue. At best, if someone believed they’d last another twenty years I might get twenty million—but that’s a big ‘if’. So, how, you ask, can they be worth fifty million? Simple. They’re not.”
“So you need to write down your investment by thirty million dollars. And that, I presume, is a problem for you.” Roy had no idea of the size of Ken’s company so he was unable to determine exactly how big a loss that might represent.
“It would be a problem for anyone, Roy, but now is a particularly bad time for my company. I’m about to negotiate construction financing for an extremely expensive high-rise office building here in Manhattan. Wherever I borrow the necessary funds, significant due diligence will ensue. It won’t look good if they discover an asset worth twenty million—at best—listed at fifty. In short, I need to get the Buxton property off my balance sheet.”
“And writing it off isn’t an option?”
“Hardly. We can’t afford to show that kind of loss. Wouldn’t look good. Wouldn’t inspire confidence in potential creditors. If I wanted to do that, I already have an offer for the property, but it’s way too low to do me any good. Besides, I don’t like the guy. He’s a competitor and something of a jerk. No, I need to get the property off the company’s books without showing a loss.”
“Nice trick, if you can do it.”
“I can do it.”
“With your help.”
“You’re joking, right?”
“Do I look like I’m joking?”
He didn’t. Perplexed and a bit unnerved, Roy leaned forward and helped himself to a cigarette. He hadn’t smoked in a long while, but this situation seemed to warrant it as uncharted territory clearly lay ahead.
“I need someone to buy the property at a price I set. I thought maybe you might be interested. Are you, Roy? I could make a decent profit and an embarrassing liability will disappear from my balance sheet.”
Rattled, Roy quickly proceeded to do exactly what Alan had advised him not to.
“Sure. Great. Had I’d known a little more about your proposal beforehand, I would have brought my checkbook. Will a handshake do?”
Ken appreciated neither Roy’s sarcasm nor his cavalier attitude, but chose to overlook both for the moment.
“In a way, Roy, it will. What I really need is your permission, not your money. If you’re interested, attorneys will handle the transaction. No money need change hands. To be frank, I just need someone willing to put his name on the deed.”
“Sounds a bit preposterous.”
“I assure you, Roy, it’s not. Trust me. If it were, I wouldn’t be suggesting it. Actually, it’s not even a particularly novel method for removing troublesome assets from a company’s books. It’s been done many times before.
“You would know better than I. Perhaps I’m just not as sophisticated as we both might like, but it certainly sounds like I wasn’t that far off earlier. I have to say, Ken, the idea strikes me as crazy. It sounds more like the script for a bad B movie than a real opportunity.”
“Sorry you feel that way, Roy. Believe me, it’s not. We picked you for good reason—or rather Alan did. I hope he didn’t make a mistake. Should I continue?”
“Sure. Why not?”
“Good. But if you’re really not interested please don’t waste my time.”
Roy nodded in agreement.
“As I said, this will be solely a paper transaction. But it will include a low interest loan procured on your behalf. A loan, I might add, secured by assets unrelated to you since you don’t have any assets. Or do you, Roy?”
Roy didn’t respond. There was no need. It wasn’t a question.
“You’ll use the loan to buy the property, and then you’ll use the income from the property to make the interest and principal payments on the loan. A simple arrangement and, as I said, lawyers will handle the details. All you need to do is to lend your name and management expertise to the cause.”
“Who else is privy to this proposal? Alan?”
“Yes, Alan. But just enough to see if he knew anyone qualified who might also be interested. As luck would have it, he did.”
Roy wasn’t buying Ken’s explanation. He was sure Alan knew the details, but there was no reason to push the issue.
“I’ll remember to thank him.”
Sarcasm was Roy’s default mode, but his concern was real and it showed.
“Something bothering you, Roy?”
“How legal is all this, really?”
“What does that mean?”
“Well, some people might have trouble with it. It does appear somewhat deceptive, but it’s really not. When all’s said and done, it could be very beneficial for both of us. Besides, nobody’s truly at risk here.”
“Unless someone happens to have occasion to look into the circumstances of the transaction.”
“That’s not going to happen, Roy. There’s not going to be any reason for anyone to do any checking. Due diligence will only turn up a sale of a property the company owned in North Carolina, one sale among many. No one will have any reason to assume anything unusual. You have no reason to worry.”
“Really. I should just take your word for it? And where is a loan that size coming from? You haven’t mentioned that.”
“That’s right. I haven’t.”
“And you’re not going to. Right?”
“And you’re comfortable telling me all this? Comfortable I’ll keep it to myself? We both know that if this isn’t fraud, it’s the next best thing.”
“I think that’s a harsh judgment, Roy. I’d be careful there if I were you. It’s not fraud. It’s creative accounting and it’s done all the time. And no, I’m not afraid you’re going to say anything. Frankly, Roy, I’m surprised you haven’t asked about what precisely is in it for you.”
“I knew you’d get around to it eventually,” Roy said, a bit arrogantly.
Ken handed Roy a spreadsheet. “Don’t look at the numbers now. Review them at home. When you’re ready, we’ll talk again. But don’t take too long. I need to get this done. Understand, though, that your share of the monthly income—even after loan payments—will be significantly more than anything you ever hoped to see. You need to think about that.”
Roy already was.
“There is one additional piece of the puzzle, though, you’ll want to consider. The loan at the heart of this transaction will be callable on six months notice. So, although your name—or actually the name of the LLC we’ll create—will be on the deed, I’m not exactly relinquishing control. The money you make will be yours, but I can stop the flow any time and, for that matter, reclaim the property. Or rather the loaning entity can.”
Finally the full implication of the deal became clear. Roy already understood he wasn’t being given the opportunity to own anything. He would be paid for the use of his name and his ability to keep things under control in Buxton. Now, though, it appeared the generous income stream his participation would garner could be precipitously withdrawn. The whole idea seemed increasingly absurd to Roy, albeit well thought out. All he needed to do now was sign off on it and pack his bags.
The discussion in Ken’s office continued for some time. Understandably, Roy had a lot of questions. But as soon as he was back in Bed-Stuy, he called Alan.
“Jesus, you could have prepared me a little better.”
“Ken asked me not to.”
“He wanted to sell you on the idea himself. He’s in more of a bind than he probably let on. He needs to get this Buxton business taken care of fairly soon.”
“Are you involved in any way?
“No. Ken just wanted to know if I knew of anyone who might be willing to take a little risk for a sizeable return. I thought of you.”
“You know, Alan, it all seems quite farfetched. If Alison were still around I doubt I would have even agreed to meet Ken, let alone consider leaving New York or engaging in an arrangement that, at the very least, strikes me as highly irregular. Ken may be comfortable minimizing the ethics of this. I’m not.”
“When did you get so high and mighty?
“It’s an opportunity, Roy. Not without risk, but you’re never going to make any money in your current situation. Showing strangers apartments you’d never consider living in is not your idea of a good time. It’s not who you are, Roy. And remember, it was hard enough for you to find your current shithole of a job. Ken’s deal could eliminate your financial problems overnight. You’ve always said you wanted to live by the ocean. Here’s your chance. And, who knows, the change of scenery might even spur you to write—if you can find the discipline. How did you leave it with Ken?”
“He said take a few days, but not much longer.”
“So what are you going to do?”
“I don’t know. I honestly don’t. One minute I think it’s idiotic and the next I’m buying a plane ticket.”
“Do yourself a favor, Roy. Buy the plane ticket and stop thinking about it.”
…to be continued…