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FAITH AND FORTUNE--Part 2
Seeds of Empire In each case, the Reichmanns profitably spurned conventional wisdom. But Paul also distinguished himself through his technical mastery of every facet of business. ''What Paul was excellent at was his ability to listen and ask questions of all sorts of people and then go off by himself and use his own brain finesse to improve on something,'' says Robert Canning, a Toronto investment banker who helped Reichmann craft scores of transactions. ''He was better than his lawyer, better than his accountant, and, yes, better than his financier. He was better than everybody at everything. For 25 years, I said he was the most brilliant man I ever met.'' Flemingdon Park was a sprawling office development on the outskirts of Toronto begun by Webb & Knapp, a U.S. company that had overextended itself and began selling off assets at fire-sale prices in the early 1960s. Other developers were intimidated by the sheer size of half-completed Flemingdon Park and put off by the stigma of failure. Although O&Y was still tiny by comparison, Paul recognized a bonanza in the making. In 1965, he engineered a deal in which he and his brothers gained control over the largest part of Flemingdon Park--300 acres of prime suburban property--without putting up a penny of their own money. Completing the project generated huge surplus cash flows that Paul used to lay the foundations of a far larger company. The $200 million First Canadian Place project, begun in 1973 in partnership with the Bank of Montreal, completed the Reichmanns' drive from Toronto's suburbs into its financial district downtown. The centerpiece of this retail-and-office complex was a 72-story tower, the tallest building in the British Commonwealth. Leased at premium rents, First Canadian Place soon became Canada's finest corporate address. What's more, in its construction, O&Y pioneered methods that established it as the world's most cost-efficient skyscraper builder. Long before First Canadian Place was completed in 1982, Paul refocused his ambitions south of the Canadian border. The bargain he found in Manhattan in 1977 proved one of the most lucrative purchases in modern real estate history, vaulting the Reichmanns into the ranks of the superrich in a few years' time. O&Y bought eight skyscrapers from Uris Building Corp. for about $334 million--and only $46 million down--just as the New York market began to pivot from bust to massive boom. O&Y paid $30 a square foot for about 10 million square feet of office space. When the market peaked in the late 1980s, the properties were worth $300 a square foot, or $3 billion. In negotiating the Uris purchase, Reichmann demonstrated extraordinary clarity of mind and great tenacity. The deal's critical element, though, was sheer daring: In essence, he wagered his company on his conviction that Manhattan's depressed office market would rebound sharply. If truth be told, he was attracted not just by the probability of success but also by the possibility of failure. ''Paul knew perfectly well the risks he took and liked taking them,'' says investment banker Canning, adding: ''He told me: 'My religion won't let me go to Las Vegas. This is my Las Vegas.''' By most interpretations, Jewish rabbinical law stops short of prohibiting gambling. But like most religious fundamentalists, the ultra-Orthodox frown on gambling as at best an unproductive distraction. Reichmann disavows the gambler label, though not with the vehemence one might expect. ''I don't think I am [a gambler], but it is difficult for a person himself to decide about his character,'' he said a few years after O&Y's collapse. ''...What some might call gambling was that I was willing to risk my fortune on what were not yet proven facts.'' Reichmann followed the Uris purchase with an even bigger bet on New York City's future. For a dozen years, New York officials had been struggling to create a city-within-a-city on a spit of landfill at Manhattan's southern tip. By 1980, they were offering Battery Park City sites at giveaway prices, but developers remained leery of the unproven location. Reichmann blew away his rivals by committing to construct the project's entire commercial core--five buildings containing 8 million square feet. When the World Financial Center was completed in 1988--on time and on budget, as usual--the Reichmanns surpassed the Rockefellers as Manhattan's largest real estate owners.
In the mid-1980s, the Thatcher government had begun an effort to rehabilitate the Docklands district, which included the Isle of Dogs. But Whitehall failed to invest in what the area needed most: transportation. Other than the Thames, the only connections between the Isle and central London were a traffic-clogged two-lane road and an unreliable light-rail system. Still, the government had larded the Isle of Dogs with tax breaks and financial incentives so huge as to all but eliminate land as a development cost. Before O&Y purchased the site in mid-1987 from an American-led investment banking consortium that had launched and promptly abandoned the project, Paul Reichmann made the rounds of Britain's largest corporate tenants. ''I asked them, 'Are you satisfied with your existing space?' The answer was a strong 'No,''' Reichmann recalls. ''But when I asked them, 'Would you move to Canary Wharf?' the answer also was 'No.''' Englishman Keith Roberts, O&Y's senior construction executive, strongly advised against Canary Wharf. Brothers Albert and Ralph also were unenthusiastic. But for Paul, Canary Wharf was irresistible. An ardent admirer of Margaret Thatcher, he believed that her administration had infused Britain with a new entrepreneurialism that would make London the reborn financial capital of an increasingly unified Europe. The city would need vast amounts of new office space, which only Docklands could accommodate. He was confident the Isle's transport deficiencies could be cured by joint private- and public-sector investment. And not even the stuffiest corporate panjandrums, he figured, would be able to resist ultramodern, top-quality space at half the going rate in the City. After the World Financial Center opened, Paul had told a reporter that what pleased him most was that the new complex had made ''a prominent imprint on New York City.'' The World Financial Center was indeed a widely hailed emblem of New York's renewal. But as the centerpiece of the Thatcher government's Docklands revival, Canary Wharf was a venture of national consequence--as well as a way to stamp the Reichmann imprint on the skyline of the historic capital of the English-speaking world. Canary Wharf ''is a challenge of creativity and will make a contribution for generations to come,'' Reichmann declared in 1988. ''It will be recognized as the best in Europe...and the world.'' Massive as it was, Canary Wharf was not out of scale to O&Y. The company had become a colossus, with cash flow in excess of $400 million a year. But financial might aside, Paul did not believe he was wagering O&Y's future on Canary Wharf, since he never doubted the project's success. The Reichmanns had always shrunk from publicity, but in the early stages of Canary Wharf, Paul was all over the papers, issuing statements so bullish as to evoke the prefight hype of professional boxers. ''On a scale of 1 to 10--if the risk with [the World Financial Center] was 9--here it would be 1,'' he proclaimed. Other developers would have arranged construction financing in advance. Not Reichmann. ''We can complete it on our own strength,'' he said of the eight-building first phase. In his remarks at Canary Wharf's groundbreaking, he redefined ceremonial optimism: ''The only question that enters our minds is: 'Will success happen immediately or later?''' At age 57, Paul Reichmann had ceased believing in the possibility of his own failure. Or, as he conceded after O&Y's collapse: ''The fact that I had never been wrong created character flaws that caused me to make mistakes.'' When a nephew by marriage, Morris Brenick, had decided in the early 1980s that he, too, wanted to go into real estate, Reichmann had taken the young man aside and confided in him. Recalls Brenick: ''Paul told me, 'If you are now going into business, I will tell you that what multiplied my initial success by a factor of 100 had nothing to do with my own efforts. It was God's will that I was successful on such a scale.''' If the activist God of Reichmann's faith had smiled on his lesser works, surely He would not let Canary Wharf fail.
North American property and financial markets slumped simultaneously, sapping O&Y's strength across the board. The downturn exposed critical defects in O&Y's foundation. During the 1980s, the brothers, to hedge their investment in real estate, had shelled out billions to buy stock in oil and other natural resource companies in the mistaken belief that the high inflation of the 1970s would persist ad infinitum. With the onset of recession, the portfolio's value plunged. Worse, Paul had chosen to finance Canary Wharf's construction by borrowing against his trophy properties in North America rather than selling one or two, inflating O&Y's indebtedness to an insupportable $20 billion. Had Reichmann presented his many creditors with a realistic restructuring plan in 1991, O&Y probably would have survived in shrunken form. Instead, he went to great lengths to mask the severity of O&Y's problems while arranging an increasingly desperate series of ad hoc transactions in hopes the world economy would turn and restore the foundations of the company's prosperity. In May, 1992, Paul grudgingly surrendered control of Canary Wharf to court-appointed administrators in London and put O&Y under bankruptcy court protection in Toronto. The net effect was to dismember the greatest property development company in modern history and wipe out the Reichmanns' equity, leaving the family with $100 million at most. Paul's abrupt transformation from the Einstein of Real Estate into the Man Who Blew $10 Billion humbled him but didn't come close to extinguishing his developer's verve. While he now admits to many strategic missteps, he bristles at the widely held notion that trying to refashion the Isle of Dogs into a business district to rival the City was one of them. ''Olympia & York brought Canary Wharf down, not the other way around,'' he insists. ''Olympia & York's problems were extremely deep; Canary Wharf's problems were not deep.'' Reichmann began maneuvering to regain Canary Wharf even before he officially lost it. A few hours before putting the project into administration, he phoned his two most trusted construction managers and asked them to remain on the job come what may. ''It was an instinctive thing on my part, rather than a definite plan,'' Reichmann says. ''I wanted the talent in place in case I was able to make a comeback.'' His tenacity soon assumed audacious form. In the summer of 1992, Reichmann assembled a group of well-heeled investors in an effort to buy Canary Wharf back from O&Y's creditors but was promptly rebuffed. Shifting tack, he worked up an elaborate plan to develop three large office projects in Mexico City--valued at a total of $1.5 billion--in partnership with billionaire fund manager George Soros. When the peso collapsed in late 1994, Reichmann, at Soros' insistence, put the projects on hold. He then assembled a new investor group to bid for Canary Wharf. In October, 1995, the consortium reached agreement to buy the project for 800 million. Today, more than 80% of the space in Canary Wharf's 12 completed buildings has been leased, and the complex is generating a small monthly operating profit. Within a month or two, Canary Wharf Ltd. will break ground on a 13th building, which Citibank already has committed to buy. ''The exciting part of [the Citibank] transaction,'' Reichmann says, ''is that it jump-starts our plans to build Canary Wharf to its full dimensions.'' This time, though, he makes no bold predictions of inevitable success. ''It will be a struggle,'' concedes Reichmann, whose ambition is tethered in part by dependence, since he owns only about a 5% equity stake in the reconstituted Canary Wharf. Separately, Reichmann also has revived one of his Mexican projects and is scouting new investments. The odds are against his building a second company the size of O&Y or regaining billionaire status. Nor will he ever again be regarded as a great business sage. At age 66, however, Reichmann remains what he has long been: one of the most resourceful and resilient entrepreneurs of the 20th century.
By ANTHONY BIANCO
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Updated June 15, 1997 by bwwebmaster
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