It looked like the next few months would be relatively stress free so Dave decided to enter the club’s match play championship. He was shooting in the high 70s and feeling pretty good about his game. He entered the championship flight. The other two flights are handicapped, meaning that a 14 handicap would give 10-handicap, a stroke on the four toughest holes. There are no strokes given, everyone plays straight-up. Dave’s handicap was down to a six, but there were several scratch golfers in his flight. The odds were against him.
The first match was a week from Saturday and Bradford was paired against a new member who was a 5-handicap at his old club. The man was nervous and played poorly. Dave was five up after his opponent hit into the water on 14, and the match was over. The two men had a couple beers in the clubhouse and promised to play together in next week’s Friday game.
There was nothing that Bradford could do but wait for financial results from the casino. He spent his time working with the commercial mortgage team, which included three new faces hired in the last nine months. Roger had turned out to be a lifesaver and he soon was promoted to manager.
Bradford handled some deals himself, but generally only if they interested him or were with people he had worked with previously. Fred’s restaurant business continued to grow with Dave’s help. Fred and Mario doubled the number of Shells restaurants they co-owned and were considering franchising the Shells name nationwide. Fred also opened six new stores under his own name. His Oyster Bay restaurant, Dave’s first commercial mortgage deal, was a huge success.
July financial results for the casino would be skewed due to the unusual revenues and expenses generated from the Grand opening. The project team hoped August and September would be good months, although September is usually a bad tourist month in Mexico. It’s still hot and kids are back in school. They hoped Sven would be smart enough to understand the seasonality of the resort business.
July casino profits were posted the first week of August and were disappointing, despite the boost from the Grand opening. Revenues were good, slightly over $10M. However, net operating income was only half of what it should be. Ken and Chris started analyzing the numbers and the underlying operating statistics.
Ken and Chris asked for a meeting to discuss the Cabo numbers. Ken started it off. “Dave, I can’t put my finger on it, but something isn’t right. Maybe it’s the impact of the Grand opening, but I don’t think so. None of the ratios are making any sense. For example, occupancy was good, but their revenue per occupied room was down. Net profit is too low for the revenue they generated. Something was wrong.”
“Maybe it’s because of the Grand opening? Did they expense the $2M promotional expense?”
“They amortized it,” said Chris, “which is the correct thing to do. If they had expensed it, they would have lost money for the month. We don’t see anything in the expenses that seems unusual, but it’s difficult to tell without an audit.”
“Let’s hold off on the audit and give them the benefit of the doubt for now. All of this is conjecture until we get more substantial information. Let’s analyze the operating statistics. They might shed some light on why profits are low. The two of you should plan on spending some time down there after we see the August numbers.”
“One more thing,” Dave said as Ken and Chris were leaving his office. “Let’s try to find a backup lender, just in case Sven doesn’t exercise his option on the Phase II projects. As you know, Mario has $40M at risk. Have we kept in touch with the lenders that you and Chris identified before we opted to go with the Zurich group?”
“We have,” said Chris. “In fact, two of them called me this week to say that they want participate in Phase II. We’ll get back to them.”
“Send them a financial package and see if they are serious. Tell Sally what you need and she will help you. You might also ask Roger if any of our traditional lending sources might be interested. He has developed a lot of good contacts.”
August revenues and operating income came in above forecast. It was only when Ken and Chris analyzed the underlying statistics that warning flags went off. The ratios were different than the ratios generated for July. A month-to-month comparison of expenses indicated large swings. It didn’t make sense.
Dagfin Jensen called Ken the following day. After they exchanged pleasantries, Dag got to the point. “How about a trip to Mexico next week? I’m having a little trouble making any sense of the August numbers. Are you having the same problem?”
“You read my mind, Dag. Something is screwy. Maybe Pedro and his accounting staff can make some sense of it? I want Chris to come along too, just so we don’t have a language problem.”
After five days, Ken came back without making much progress. Chris stayed behind to continue working on the problem.
“Dave, Dagfin is not happy. He smells a rat. Dag is talking about bringing in an audit team, but we convinced him to wait until the September results are in.”
“That’s not good, Ken. Without Dag’s support, it will be difficult to get the rest of the money for Phase I, much less anything for Phase II.”
Let’s hope September is a good month.
September revenues and profits were up. More importantly, the ratios and expenses compared logically to August. It appeared that July might have been an aberration caused by the grand opening and the short month. Ken and Chris were reserving judgment until they analyzed the underlying statistics.
Two hours later Ken asked Bradford if they could meet to discuss the September results. “How’s 3:00, Ken? Roger and I are in the middle of something.” Bradford later regretted not taking the time to talk with them immediately. He would have been more prepared for Dag’s call.
Dag called at 2:30. “Dave, I wanted you to be the first to know. We are putting an audit team together and will be in Cabo San Lucas Monday. The audit should not take more than a week. If everything turns out okay, we should still be able to meet your funding deadline.”
Bradford tried to think quickly, but all he could say was; “I would like Ken and Chris to be there. Agreed?”
“Agreed.”
Ken and Chris came in soon after Dag’s phone call and Bradford relayed the bad news. “What do you think they will find? Why is he demanding an audit?”
“Dave, we’ve been waiting for a chance to talk to you,” Ken said. “The daily occupancy numbers tell a bad story. Remember when Dag, Chris and I went there a few weeks ago to see what we could find out?”
“Sure, you said you didn’t find anything, didn’t you?”
“That’s right, we didn’t, but we laid the groundwork. Every day we went door-to-door counting occupied rooms. We looked at their room telephone and room charges to see which rooms were occupied, and we came up with a daily occupancy number that is pretty darn accurate. The problem is that these numbers are not close to the numbers Cabo is reporting. For example, Wednesday we counted 206 occupied rooms. The report says 112. The same is true for the other days. It looks like they are underreporting revenues.”
“Someone must be skimming profits,” Chris concluded.
“I assume Dag has the same information at his disposal?”
“He obviously knows what we counted but I don’t know if he has all the detail. However, the week we were there occupancy was approximately 78% and they reported occupancy for the month at 55%. He knows that can’t be right. I am sure that’s one of the reasons they requested the audit. We were also suspicious of a few vendor expenses but couldn’t be sure.”
“Ken, I’d like you to email Dag the daily reports you just got, with a summary of your conclusions. I don’t want him to start distrusting us. Stay here while I call Mario. He won’t be happy.”
“Mario, Dave Bradford. I have some bad news for you.”
Mario was absolutely livid. “Dave, we need $200M in two weeks or I lose the $40M deposit. We have cut this too close. What can we do? Is there any money left over from the second funding of Phase I?”
 
; “Sure there is, Mario, but I don’t think that’s the solution. It would be too easy for Zurich for discover the transfer and default our contract. We are talking to other lenders. I’ll get back to you.”
“Okay, Dave, but I’m telling that this is important to me. I can’t afford to lose that deposit if you know what I mean.” Bradford heard Mario slam down the phone in obvious anger. Mario was scared.
Bradford turned to Ken and Chris. “Where do we stand on a backup lender by the way? Are we set up to get funded if we need it?”
“Yes, but not in time for Mario,” Chris answered. “Both lenders are interested. However, their funding is dependent upon obtaining appraisals and environmental reports. It would take at least 45 days, probably 60 to actually get the money. By the way, they both want a $25,000 deposit to get started.”
Bradford beeped Roger and asked him to join them for a minute. “Roger, do we have any sources that will lend Mario $80 Million within two weeks? Mario needs to exercise his options on several land contracts or he will default a large sum of money. I guess the collateral would be the contracts on the property he is purchasing.”
“Well, Dave, until he gets title to the property it’s not his, and it’s worthless as collateral. I don’t know anyone that will give him a revolving credit line without land or some other hard asset to back it up. His local bank is the only one who would lend him money based upon his personal guarantee.”
“Is there a way we could borrow money on the assets of the other Phase I projects? For example, how about borrowing against the leases on the Dominican Republic office development?”
“That’s a possibility, Dave. It’s almost like doing an accounts receivable or inventory loan. The problem is the assets are in the Dominican Republic and that will scare away almost any U.S. based lender.”
“Ken, do we have any assets in Miami or Las Vegas that we can borrow against?”
“None that I know of,” said Ken. “The Miami project is still under development. The Vegas hotel probably will appraise for a lot higher than cost, but not until it is finished and stabilized. We are at least a year or two away from that. By the way, I agree with you that using money that has been earmarked for these projects scares me. It sounds like fraud and I for one, don’t want to spend the next years looking over my shoulder when I take a shower.”
“Okay, here’s the plan for today. Chris, you plan on spending the week in Cabo working with the audit team. Let’s get going with the other two lenders. The stakes are pretty high so I am willing to fund the $25,000 application fees. It will be nice to have a bargaining chip in our pocket when we negotiate with Zurich.”
A crisis was brewing and Dave had a feeling things would get worse before they got better..
The Par 4, 375 yard 17th, was a sharp dogleg right. They halved the hole with bogeys. Dave’s drive caught the last tree on the dogleg and forced him to pitch out into the fairway. He missed the green with his third shot and was lucky to save bogey by sinking a nine footer that curled in at the last moment. Buzz played the hole perfectly until he 3-putted from 20 feet, pushing his three foot par putt two inches right.
The beers had caught up to him.
Chapter 18
Par 5 – 555 Yards
Problems – Meeting in Cabo San Lucas