For an added outrage and the real reason I am writing this post, Woodbridge's CEO, Robert Shapiro, resigned last Friday but signed a consulting contract that pays him $175,000 a month. That is stunning. I am not sure how a bankruptcy judge can let this stand. This guy needs his previous salary clawed back.
Memo to all: I don't know if the Woodbridge programs matched any of following points, but as a rule avoid (where avoid means never, never, never consider) note programs where your proceeds are acting, in effect, as development equity for a sponsor. Here are just some of the issues you face:
- Development real estate does not generate cash flow to pay your interest, which is important if you are a note holder dependent upon interest payments;
- Your notes are subordinated to all other debt including construction and bridge loans, so if something goes wrong, your notes are likely worthless;
- The full value of the property, which is essential to repay your note principal and that may or may not secure your notes, is not realized until the development is complete;
- You are the last debt to get repaid; and,
- You share in none of the economic upside, outside of receiving interest and a return of your principal, if the development is successful. The sponsor keeps this gain and has used your cheap financing to earn its profit. You took equity-type risk for debt-like returns.
Third memo to all: Avoid (see above for definition of avoid) sponsors that claim to offer "next generation financial products." They don't exist. The only next generation that should concern you is is your grandchildren and not losing their inheritance.