http://members.forbes.com/global/1999/0503/0209068a_print.html
Eddie Gilbert wants you to buy in
Convicted embezzler and stock manipulator Edward M. Gilbert is back in business. And if you're sure that you would never pour money into a real estate partnership assembled by a two-time prison resident who once fled from the U.S. to Brazil to escape lenders, then you don't know Eddie Gilbert. The charismatic 76-year-old is a seductive salesman. He now controls $250 million put up by 1,500 limited partners, among them many seasoned investors, including former Salomon Brothers vice chairman Bruce Carp and former Drexel Burnham Lambert chairman Robert Linton.
He's made some investors good money and made himself a fortune.
Very little of the money at risk in his deals, of course, is his. His rehabilitation proves one thing: You can make a nice pile of money by buying on leverage in a rising market. If the market for the office buildings, warehouses and apartments that Gilbert is buying goes the other way, Gilbert's limited partners will be badly hurt. But he won't.
Gilbert's rise from disgrace has been a long time coming. In 1958, when he was 35, the press dubbed him "the boy wonder of Wall Street" when he seized control of hardwood flooring maker E.L. Bruce Co. with a brazen, open-market share buyout.
Then, a huge blunder. When the stock market crashed in the spring of 1962, Gilbert personally lost $20 million in the stock of fiberboard maker Celotex Corp. To meet margin calls, he took $2 million from the till at E.L. Bruce.
Gilbert claimed he had the board's tacit consent for the withdrawal, since he was helping Bruce buy Celotex. With lenders and Bruce massing against him, Gilbert hopped a plane to Rio de Janeiro. He voluntarily returned five months later and pleaded guilty to fraud.
After serving two years, Gilbert earned a living giving financial advice to family and friends. In 1977 a federal appeals court found that Gilbert had, indeed, merely borrowed the $2 million from E.L. Bruce, not stolen it. Any cleansing effect on Gilbert's reputation was short-lived.
In 1981 he was convicted of stock manipulation and served a 21 month sentence.
A decade ago Gilbert vanished -- or seemed to. Some old Wall Streeters assumed he'd died.
Hardly. Eddie Gilbert is thriving in Santa Fe, New Mexico. He runs BGK Group, a collection of affiliated corporations that, through 90 real estate limited partnerships, controls 230 properties in 25 states.
Thanks to a booming U.S. real estate market, limited partners who invested from roughly 1991 through 1994 have doubled or tripled their money. The rewards have been even greater for Gilbert and his two cofounders, former options traders Ed Berman and Fred H. Kolber. The three don't have to put up any money, but they collect fees and half of any profit cleared after the limited partners have made back their original investments. The arrangement earned Gilbert $8 million last year. He claims that his net worth is more than $100 million.
When the real estate market overheated last year, Gilbert picked up steam, agreeing to buy eight properties for $80 million from September through December.
"They're all great deals," says Gilbert, a short, fit-looking fellow who comes across as far younger than his age. Here's the pitch. Gilbert spots, say, an office building that looks underpriced. He makes an offer for it; if the offer is accepted, he prints up a limited partnership prospectus. Investors put up the necessary cash, and the limited partnership borrows the rest.
Using rental income from the building, Gilbert right away starts giving investors back big chunks of their money. Mortgage terms are always negotiated with a very slow repayment of principal. He creates a 20% first-year payback, whether the property earns any such return or not. If not, investors are simply getting back their own money and going into hock to do it.
Eventually, the building is put on the block. Up to this point, investors might have made some real money -- or they might just be back where they started. The payouts are only partly taxable, thanks to depreciation deductions and the fact that some portion is nothing but a return of capital. If the property has appreciated, though, there is a nice profit after repayment of the mortgage. Payday for Gilbert: Half of any profit from this point on, from operating the building or selling it, is BGK's.
In a rising market, everyone makes good money. In 1993 BGK paid $5.9 million for an Albuquerque, New Mexico, shopping center called Plaza at Paseo del Norte. It borrowed $4.3 million and raised $1.8 million from limited partners. BGK sold an adjacent parcel of land, later refinanced the remaining property with an additional $2.3 million of debt and repaid investors within two years. Last June the shopping center was sold to Price REIT of San Diego, California, for $17.8 million, with the limited partners keeping half of an $11.4 million profit.
Results like these have brought a stream of customers to BGK's door and have also tended to overshadow troubling details about BGK's deals.
Start with the "heads we both win, tails you lose" relationship between BGK and its limited partners. If a deal founders, the partners take the hit, not BGK. In 1993 a limited partnershippaid $2.1 million for part of the Pinehill Plaza strip mall in Petersburg, Virginia; 18 months later, after a tenant folded, BGK sold for $1.5 million. The partners who'd put up $600,000, lost $360,000; BGK lost nothing.
Second, there are the fees. In BGK's recent deals, "closing costs" are 3% of the property's price, but they eat up 15 cents of each investor dollar. A third of the fee goes to BGK, which charges each partnership 4% of gross rents to manage the buildings.
Then there's the leverage. Early BGK partnerships typically bought their properties with 70% debt and 30% cash. Recent deals use 80% debt.
When a partnership's rent revenue can't support the 20% annual payouts that investors have come to expect, Gilbert lends the partnership money from BGK's corporate account -- at up to 1.5 points over prime -- to cover the distributions.
Up to now, declining interest rates, surging property values and hordes of wealthy buyers in the real estate market have been the wind at BGK's back. But conditions have changed, and many potential property buyers are lying low.
At the same time, mid-size to large, high-quality, well-located properties are getting expensive. That's why Gilbert is now buying smaller properties in poorer locations. In February BGK paid John Hancock Mutual Life Insurance $3.3 million for a 5,000-square-meter, single-story office complex in Mobile, Alabama, called University Place.
The limited partnership borrowed $2.6 million, or 80%, and put up $700,000 in cash for the purchase and $250,000 for fees and a reserve.
At its current 90% occupancy rate, University Place is supposed to generate a respectable 12% of the purchase price. After mortgage payments, there will be $190,000 left for limited partners -- the magic 20%.
Any slowdown in revenue will cut into that 20%, but say investors do get their money back over five years. What then? Gilbert thinks he'll have boosted University Place's operating income by 45% and that he'll find a buyer willing to take a 9% yield.
If a slowdown comes, however, the kinds of properties BGK is buying now will be among the hardest hit. Remember: There's no heavier object than a leveraged building in a down market. You can't move it -- not even if you're Eddie Gilbert.