did madoff take family money?


seems he was quite picky in choosing who to defraud

I actually meant the promissory note is in the process of being signed by us but not officially done so yet since I'm waiting on him to receive my copy with my signature and he said he would send me back a copy for my own records with his signature as well. He did mention that after he receives the note and money that he would be sending me something (i forget what exactly) which showed my ownership in the company so I guess I might be getting it at that point. Also, what kind of lawyer should I talk to?

As far as a minority stake being illiquid, I thought I'd have the option to sell my shares to somebody else or even back to him at any point in time... or does it not work that way? What is a put option? I'm guessing it's the option to sell my shares or get out of the investment somehow? What is the strike price?

This is something I will be doing as well as another part of what he offered me. I'm going to be working with him on another project and this was something he told me I'd be able to invest in passively if I were interested.

Hmmm, maybe he's a bankroll nit? I know in poker I've never got 3% of my roll in play at one time. I don't think this deal is taking up much of his time though fwiw, he's just a financial investor so I believe it's rather passive for him too, no? I know he mentioned that the main reason he was even around much in the beginning was to ensure the construction of the hotel stayed within budget and then after that he's not going to be there as much since he's no expert on managing/operating a hotel.

You really think this would be a security? Accredited investor doesnt come up in any ohter context does it?

"PROMISSORY NOTE AND STOCK OPTION

$150,000.00

[Family member's investment corporation], holds mortgages against and stock/shares of [Hotel corporation he created], which owns a hotel and property in [location of Hotel].

For and in consideration of One Hundred Fifty Thousand and No/100 Dollars ($150,000.00), [Family member's corporation] will pay from money it receives from [Hotel] to [Me], principal plus interest on the above sum at a rate of seven percent (7%), with the first installment being due [date], and continuing thereafter each month for sixty (60) consecutive months until paid in full. A copy of the Amortization Schedule is attached hereto.
In addition, said [Me] shall be issued, by [Family member corporation] five percent (5%) of its interest in [Hotel corporation], which will constitute three percent (3%) of the current total outstanding shares of [Hotel corporation].
[Me] shall receive a prorated basis an interest in the property with [Family member corporation] should [Hotel corporation] default in payment and [Family member corporation] shall take control and ownership of the hotel property. Specifically, should [Family member corporation] come to own through foreclosure one hundred percent (100%) of [Hotel corporation]'s properties, then [Me] shall have his interest protected by having a five percent (5%) interest in [Family member's corporation]. holding from [Hotel corporation]
AGREED TO:

____________________________________
[Me]


i'm only in law school but is it just me or is the structure of this deal kind of odd?

if you wanted a percentage of ownership of the hotel why wouldn't you just buy shares in the hotel corporation for? instead, your family member has you essentially lending his corp 150k with the promise of interest and then also turning over to you 5% of his 3% interest in the hotel, whatever that ends up being worth. what type of shares are these? are they preferred shares or are they common? do they have voting rights? what is the par value of the shares? what does the balance sheet of the hotel corporation look like? is it massively leveraged with debt that will have preference over your interest in case of default? what if your family member's corporation defaults on the note? does it have assets other than its shares in the hotel that you could collect on? does it have other debt that will have preference over yours?

you'll receive a prorated share of what should hotel corp default in payment of what? how would your family member's corp get 100% ownership of hotel corp in case of default when it only has a 3% interest to begin with? own 100% of hotel corporation's properties? what does that mean?

if the hotel is worth 3m and that is the only asset on the hotel corp's balance sheet and your family members corp owns 3% of that and that is the family corp's sole asset then your family member's corp is only worth 90k??? what else does family member corp own that is going to secure your 150k note? and regardless, your actual interest in the hotel, which is what you seem most interested in, is worth 5% of 90k??????

i'm sure you trust your family member but this just doesn't smell right to me. you need to get way more information about this before you cut this guy a check. for all you know, your family member may have been worth a lot of money on paper but that could have been leveraged to the hilt and then the real estate market fell out and he could be worth nada now. that might explain why he is coming to you for a 150k loan.

in short, this type of deal could make sense if you were a sophisticated investor and had all the knowledge and information you needed to make an informed decision. but instead, imo, you're playing over your head and this looks like your getting taken for a ride by your family member. wouldn't be the first time that's happened.

you must be good poker player to have made that much cash so i'm you understand this concept - if you can't spot the sucker in the first 30 minutes at the table, it's you. 150k is a lot of money. don't throw it away on this sort of a gamble.

Big MISTAKE.

Even if this deal works out your making a -EV business move.

Bad decision back out NOW.

There are many ways a put option could be structured, but what I have in mind is a put option in which after a couple of years you have the option of forcing your family member or the company to buy back your 3% interest at a predetermined price (the strike price). You don't necessarily need a put option to sell the stock, but there isn't really a big market out there for small interests in privately held corporations. So without the put option, you might get stuck doing a lot of legwork trying to find a buyer if you want to sell.

My understanding of the arrangement is this: Family member corp owns 60% of the hotel corp, but also has a lien on the hotel corp's property and right to foreclose if hotel corp defaults. In the event of default, newbie's 3% stake in the hotel corp would be converted into a 5% stake in family member corp, giving him 3% indirect ownership of the foreclosed property.

My understanding of the arrangement is this: Family member corp owns 60% of the hotel corp, but also has a lien on the hotel corp's property and right to foreclose if hotel corp defaults. In the event of default, newbie's 3% stake in the hotel corp would be converted into a 5% stake in family member corp, giving him 3% indirect ownership of the foreclosed property.

ah, i didn't read the original post but that explains the default provision. however, after re-reading the promissory note, it's really not very clear, as i think my original reading is a fair interpretation of it.

either way, op needs a lot more information before signing away 150k...

op, i'd recommend that you put the 150k in a cd or a money market account for a year and spend that time reading as many business, finance, accounting and investing books as you can get your hands on. to have been able to make 150k in poker, you must be fairly intelligent and you should put that same dedication and intelligence into investing rather than rush into it.

i didnt read the whole thread, but one thing that i wanna know is this.

you said he's a successful guy with a lot of $, so other than him being your family member... what does he gain financially for letting u in on this investment?

i mean surely to someone that is worth 100s of M's they dont need your 150k?

Same thing I asked him. I do know one of the reasons he mentioned was that he ultimately would be interested in having me take over all of it for him so that he can retire. So I think since this passive investment is only part of everything I'm going to be working on with him he gave it to me just to get me involved in that hotel as part of the learning experience. Or maybe even just to be nice and let me in on that investment with his main incentives coming from mentoring me on the next project he wants me to be involved in. There were other reasons as well but I believe this was one of the main ones. I asked him this very question though because I wondered the same thing.

Yeah, this. Except, if he forecloses the hotel he now owns 100% of it so I would have 5% of the hotel now since the people he was splitting 60/40 with would be out of the picture.

I don't really agree with this. I already know of these options and based on everything I learned while talking to him about his reasons for doing this investment as well as the small amount of research I did on my own about the market he's in and checking out his hotel myself and it's location, as well as the way the deal is structured, it seems that this is a far better investment than those. I've done those as well fwiw.

Ahhh I see what you mean, yeah I think I was underestimating how easy it would be to sell off my shares. I will look into this.

I don't think this is a justified means of assessing whether I'm making a -EV decision. If I have a best friend that chooses to take a % of my action at the poker tables (assuming I even sold it to him to begin with) and all he knew was that I was a winning player over all the years I'd played, had lots of money, and that he trusted me to not be screwing him over, I don't think that makes his decision automatically -EV to buy a % and I think it would actually be +EV.

I also wasn't blindly trusting him, I was making my decision based on everything I know of him as family member, all his previous successes, the actual deal he's involved in currently, his character as a person, the location/market, his justification and rationale for doing this deal, etc and my gut is telling me that it's +EV. Even though I could obviously end up losing money I feel good about it. Since it's an investment that I can afford to lose it doesn't even have to have much in the way of implied odds for it to be +EV. There seems to be a lot to be gained with his projected 30% returns annually as well as receiving my principal back w/ 7% interest, with really only my $150k to be lost, which I can deal with.

Based on what MasterLJ was saying, the main way to lose money on this deal would be if the hotel wasn't performing well and it's value decreased as a result of that in which case my family member would foreclose and explore other options. But the decision of whether or not this is +EV seems more so to rely on the management put in place for the hotel as well as the market/location of the hotel, rather than me trusting him.

ha - so really you didn't want actual advice about whether to do this or not, but were just looking for the folks on this board to affirm how smart it is to blindly lend an unsecured 150k, based on a promissory note that appears to have been drafted on the back of napkin, because you think your family member is a good guy.

and what if he does foreclose? you make it sound like that's some sort of reset button where you get your money back. when he does foreclose on the hotel corp, assuming the other 40% of the hotel corp doesn't start a legal fight with him over that and they just quietly give up their interest in the hotel, you then own a minority percentage of a corporation that only owns a hotel. the construction might not even be completed, it might not have any interested buyers, it might have to be sold at foreclosure for god knows how little, it might never open and generate any income. hell, it could open and steadily lose money! but you've spent a little time researching the market so i'm sure it's all good. anyway, at that point, your 5% interest isn't going to be worth crap because you'll never see any of that money after the creditors are paid. the creditors who from the sound of it will be your family member? your family member's corp? a bank? other private folks like you? you have no idea. you don't even know what i'm talking about

and then, to make it better, you have a note outstanding to a corporation whose sole asset (are there other assets? YOU HAVE NO IDEA) is worth less than what the corporation has invested in it. your family member will then have to sell the property, at a loss, and try to recoup his money. at that point, since your note is not secured by anything, you're just going to be one more creditor (out of how many? you haven't even seen the balance sheet for his corporation so you have no idea!!!) trying to get your money back.

for instance, let's say the hotel doesn't work out. your family member's corp forecloses and sells it at auction for $1.5 mil, after he pays all the back taxes that's 1mil cash into his corp, which is the sole asset of the corp. it also has 3 mil in liabilities. at that point, he can't make his interest payments to you and his other creditors. he declares bankruptcy. maybe he sold himself a bunch of par value shares for a buck a piece to have equity and control over the corp. but maybe he capitalized the rest of the corp with a $2m bond that will have priority over your note in the event of bankruptcy. you will then get nothing!!! you don't even have an acceleration on default clause in your note. you don't even say what state laws will apply.

who knows, maybe your family member is as great as you say, this all works out awesome, and you earn your absurdly high 30% a year. or maybe your family member is some shyster you really know nothing about and you're going to give him 150k because you looked up to him when you were a kid. well, like i said, wouldn't be the first time that's happened. at the least, get a lawyer to look this over.

and nah, there's totally nothing that you could learn from reading books, right... just jump in there and get your feet wet...

well, anyway, best of luck to you. i hope this works out. i'm not sure why i spent so much time on this - consider it my good deed for the day. and if it doesn't, hopefully your poker skills are such that you can recoup that 150k... let the board know how this goes. i'm curious.

Not sure what gave you this impression. I have listened and took in all the sound advice from this thread and also am working on checking into things people have mentioned here. I even have contacted some in this thread privately to ask advice. But on that same note, I think it would also be naive of me to also take to heart every single piece of advice I get in this thread as well. I mean no offense man but your initial post completely misunderstood how the deal was structured so just because I don't necessarily take your advice of passing on this deal doesn't mean I'm not interested in hearing various different types of advice. Even though I disagreed with what you recommended I still considered it and appreciate the input so I didn't mean to give you the impression that I'm not open to ideas.

Even if I didn't know the answers to your questions that's why the thread was made, to give me things to think about. But as for most of the concerns you bring up, unless I'm mistaken those are just all of the risks involved with the investment that I was aware of when deciding to invest with him. I'm aware that the hotel might not generate any income. As for foreclosure, if he forecloses then he owns 100% of the hotel which is part of the deal. Of that, I would own 5% and there aren't any creditors because he financed the whole thing himself. At that point in time he mentioned they would make the best strategic decision for moving forward if this did happen such as maybe turning it into an apartment building or something else.

Yeah, if the hotel isn't showing a profit I'm aware that I can lose money on the investment. As MasterLJ explained, I'm also aware that the hotel building can be worth less than he invested to build it.

It's possible he's a shyster, this is true. That's also a risk I was aware of though and if I had to place a bet on if he were just trying to screw me over (well I guess I already have in a sense) then I feel very comfortable with my decision. I feel the risks of the hotel operating profitably are the main risks instead of him just trying to screw me over. We have very close family ties and I don't believe he'd be willing to screw over his reputation in our family for $150k when I know for a fact he's worth a lot more. Again, I could be wrong but that's just my read on the situation.

Thanks, like I said I do appreciate all feedback since those who are critical present me with things to think about that I might not have considered.

OP I have been in the business world for 25 years and this is a mistake.

I could give you 100 reasons why it will fail but it sounds like your set on doing this no matter what the members of this board say.

150k is a lot of money and you will regret doing this and even if you don't, you will have rewarded yourself for doing something that is a TERRIBLE business decision and that will eventually bite you in the ass in the future.

You can't win on this deal either way it goes.

Well, I know in poker that if a good friend or family member trusted me to not screw them over then they can make a profitable investment in my poker playing even without knowing how to play. The main factors for them to consider is their trust in me and the % chance that I'm profitable in poker. I just applied the same logic here. I just thought that presuming the chance that he's lying or screwing me is low, then the profitability of the investment is based on his investment skills. No?

Were most of your reasons for this being a losing investment based around the trust issue or were there others. I'm interested in hearing the reasons but if they related to the trust issue, I don't think it makes me dumb to have more trust in him as a close family member w/ lots of success. I mean, you could know much more than him for all I know, but wouldn't me trusting what you say over what he says be a bad play on my part?

That doesn't mean that I'm not open to rationale for it being a bad deal, just that I'm interested in other reasons besides ones based on the idea that there's a high chance he's screwing me.

OP, if you have a family member who you KNOW to be successful and that you trust it would be idiotic of you to take the advice of randoms on a 2p2 message board over him as far as doing the deal! DUCY?

Getting advice on things to consider and think about during the deal is fine but leaving the decision of whether or not to make the investment up to people you don't know if they know jacksh*t is beyond ******ed. It's very simple, you trust him A LOT more and he's definitely got more business success that you can verify than anyone you'd find on here. Just be lucky you've got the connection and sure that you can afford to lose what you invest. GL

Well put Boobies. And OP, remember there will be many that believe you're making a mistake with any new investment or business idea. Its true many businesses fail in their formative years, and if that happens the naysayers will be the loudest with"I told you so". Investing always has an inherent risk, but no risk no reward. Do your homework and make a decision, then hire your own lawyer to review the contract, but not someone like mrsocko, who seems to think some law school is better than experience.

fair enough, cres. if you'll notice, i strongly recommended that op hire a real lawyer to look things over. i only said i'm a law student in the thread so op would know to take my advice with a grain of salt.

duh, all investments have risk. however, you don't seem to recognize that there is a difference between: (a) making an informed decision to accept the inherent risk in any investment, as well as taking steps to mitigate that risk, and (b) just jumping in with no idea what you're doing and saying, "oh well, all investments are risky and i can afford to lose the money." the latter option seems to be op's plan and that was the only point i was trying to make.

I am a commercial appraiser. You need to do more homework, but my initial impression is that this is a bad time to be in hotels, especially in development deals.

Conversely, it is an excellent time to buy existing deals where you can pay based upon their current income, which should rebound in the future. 2008 was a crappy year, but it will take all of 2009 to see if the market will recover soon or if it will be a slow process.

Here is some hotel info:

http://www.hotelnewsnow.com/Articles...TRPressRelease

STR is the source for hotel data in the US and on a more limited basis, the world. They can put together market specific info for you to evaluate the average daily rate, occupancy and room nights in a market.

I have no idea with regard to the structure of your investment, the partnership, etc, but being in the hospitality business perhaps I can add my $.02 on entering the industry.

I complete agree with the comments that this is a pretty horrible time to be in the business -- but that's because the operating fundamentals are bad right now. It could very well be one of the better time to invest in a new development, as land and development costs have come down considerably in the last 12-18 months. And when your property is up and operating 18-24 months later, it may be perfect timing to hit the upswing.

You're clearly also investing in a budget/economy property at $3 million. Let's just say 100 rooms, $30k per key -- we're talking below Motel 6 quality. (I don't even know what franchises are out there for < $30K/key). The budget chain scale is weathering the current storm better than the higher tiers, so that may be another factor working in your favor.

But yeah, learn the business you're getting into, get the data from STR, have HVS or someone like that do a feasibility study for you, etc., etc. Certainly a risky investment class in this environment, but one that could pay off.

mrsocko -- very good 3rd post ever. I guess you were saving up from when you registered 4 and a half years ago?

OP -- You are betting in the 4th quarter of the game, and you're betting on the losing team. This is a deal that's been in the works for some time now, right? Like more than a year? Like before the financial crisis really got going? Commercial real estate values have fallen off a cliff in that time. And you're supposedly getting a good deal by getting in on the same terms as the original investors? That's like somebody letting you buy a house at the price it sold in 2006. It's a terrible deal on the face of it.

The fact that your family member is offering you such a bad deal and presenting it as a good deal makes me distrust him. If he's been in real estate for the past 2 years, he's probably lost a lot of money. To the point where your $150,000 is an important sum to him. I wouldn't be surprised if there were other events going on that he didn't tell you about, where he needed your money to cover other loans and keep his deals afloat. This smells very bad.

I know you want to trust family. Trust but verify. Just please spend $1000 on a private investigator to find out what his financial situation is.

i think OP has decided to do the deal and ignore everything else. lambasting mrsocko's excellent posts was a pretty good indicator of this.

I'm with these guys in the apparent minority. Why so nitty BFI? Of course he could lose. Sure his due diligence is lacking. This is a family deal, where OP absolutely trusts his uncle with the money. His high net worth uncle that supports his poker playing and wants to help him to diversify and show him the ropes of his business. The upside is potentially huge, the downside is capped at $150k assuming no personal guarantee/capital calls.

I'd jump on this in a heartbeat. If he gets screwed over by his misplaced trust in his uncle, it cost him $150k to find out the guy is no good. Some of us put that much trust (or more) in employees that we have vetted but only known for a matter of days/weeks prior to hiring. OP has known his uncle his entire life. I'd be comfortable with that type of risk, it sounds like OP is too.

thanks, loz and aviva- appreciate it.