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Investor Terminates Capelli Management of New Roc, Seizes Accounts After Discovering $700,000 Unauthorized "Loan to Itself"

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Investor Terminates Capelli Management of New Roc, Seizes Accounts After Discovering $700,000 Unauthorized "Loan to Itself"

June 09, 2010 - 14:51
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Louis Capelli.jpgAn entity controlled by Louis Capelli made an unauthorized $700,000 loan to itself, according to Capelli's partner in the New Roc Entertainment Retail Center. As a result of the unauthorized loan, the investor, Entertainment Properties Trust (EPT), terminated the management agreement with the Capelli entity and seized all bank accounts related to the project. EPT subsequently installed CB Richard Ellis as the day to day manager of the property.

UPDATE: Louis Capelli has responded to our story here, Entertainment Properties Trust Grossly Misrepresented New Roc Deal to Wall Street Analysts Says Capelli, Demands Retraction

Capelli is a partner with Entertainment Properties Trust in New Roc City and, through an affiliate, was also the property manager. EPT began legal action against various Capelli legal entities in 1Q10, including New Roc City in New Rochelle, City Center in White Plains and the Concord Resort in upstate New York.

In a conference call with investors on May 3, 2010, senior executives of Entertainment Properties Trust, the primary investor in New Roc City, disclosed the unauthorized loan and were then peppered with questions by Wall Street analysts about problem investments with Capelli in New Rochelle, White Plains and the Concord Resort.

EPT told analysts they were "not sure that we will ever get paid back" on the unauthorized loan and that they have "reserved" $700,000 for related losses.

Listen to the Entire Call: Q1 2010 Earnings Conference Call Monday, May 03, 2010

Read the Full Transcript: SeekingAlpha: Entertainment Properties Trust Q1 2010 Earnings Call Transcript (registration required)

[note: emphasis added to transcript]

You can listen along with the edited version of the transcript described below by clicking here to hear a YouTube audio recording (recommended).

Earnings Presentation on Capelli Issues in White Plains and New Rochelle by Gregory Silver, Chief Operating Officer of Entertainment Properties Trust

In our last call, we discussed that we had initiated legal proceedings against Louis Capelli, along with various entities controlled by him, relating to various payment obligations and our obligations under the Concord project. We filed this action in Missouri State Court, and it has been subsequently removed to federal district court in Missouri. Mr. Capelli and various entities controlled by him filed a complaint in Westchester County, New York against the company and certain of our subsidiaries, for declaratory and monetary damages relating to the Concord project, as well as the White Plains City Center. The company intends to vigorously pursue its claims against Mr. Capelli and his related entities, and to vigorously defend the claims asserted by Mr. Capelli and his related entities, for which we believe we have meritorious defenses.

As Mark [Peterson] will discuss with you later, during the quarter, an entity controlled by Louis Capelli, our partner in the New Roc Entertainment Retail Center, who through an affiliate is also the property manager, made an unauthorized loan to itself. As a result, as the general partner of the partnership, we exercised our rights to terminate the management agreement and seize all bank accounts related to the project. We have subsequently installed CB Richard Ellis as the day to day manager of the property.

Q & A on Unauthorized Loan at New Roc City

Jordan Sadler – Keybanc Capital Market

I just need some clarification on the $0.7 million charge during the quarter related to a Capelli loan and debt? Would that also relate to that $1 million bad debt expense in White Plains or is that separate?

Mark Peterson, Chief Financial Officer of Entertainment Properties Trust

No that is really separate. The million dollars is more related to tenants, which that he has a hand in at White Plains. The $700,000 really happened at New Rochelle, another project with Capelli. That was basically that they made an unauthorized loan to our partner in that venture and we then went and seized the bank accounts and changed the manager, but we thought that we really needed to reserve that $700,000. It’s a reserve that we put in place for an unauthorized loan. We are not sure that we will ever get paid back.

Jordan Sadler – Keybanc Capital Market

Okay, he is a principal partner?

Mark Peterson - EPT CFO

He controls that partner that made the unauthorized loan.

Jordan Sadler – Keybanc Capital Market

Okay and that received the proceeds.

Mark Peterson - EPT CFO

Yes.

Earnings Presentation on Negative Impact of Capelli/White Plains by David Brain, Chief Executive Officer of Entertainment Properties Trust

...our White Plains, New York investment, which is a theatre anchored retail center; further it is the only one in our portfolio that can be described as dominated by soft goods and fashion retail and it is dragging down our credit statistics, our reported FFO with non-cash charges, and looks to continue to do so until we can get to a point of eliminating it from our financial statements.

We have spoken about this project often. I will summarize to say that this was a highly leveraged project when we bought controlling interest and it has incurred two major vacancies; Circuit City and Filenes Basement. It has rendered it uneconomical beyond the non-recourse loan value in our opinion.

We are not supporting the project with any further cash expense or investment, but we are still carrying its leverage and book losses in our reported financial results and likely to do so until the mortgage loan matures in the fourth quarter. You should know that without it in our results, our FFO would be increased by $0.04 to $0.82 per share. Our leverage ratios would fall by about 300 basis points and our debt service coverage would be improved by about 0.2 times. Now taken as a whole, I want to express that our reported results for the quarter are consistent with our plans, expectations and guidance.

Q & A on Bad Debts at White Plains

Greg Schweitzer - Citigroup

...I just have one more for Mark. With respect to guidance......the operating expenses?

Mark Peterson

Operating expenses were impacted to some degree this quarter at White Plains, which kind of a non-cash item. But they were higher that we’d expect on a run rate basis by probably a $1 million. And second of all, of course the acquisition of Toronto Dundas Square certainly affects the operating expenses going forward. And it also, in the quarter, we had a partial quarter for 10 Dundas, so that will of course annualize as we go.

Greg Schweitzer - Citigroup

What was the one at White Plains?

Mark Peterson

White Plans recorded some bad debts during the quarter related to some receivables outstanding that shouldn’t repeat itself frankly, that happened in the quarter.

Greg Schweitzer - Citigroup

Any specific on that?

Mark Peterson

It’s a Capelli entity.

Q & A on Legal Fees for Litigation with Capelli and Concord Resorts

Anthony Paolone - JPMorgan

Question on the G&A, I know it’s been hit on before, but were there any legal fees related to Capelli in the quarter hitting that number as well?

Mark Peterson

No, very little. We did have some, but it was probably around $50,000 or something. So it was not a significant event in the first quarter.

Anthony Paolone - JPMorgan

And you expect that to be steady for the rest of the year?

Mark Peterson

No, we budgeted, I think we talked about in our annual budget, something like $1 million for the year for those legal expenses. So we expect that could increase as we go forward, but we have that contemplated in our guidance.

Anthony Paolone - JPMorgan

Okay. And from a practical point of view, what’s the status of Concord? Is there anything going on at the site? Any update on the potential to issue industrial revenue bonds, or anything else going on there we should be aware of?

Mark Peterson

I mean, physically, I don’t think there’s anything going on at the site. As far as discussing the improvements, as you can imagine, since we’re embroiled in litigation, we’re not getting monthly updates from Capelli on the matter. So I think where we’re at is that we’re not seeing significant progress.

Q & A on White Plains City Center Default on EPT Loan

Anthony Paolone - JPMorgan

Okay. And then just one last question, on City Centre, is that in default right now, and if so, what do you think the likelihood… or I guess regardless, what do you think the likelihood that the banks working with you on that is?

Mark Peterson

You know what, it’s technically not in default. It’s in default of its loan to us, but it’s not in default under the underlying property loan and first mortgage. I just hate to comment on what a lender might do. I don’t know. Again, since that’s a note that we’re suing on to one of the Capelli related entities, I don’t know that we want to talk about how you would potentially settle that out anyway.

Q & A on Unique Status of Capelli's Concord Gaming License

Jordan Sadler – Keybanc Capital Market

Who owns the gaming license at the Concord?

David Brain

The development entity does.

Jordan Sadler – Keybanc Capital Market

Gaming is illegal in the State of New York, so is the property owned by the developer and how do they have the license?

Mark Peterson

The point is that if I can go a little bit with where I think you’re going, the entitlement for the 25% gaming tax runs to the land. The actual site. The physical gaming license is in Capelli’s name, but if someone else would have gave me license could benefit that 25% gaming tax by doing it on that property.

Jordan Sadler – Keybanc Capital Market

Is there a tribe associated with the land?

Mark Peterson

It’s a New York state legislature granted.. It’s not associated with Indian gaming. That’s the way most people know that lower tax rate in New York, but this is the only, this is not associated with Indian gaming.

Jordan Sadler – Keybanc Capital Market

Is it a unique property in the State of New York?

Mark Peterson

Yes it is. It has site-specific legislation and the specific legislation is the only license granted and it does have to do with just this site for purposes of it being an empire district and a variety of other things and so it was unique legislation and a unique license.

There are 2 Comments

My My certainly the emperior who has had no clothes for quite some time now sits naked and exposed for what he is. Desperate enough to watch the entire kit and kabodle go down the tubes.
Oh great Mayor how will you now spin this into something great for our fine city. You who have made your bed with dogs you got some flea's don't you think. New Roc can only improve without the likes of these characters. New Rochelle must distance themselves from Cappelli and Apicella LeCount must go into the dead pile as this guy clearly has seen his last days. This may rise to criminal, how can any Council Member even Sussman and Fertel stay on board this ship that has sunk?

We gave tax breaks galore, what if New Roc, closes down ?

Please -- we need the following to happen:

sussman - retire - NOW
fertel - just go away
bramson - get a real job

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