Case Study: The Music Lovers | Peter Mehit

imagesEverything that follows actually happened. I’ve changed the circumstances and identity of the people involved significantly, but the gist of the story is true. It’s at once proof of the old adage, ‘The truth will out’.

Sara and Tom have been friends since they worked on a successful advertising campaign for a major spirits producer. In their ten years as friends they’ve shared a lot: Holiday gatherings, the breakup of Tom’s marriage and their dreams of opening a music venue. Sara’s husband Bill was also good friends with Tom and supported their idea of opening the night club, up to the point pledging property he and Sara owned free and clear in San Francisco to secure start up money.

Because of their connections in the advertising and corporate worlds, Tom and Sara knew a lot of inside stuff. For example, they found out that a coastal city was pouring millions into a waterside development and had attracted several X Games type events to the area to take place in about two years time. Knowing this, the pair secured a lease on a large space in the heart of the development, negotiating a six month delay in rent payments.

They engaged an architect to design the interior. They shopped for restaurant equipment, table ware and decorations. As things came together, they felt better and better about their idea and started taking personal cash out to order items they needed for start up, along with hiring a contractor to perform tenant improvement on the space.

Then they went to the bank. The bank wanted a full business plan to demonstrate the profitability of the model. By the time Sara and Tom engaged us, they had committed to well over $250,000 in contracts. After explaining the requirements that most banks have regarding SBA loans, they seem unconcerned. They had the requisite experience, both had homes with equity (this was a while ago) and there was the San Francisco property. Nonetheless, we advised them to put all contracts on hold until they had an answer from the bank.

They did not do it.

We shopped the plan when it was completed and had bank business development people pestering us for copies. The combination of the venue itself, along with its location (which had killer foot traffic) and the upcoming event really captured their imaginations.

During underwriting, it was revealed that both homes had second mortgages and little equity. The bank was unhappy and felt misled. But there was always the San Francisco property, a small apartment building worth a couple million dollars. While not pleased, the bank would still do the deal if the property was pledged.

It wasn’t.

Suddenly, Tom and Sara were on the hook for all the engraved wine glasses, serving trays emblazoned with logos and the half completed tenant improvements. Then there was the lease, which was kicking in less than sixty days in the future. There was a mad scramble to find investors, but Tom and Sara’s stories about why the property up north was off limits got more and more disjointed and after awhile; they stopped returning phone calls, even ours.

About a year later, we heard from Tom. He said that when the time came to pledge the apartment building, Bill asked Tom to quit the project even though it was his ideas. He offered him a 30% stake in the company although he would have no say or participation in the business. Tom declined and all three of them took the financial hit for the aborted project. Tom was looking for a referral to a lawyer.

Tom wouldn’t clarify why Bill would put himself (and everyone else) in a deep financial hole, especially after he agreed to pledge the asset. We’d noted quite a bit of chemistry between Tom and Sara when we worked with them. Whether they were lovers or if Bill was simply jealous, we do not know, but the result was the same. All of them had a $400,000 hole to dig out of.

And the location? I recently watched an air race that featured the spot they’d picked up front and center on every lap the planes made. There was a wall of people ten deep in front of it. They would have made a killing.

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