We also manage a real-estate investment fund. Marketed as a high-risk, high-return vehicle, it allows the shareholders to get in on juicy property deals in the ‘developing world’ (Iceland excluded, of course). The fund launched and closed before I started, with some of the capital already deployed.
The fund is a cooperative venture with a firm called Askar Capital, one of the many Reykjavík investment companies that spring up during these years15. Askar claims special expertise in real estate, although around this time they also try to get us excited about their expertise in junk American subprime equity tranches offered by Bear Stearns.
When the big foreign money came into Iceland earlier in the decade, it began to inflate a vast bubble of anything and everything that a person could buy; things like local real estate and stocks mushroomed in value. But there is just not that much for sale in the tiny economy of Iceland. So a lot of this new money also flowed back offshore—for example, into property development in eastern Europe—via newly created investment companies. Askar was one of these.
Fabio and I take a trip to Bucharest, where Askar has chartered a helicopter to fly us around and look at potential development sites. The Icelandic firm is putting big money into this country, which has been in the middle of a real estate boom for some years. Now they want to get us juiced up to invest even more alongside them. After seeing a couple of potential projects closer to the city center, we fly far out of Bucharest in a rattling chopper over forests, rivers, and dams. We land in a bright green field in the middle of nowhere, hot Romanian summer all around. It’s a beautiful country and an expensive junket.
The most promising thing we see is a piece of formerly government-controlled land in an up-and-coming suburb of Bucharest. The proposal: knock down the old concrete building that sits there and throw up an office tower. The plot is situated kitty-corner from a tiny but allegedly trendy mall: could this be the CambridgeSide Galleria of Romania?
Askar says they have done the due diligence on the project, meaning they have dotted the i’s and crossed the t’s in a thorough feasibility and background check. They are partnered with a local developer, with whom they are already working on another project. They tell us the work is “shovel ready”; as soon as they have the cash from our fund they can rock and roll.
When we get back, Fabio discusses the trip with our boss and they agree to commit to the project. I am in the dark about this decision, but later find out that they’ve gone forward with it, and wired €5 million out of the fund to buy the land and start the project.
This is the smallest project our real estate fund takes on, and it seems to get lost in the shuffle. Each financial quarter we get a report from Askar on the progress of all the investments: in Turkey, Dubai, and now Romania. I’ve been assigned to generate an investor report on the back of this, and so I dutifully copy-paste, clean up the English, and get the document ready to go out to investors. I am curious about the one project I got to see in person, but the updates on ‘my’ office tower stay verbatim for two or three reporting quarters in a row. By this time the original timeline called for the new tower to be nearly finished.
I push on Fabio and the boss, who meet with Askar more often than I do. Nobody seems to know much about this investment. Finally in early 2008 they relent and let me do some digging. Our development partner in Romania meanwhile tells us there might be a buyer interested in our parcel, at a price around 10% higher than we paid, giving the fund some profit on the deal and letting us wire cash back to our investors and walk away.
Fabio and I take this back to our boss, advising that we move forward on soliciting a formal offer for the lot from this buyer.
“Absolutely not,” he replies. “We won’t even consider this.”
“Why wouldn’t we at least look to see if this is a serious offer?” I counter.
“Because 10% over eight months does not meet our return target for this fund.” The Commandment has been handed down on a stone tablet. This topic is now closed.
So, we will need to continue our work with Askar to ensure a successful project during these increasingly shaky markets of 2008. And despite their claims of investing expertise, what Askar seems to be especially good at is ultra-high employee turnover. Each time we touch base on the outstanding projects, the last guy has left and we are dealing with a new project manager. I ask for an update on the Romanian project. They send me the same information they’ve been sending for half a year: the building permit has been issued and work will start soon. I call the new guy up. And it’s Pétur, my old CEO from Zodiac! Apparently even he can be tempted away by the Dark Side.
“Hey, do you have a copy of this building permit?”
“Yeah, it’s in the file,” he says. “But it’s in Romanian.”
“That’s OK, send it over,” I say. “How about the old structure, what’s the status there?”
“Oh that’s already been demolished,” he says. “They have started the foundation for the tower.”
It takes a few more emails and a phone call, but finally they send me a PDF of the building permit. The file is a grainy one-pager, dated a few years in the past. This permit is not newly issued at all, the first warning sign. After all, our reports to investors have been trumpeting receipt of this document as the first real accomplishment. Even more oddly, when I translate the title of the document from Romanian, I don’t get ‘building permit’ at all. It says “zoning certificate”. This faded document turns out to merely be proof that the building site is zoned for industrial use. There is no mention of our project at all.
On top of that, Askar’s reports of construction progress over the past months have been vague and contradictory. I email a friend who studies in Bucharest. I tell her if she wants to make a few bucks I’ll send her out to the building site to report back on what’s going on over there. She doesn’t want money. She says she’d like to take a trip out there anyway. The next day, I get an email back from her and inside find four blurry Nokia phone camera photos. The site looks exactly as it did when I saw it nearly a year before: the old concrete building still stands, with some worn-down Ceaușescu-era cars parked in front. Nothing has happened.
Confronted, Askar’s latest project team is forced to admit they have no idea what’s going on. Pétur, who inherited this whole mess, seems embarrassed. Fabio and I have an easy time figuring out what’s really happened: Askar has invested its own capital in a much bigger building site in Bucharest and the entirety of their thinly staffed efforts have been going into that. Trying to make lemonade, Askar circulates a new plan for our investment, one that calls for a 30-storey residential tower. They have chosen an even more grandiose project to try to meet the return targets of the fund in a market that gets weaker by the day.
Armed with the knowledge that Askar has been misleading us for a year, I draw up a comprehensive list of questions about the deal, and my boss sends me on a fact-finding trip to Bucharest. Our investment is a shambles. The land our fund bought is part of a larger parcel of government land arbitrarily cut in half. The old tower that we plan to knock down on our side of the lot is physically connected to another, lower structure, so that in order to build anything new, we first need to saw the second building in half! The Siamese twin is not an abandoned facility either, rather the headquarters of the national institute for nanotechnology research. I book a meeting with the head of the agency.
“You’re the first person who’s come and talked to me,” he says, welcoming us into his spacious 1970s office. Together, we go over the project plans, which call for pilings to be driven deep into the ground in the construction of our fund-return-target-achieving skyscraper.
“But this will interfere with our delicate experiments,” he says, over and over, like a mantra. The newest Askar shill, who looks like he’d much rather be out on the links, keeps intoning that there will be minimal disruption from this activity. But Mr. Nanotech has an ace up his sleeve: not only is our land industrial, and so unsuitable for either an office tower or a residential tower, but any change to this requires approval from a local official he happens to know well. There is no way we do any project without his green light.
Our local development partner is a gentle and soft-spoken man of about 30, heir to a wealthy Romanian family. We met on the first trip to Bucharest. Since then I have learned from the Askar boys that he studied theology and planned to become a priest. But something changed and he is entering the family business with this, his first-ever real estate development project. It also turns out that the other party in the land deal—the recipient of that €5m disbursement we made—is his own father. It seems like our office and/or residential tower may be a family test case: the first chance for the young seminarian to prove his business acumen to his dad.
And now the project is stuck. No way to get a permit to build anything at all on this half of a site, and no way to get out, either: that buyer from last winter is last winter’s news, with Romanian real estate prices now in freefall. I solicit valuation estimates from two local estate agents, and as I feared the price per square meter is already well below our cost.
“If you want this project to succeed, why don’t you have a guy down here full time to manage it?” asks Askar’s Romanian man on the ground to me as we drive back downtown from the project site.
“I thought you were that guy,” I tell him.
“No way, chief,” he says. “I have too much to do on the big project.”
Notes
15 Active 2007–10, Askar was technically designated an “investment bank” by the FME.