NorthBay biz chronicles the rise and fall of local developer Clement Carinalli.
While Carinalli can’t do much about the reality of a 24-hour news cycle, there’s an uncomfortable sense of Schadenfreude as the yarn of high finance and even higher leverage is laid bare for public consumption. It’s not that Carinalli isn’t well liked—quite the opposite is true. Tales of his generosity are legion. And the fact he has no less than 10 banks waiting in line to be paid certainly adds to the public sympathy coming his way. At this point, if banks didn’t warehouse cash, bank execs would rank just above the media, below PG&E and in a dead heat with politicians in the status of objects, organizations and people the public scorns these days.
For the most part, Carinalli’s supporters have been circumspect in their public comments about his financial woes. Some have been put off by the harsh glare of the spotlight his bankruptcy has generated. Others have more professional reasons to steer clear of the controversy. “A lot of people may find themselves in the same spot I’m in,” says Richard Abbey, senior partner at Abbey, Weitzenberg, Warren and Emery. “A lot of people who know Clem have done business with him. They’re business people or lawyers, who now find themselves involved in Clem’s legal proceedings, and there are ethical standards to stand by and practical considerations.”
Abbey represents some of the banks that hold Carinalli’s debt. Still, Abbey is willing to give some insights into the man. “I’ve known Clem for 30 years. I’m a long-time member of the YMCA board, and Clem has always been an incredibly solid supporter, always worked very hard to help us and never wanted any attention about it, always on the down low.”
For his part, Carinalli declined to speak to NorthBay biz for this story.
The fall of the house of Carinalli has opened fissures in the community. Since Carinalli let friends invest with him, the lines blurred between business associates and cohorts. Some have stood solidly behind Carinalli, ignoring calls from newspaper reporters seeking comments about the scandal, while a few have chipped in with quotes about trusting Carinalli. On the other side of the chasm are those troubled by Carinalli’s actions. They’ve made no secret that Carinalli’s failure to pay back their investments has taken its toll. For some, like 79-year-old Santa Rosa investor Bob Huppert, the bankruptcy has had a significant impact. Huppert invested significant retirement savings and now fears losing his home.
Other Carinalli investors were shaken by his dealings with Sonoma State University’s Academic Foundation. From 1990 to 2003, Carinalli arranged 18 different private loans using the foundation’s money. Half a dozen of those loans were to Carinalli himself. At one point, Carinalli sat on the foundation board, but university officials concerned with conflict of interest issues asked him to resign. This only cosmetically distanced Carinalli from the board, as Alan Johnson, a Sonoma Mortgage & Investment Co. employee, remained a board member until 2009 when he, too, was asked to resign after Carinalli’s dealings with the foundation came to light (Carinalli owned Sonoma Mortgage for a time). Those dealings were brought into sharper focus when it was revealed that, while Carinalli stopped making debt payments to other creditors, he paid off a foundation loan. Moreover, there remains a mystery over how some Carinalli property, used as collateral for loans from the foundation, was released while the developer still owed the foundation money.
Carinalli has since sued the foundation to return the $232,500 loan payment. The suit claims the money needs to be returned to go into a pool of cash that would be used to repay all creditors. Carinalli had asked the foundation to return the money, but the foundation declined, hence everybody getting lawyered up.
For Carinalli, the suit is just one more snag in the complicated web of finance the court must now unwind. Originally, Carinalli had hoped to avoid bankruptcy by pledging to pay all his creditors back in three to four years when higher values returned to the real estate market. However, in September 2009, a group of investors nervous over the timeframe, as well as the fact that some of them held unsecured debt, filed to force Carinalli to liquidate his assets in a Chapter 7 bankruptcy. Carinalli instead filed a request for a restructuring of debt under Chapter 11. As of April this year, Carinalli has run up a $1.3 million bill via lawyers and consultants for the bankruptcy, and investors submitted another $165,000 in expenses.
The rise…
If Carinalli worked hard for nonprofits, he worked harder for himself. For years, the name Clement Carinalli was synonymous with shrewd business moves and wise investments.
Carinalli’s ascendancy to the top of the North Bay business heap is the stuff of movies. He’s one of the founders of Sonoma National Bank in 1985, which later was bought out by Sterling Financial. Two decades after the bank debuted, he and asset management firm Redwood Equities (led by long-time Carinalli business associates James Ratto and Dennis Hunter) sold a combined 270 acres of land for $100 million to a subsidiary of Station Casinos, the Las Vegas-based partner of the Federated Indians of Graton Rancheria, for its proposed casino near Rohnert Park—a killing considering the land cost them just $11.4 million. If others were a day late and a dollar short, Carinalli showed up a week early, pockets stuffed with cash.
He was a partner in North Bay Corp., a highly profitable refuse collection business, as well as subsidiaries like Santa Rosa Recycling and Collection (SRRC) and Unicycler. As his empire crumbled, Carinalli reportedly sold his stake in Unicycler to its co-founder Ratto in 2008. (In a clear indication of how far Carinalli’s reputation has fallen, a spokesperson for North Bay Corp. in January denied his past ownership in the company and insisted he’d stepped down from his CFO role at SRRC more than two years earlier—despite state records to the contrary.)
He owned interests in wineries including De La Montanya Winery as well as two in partnership with John Balletto. He was a partner in Rockpile Ranch. At one point, Carinalli was a partner in no less than 29 different ventures. In short, he invested in everything from picking up garbage to growing grapes.
While his investment portfolio included real estate of almost every flavor, one factor remained unswerving in how the deals got done: He wasn’t in it alone. Whether his partners brought expertise or capital to the deal, one thing was dead solid certain: Clem Carinalli didn’t favor investing by his lonesome.
Looking at his portfolio, it’s impossible not to point to Carinalli as an experienced investor. And given the breadth of his investments, it’s ludicrous to think he didn’t have a healthy understanding of risk (the classic measurement that an investment may someday go badly when balanced against the possible size of the return).
And there was one investment area in particular where Carinalli was an expert—real estate. At one time, he was the single largest individual property owner in Sonoma County, which is saying something when you consider how many corporate conglomerates own land in grape production. He was a developer of note, with an intuition to look at property and envision a building that delivered what the market needed. And he didn’t put his extensive real estate holdings together overnight, which means he’s seen different real estate cycles, as real estate—more than most business segments—is given to ugly pendulum swings. And since he owned Sonoma Mortgage & Investment, he knows what it’s like to sit at the table as both lender and borrower.
So as a veteran real estate player and investor, how did Carinalli end up on the business end of a bankruptcy of more than $190 million? Three words: Leverage, judgment and timing.
While Carinalli’s professional background is in accounting, he’s been a full-time investor since 1989. In 1996, Carinalli bought Sonoma Mortgage & Investment from Joe Mattos. The firm essentially was a mortgage banker, a combination of lender and loan broker. For a fee, Carinalli would line up a loan for a client. Alternatively, he might make the loan himself, using capital from investors and/or his own money.
Carinalli let investors park their capital in his firm, and he’d loan the money out, returning someplace between 8 and 12 percent to investors, depending on the deal. Carinalli made his money off fees attached to the loan, as well as the difference between the return to investors and the interest on the loans. For instance, he might promise investors a return of 8 percent on a loan, and charge the borrower 11 percent interest, putting the difference in his pocket. Investors might have their money tied directly to a property loan, in which case their investment was collateralized by the property itself. Others, however, simply invested the money with Carinalli and didn’t enjoy the security of collateral.
As a mortgage banker, Carinalli built a wealth of knowledge about real estate investing. When he wasn’t making loans, he was building a portfolio of quality assets and developing properties. Along the way, he developed a reputation of paying a solid return to investors, so he had little trouble attracting investors to keep cash flowing.
From 2004 to 2008, Carinalli went into overdrive as he increased the investment real estate he owned by 50 percent. The jump in activity coincided with the increased availability of relatively cheap debt. Nationally, insurance companies and Wall Street investment banks not only increased the volume of their loans, the terms of the loans became more liberal. Lenders began making larger loans, requiring less investor equity and including periods of interest-only payments. Banks, seeing the money to be made off increased commercial real estate lending, plunged in, and investors like Carinalli benefited.
At the same time, Sonoma Mortgage saw a jump in its business. Carinalli made 138 loans in four years, worth a total of $70 million. His investors saw returns of 8 to 12 percent, depending on the structure of the deal. Everyone was happy.
…and the fall
But in 2007, the commercial mortgage backed security (CMBS) market virtually shut down. CMBS loans are real estate loans originated with the idea of selling the loans, placing them into packages and then slicing them into bonds. The lender who originated the loan receives its money back, the firm that packages the loans receives fee income, and the bond investors are paid back by the borrowers. At the time the market shut down, better than 40 percent of the commercial real estate loans in the United States were flowing out of the CMBS market, to the tune of $237 billion.
When the credit markets froze, cheap debt went away. Developers like Carinalli, who’d invested heavily in a marketplace that seemed to only increase in value, suddenly were faced with a slowdown. Eventually, the economy plunged, and with it, property values sank. Lenders began realizing that properties backing loans for investors like Carinalli were no longer high-value collateral. They began to ask investors for more equity to make up for the plunge in value. At the same time, tenants in every type of property—from retail to restaurants to apartments—were having trouble making lease payments.
Carinalli’s cash flow slowed down dramatically. Complicating his problem was the fact he held raw land as part of his portfolio. Land has no cash flow, but it does have debt service. In good times, developers pay land debt using cash flow from other investments.
But these weren’t good times.
According to U.S. Bankruptcy records, Carinalli started making moves on his holdings in 2008. He transferred more than 30 properties into the names of family members and moved 14 more to frequent business partners Ratto and Hunter. At the same time, his line of credit balances with banks swelled from $4 million up to $17.6 million. In a 2008 statement to investors, Carinalli pegs his debt load at $72 million.
In 2009, Carinalli stopped making loans out of Sonoma Mortgage. This is significant, in that his fee and interest income slowed down and, thus, the cash flowing from the business slowed as well. To make up for the shortfall and service debt, bankruptcy records show he lined up more cash from private investors in 2009 than he did from 2004 to 2007.
Though he’d been meeting privately for some time with banks and other creditors, the wheels officially came off in June 2009 when the Press Democrat reported Carinalli wanted to restructure his debt. He promptly hired Roseville debt specialists Huntley, Mullaney, Spargo & Sullivan.
In July 2009, the news of his relationship with the SSU Academic Foundation broke. School faculty publicly chastised the foundation’s management over its dealings with Carinalli, and the school attempted to hunker down and ride out the storm (with decidedly mixed results).
As public schools welcomed students back in September 2009, a group of small investors led by the Brown family forced Carinalli into court over his debts. A series of meetings between Carinalli and his investors followed and, in October, Napa Community Bank and Mead Clark brought lawsuits against Carinalli alleging fraud over the stated values of properties collateralizing loans.
News about perhaps the most puzzling of the revelations surrounding Carinalli’s investments and financing also came out. In 2007, Carinalli made a series of loans for $4.5 million to Ripp It, Inc., an entity controlled by Jay Soderling, who gained notoriety in the 1980s by being convicted along with his brother, Leif, of looting $16.5 million from Golden Pacific Savings and Loan, a Sonoma County lender they controlled. The Soderlings were convicted, but did just eight months in prison before being released. Jay wound up behind bars for another three years for violating parole, and did a six-month stint later for bouncing checks. He then declared bankruptcy in 1999, failing to pay the court-ordered $10 million restitution on the Savings and Loan swindle.
Some investors who ended up with their cash going to the Soderling loans maintain they were never made aware a cheat who’d resided at the Gray Bar Hotel received the loan. In turn, Carinalli dismissed the idea that investors didn’t know the cash was going to Soderling; “a ridiculous statement” is how he termed it in the Press Democrat.
Since then, Carinalli has hunkered down, spending his days with accountants, consultants, lawyers and, on occasion, creditors. A few properties have already been sold with court approval. In November 2009, two properties worth $3.45 million were sold. In December, the Savings Bank of Mendocino County foreclosed on a property with the U.S. Bankruptcy court’s permission. However, North Coast Bank filed a lawsuit against him in May 2010, alleging he provided false financial statements to obtain a loan. If the bank wins, Carinalli will owe it $2 million even after bankruptcy.
In the end, Carinalli was a victim along with his investors as the economy tumbled. Most observers agree that Carinalli was over-leveraged and had too many properties burdened by too much debt. That problem is on Carinalli as well as the banks that agreed to lend him money despite his heavy debt load. This is cold comfort to the dozens of investors out real money and not seeing any return on funds they entrusted to Carinalli.
One of those investors is Exchange Bank. Its president, Bill Schrader, has known Carinalli for at least 15 years. The bank holds $5 million in secured Carinalli debt, and Schrader reports that, until recently, the debt had remained current. As a creditor, he’s reluctant to speak about Carinalli’s bankruptcy. But he is willing to talk about what his friend has meant to the community. “In addition to his generous donations, Clem was always a very dependable contributor of his time and experience to many nonprofits,” he says. “He was more than a figurehead board member. He showed up to meetings well-prepared and actively participated in a positive fashion.” Schrader points to Carinalli’s work on behalf of Santa Rosa Junior College and the YMCA, among many others.
Schrader believes the Carinalli bankruptcy is having a powerful impact on the community—and, for some, the losses will be significant. “For investors who risked their hard-earned money, this is a powerful financial setback and a breach of confidence and trust, both for individuals and financial institutions. It certainly hurts nonprofits and, for Clem himself, it has to be devastating.”
As a lender, Schrader understands leverage and investment. “In general, he was heavily invested in real estate with more leverage than proved to be prudent. But he was also deeply invested for decades in the community, unselfishly dedicated to civic and nonprofit causes.”
David Brown, CEO at the Sonoma County YMCA, also sees Carinalli as a player in the community. “He’s always been a large supporter of what we do. He’s given on an annual basis as well as being a major contributor to capital campaigns,” he says. “We wanted to honor him and asked him to come to an awards dinner. He did come, but it was clear that he was more comfortable with simply giving quietly. I think he was humbled by it.”
It’s a fair bet that Carinalli is humbled by his current circumstance as well. Late May brought news that a restructuring deal was close to approval. If the details hold, close to $190 million in real estate (including Carinalli’s private residence) and other holdings will be placed in a trust and liquidated over the coming five years; assets will be distributed among creditors as they become available. Unsecured creditors seem to be included in the payoffs, though they would likely receive far less than their full investment amounts. A “creditors committee,” made up of individuals and institutions owed by Carinalli, may further investigate whether any of Carinalli’s near-term pre-bankruptcy business transactions involving his children and some close associates were inappropriate. If that’s determined to be the case, those properties could face a forced return and be added to the pot.
There can be no doubt that Clem Carinalli made mistakes and that his investors and creditors will wind up paying a price for those mistakes. It will be interesting to see what decisions the court ultimately makes in terms of disposing of Carinalli’s assets. The market is still a mess, and the portfolio won’t bring anything approaching its true value for some time. Conversely, investors need to be made whole, and that money will need to come from sales of the properties.
By all accounts, Carinalli is a proud man who believes in responsibility and charity. In the coming months, those two words may take on an even more bedrock meaning for him.
