Know Your Bets: Reichmann’s Failure to Risk Think

Author: Ron Dembo

Canadian real estate developer Paul Reichmann saw billions of dollars flow through his hands while transforming the city skylines of Toronto, New York and London. By the time he died on October 25, 2013, his family’s real estate business Olympia & York counted the World Financial Center in Lower Manhattan and Canary Wharf in London’s East End among its achievements.

An Empire Built on Risk

At their height in 1991 Paul and his two brothers held 8% of New York City’s commercial office space. That was double the amount of the Rockefellers, their nearest rival. And, in a dozen cities on both sides of the Atlantic they owned 40 major office towers and controlled $12.8 billion in assets, putting them in the top 5 of the Forbes wealth list.

But that didn’t stop them going bust in 1992 when they ran into cashflow problems while building their most ambitious project ever, Canary Wharf.

Paul was a thrill-seeker. During his career, he was well-known for taking enormous risks, betting that each new development project could outdo the preceding one in scale and impressiveness. According to a close family friend, “For Paul, it is like being a gambler, like being a heroin addict — he cannot stop.”

But Reichmann derided such criticism: “You don’t get the returns if you don’t take the risk,” he often said in interviews.[1]

And for a while his track record spoke for itself. In the notoriously cyclical real estate market, it seemed his timing was impeccable; many characterized him as a master negotiator able to pull all the right strings to secure complex financing structures and sail through red tape.

Reichmann’s Grandest Venture

Reichmann’s biggest gamble by far was committing Olympia & York to build Canary Wharf. Once the site of desolate docklands formed by a loop in the Thames, his vision was to turn the area into London’s new financial centre.

At the time, London was reluctant to abandon its traditional infrastructure and was staunchly anti-skyscraper. But Reichmann saw potential: “I had 29 meetings with business leaders in London to see if such a project made sense,” he told the National Post newspaper. “I did not ask them if they would move to Canary Wharf. The answer would have been no. My main question was: are you happy with your operating premises or do you see the need to do something dramatic? What I detected was the great majority were very unhappy with their premises, but their attitude was that they had no choice.”[2]

So, he befriended the then prime minister Margaret Thatcher, gaining generous tax benefits on the project and a promise from her to extend the Jubilee line out to the site so that it had the required transport connections. By his plans, the project was to have 24 buildings and 12.5 million square feet of office space, costing $8 billion.

The Tides of Fortune Turn

But Thatcher didn’t get around to extending the line until 1999, and many derided the project as a white elephant — a towering, characterless mess that no one wanted to rent.

And with a dearth of paying tenants, Olympia and York ran into liquidity problems. Combined with a property crash in the early 1990s and Reichmann’s decision to borrow heavily when diversifying into other businesses in the previous decade, Canary Wharf was enough to sink them.

Soon banks began to question the company’s crumbling finances, and when they missed a critical $17 million bond payment in May 1992 their creditors called time. By the middle of the next month they had simultaneously filed for bankruptcy in Toronto, New York and London.

Why Did Paul Fall?

Primarily Reichman’s failure was improper risk management, something to which he later admitted.

If we think about Reichmann’s actions, are they consistent with someone who was aware of his bets? When he shook hands with Thatcher, did he realize he was hinging the success of a multi-million-dollar project on the promise of a politician? You don’t have to do any complex scenario generation to realize that this was a crazy risk.

Reichmann eventually ended up pulling together a bunch of investors, including Wall Street banks and the Saudi Prince al-Waleed bin Talal, to buy back Canary Wharf from the creditors. But another slump in property values meant he finally lost control of the business in 2004 during a grim takeover battle. He managed to hang on to some shares, but only until a German bank repossessed them following the 2008 financial crisis.

Canary Wharf, in the meantime, had gained that access to the Jubilee Line (and the extension was joined by the Overground Line; today there are five Docklands Light Railway branches) and by 2000 boasted nearly full occupancy. Morgan Stanley, Credit Suisse First Boston, HSBC, Citigroup and Barclays are all tenants, and Canary Wharf now stands as London’s primary financial district and one of the world’s most iconic.



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