The owners of the New York Mets are no strangers to financial calamity. After losing $550 million in Bernie Madoff’s Ponzi scheme and paying out $80 million to settle a lawsuit claiming they were in on the scheme, Fred and Jeff Wilpon managed to keep their team by taking out loans and slashing payroll.

But Madoff’s predatory investment schemes aren’t the only source of red ink for the Wilpons. One of their own major investments in real estate—long their area of business expertise—has gone deep underwater, according to documents obtained by Deadspin.

A performance report at the end of June 2015 concluded that a real estate private equity fund run by Fred Wilpon had turned $497 million—including $150 million of its own money—into cash and investments worth $173.25 million. In its way, this performance is at least as remarkable as the one that put the Mets in the World Series this past fall.

Real estate is where the Wilpons made their fortune before taking over the Mets. Fred got into the real estate game back in 1972, when he co-founded Sterling Equities with Saul Katz, his brother-in-law and the current president of the Mets. Today, Fred Wilpon and Saul’s brother Michael Katz are the executive officers of Sterling American Property, Inc., a private equity firm specializing in real estate investment.

Sterling America Property’s website touts the $4.5 billion it has invested in real estate assets across the country, and claims that “Sterling American has consistently demonstrated the ability to identify attractive investment opportunities and succeed in all phases of the real estate cycle.” It started its first private equity fund, known as SAP I, in 1991, and went on to open new ones every few years until SAP V opened in 2006.

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A real estate private equity fund usually has a life cycle of about 10 years. Things get started with the fund managers collecting capital from investors, who become limited partners. In the next stage, the fund uses its capital to buy up various properties that it believes can be enhanced in some way and then re-sold at a higher price. Different funds have different strategies for enhancing the value of their properties; Sterling takes an approach that includes “capital restructuring, strategic capital improvements, proactive leasing, expense reduction and asset repositioning.” As the value-enhanced properties are sold off, returns are sent back to the limited partners, and everyone goes home fat and happy and rich.

The SAP I through SAP IV funds finished their life cycles successfully, and Sterling touts their performances on its website. As SAP V approaches the 10-year mark, the Sterling site doesn’t have much to say about it:

Sterling American launched Sterling American Property V in April 2006. SAP V is a $609 million discretionary fund formed to invest in a broad range of real estate and real estate related assets, with an emphasis on office and multi-family properties with value enhancement opportunities.

Sterling American Property V is the fifth real estate investment fund organized by affiliates of Sterling Equities, Inc., American Securities, L.P. and American Securities Capital Partners, L.P. Sterling Equities is the largest investor in this fund with an equity commitment of $150 million. American Securities has committed $20 million.

As of the first quarter of 2010, SAP V has deployed over 70% of the raised equity, acquiring approximately 4,600 residential units and 2.8 million square feet of office space.

Despite SAP V being near the end of its expected life cycle, Sterling’s website only lists three of the properties that the fund purchased during its investment phase as having sold. Those three properties listed as sold were cited in a 2011 Wall Street Journal article as properties that Sterling had defaulted on:

Last year, a loan servicer filed to foreclose on two office buildings in Fairfield, N.J., where the fund defaulted on a $35 million mortgage, according to loan research service Trepp LLC. Sterling said it is negotiating with the firm in an attempt to hold on to both properties.

In 2009, the Sterling fund agreed to hand over to lenders its 43-story tower at 333 Bush Street in San Francisco after a major tenant went bankrupt.

The performance report describes SAP V as a $610 million fund that had called in $497 million as of June 2015. What this means is that although the investors may have committed $610 million, only $497 million of that had been invested in real estate properties.


Fred Wilpon and Mr. Met, 2012. Photo via Getty


The difference between the money available to the fund and the money put into real estate can be interpreted in various ways. It could mean that SAP V’s managers haven’t yet found the right investment opportunities to call the rest of the money in for, or it could mean that the limited partners have put pressure on the managers to not call in the remaining $113 million—that money still belongs to the limited partners until it’s called in—because of the fund’s poor performance.

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There are a few ways to judge the performance of a private equity fund. One is to look at the fund’s Distribution and Net Asset Value (NAV). Distribution denotes how much cash has been paid back to the partners, and NAV shows the value of the fund’s active investments (i.e. the properties that have not been sold yet). According to the data provided to Deadspin, as of seven months ago SAP V had distributed $22.9 million back to its limited partners, and had a NAV of $150.35 million.

It’s possible that the remaining assets could eventually bring in returns that exceed $150.35 million, but that is their valuation, as of last summer. Taken together, what these numbers show is that, as of June 30, 2015, SAP V had taken $497 million and turned it into $173.25 million worth of cash and investments.

Another way to judge a fund like this is to look at its Internal Rate of Return (IRR)—a percentage that calculates how much return the fund has gotten on its investments—and compare that figure to similarly-sized funds. According to the performance report data, SAP V’s IRR has been negative since its inception, and was at -14 percent in June 2015. The fund’s IRR went as low as -30 percent after the market crash in 2008; this is no great shame, but it has failed to rebound along with comparable funds.

The performance report provided to Deadspin includes a table showing how SAP V compares to nine other real estate funds in its peer group. The top-performing fund in that group has an IRR of 13.76 percent, and SAP V is one of just two funds on the list that has a negative IRR.

Sterling American Property declined to comment.

Real estate is supposed to be the bedrock of the Wilpon empire, the one layer of wealth so deep that it could weather the financial calamities above. In 2011, the New Yorker described real estate as the “heart” of the Wilpons’ operation, and sung an epic catalog of their New York properties:

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Real estate remained the heart of the Sterling operation, and, thanks to the cachet of owning the Mets, Wilpon finally started playing on the big stage of midtown Manhattan. In 1986, working with partners, he built the Lipstick Building, designed by Philip Johnson and John Burgee, on Third Avenue; in 1992, 450 Lexington Avenue, next to Grand Central Terminal; and, later, the tower for Bear Stearns, on Madison. Madoff took three floors in the Lipstick Building. In all, Sterling came to buy or develop 25.2 million square feet of commercial property, sixty-five thousand residential units, 8.7 million square feet of retail property, and sports complexes. In 2001, as a sort of dry run for Citi Field, Wilpon built the stadium for the Mets farm team in Coney Island; it was the first new stadium in Brooklyn since the demise of Ebbets Field.

Even in 2011—after the market had crashed; after $550 million of the Wilpons’ money was vaporized by Bernie Madoff’s Ponzi scheme; after the brothers were sued for $300 million by bankruptcy trustee Irving Picard—Fred Wilpon was still being lauded as an exemplar in the industry. From that same New Yorker profile:

“In New York real estate, there is a small group of people who are in their own league—Vornado, SL Green, Tishman Speyer,” Steven Spinola, the president of the Real Estate Board of New York, said. “But Fred is in the very next group, with the Rudins, the Resnicks, and the Zuckers.” Wilpon’s reputation transcends the extent of his holdings. “Everybody likes Fred, there is tremendous respect for Fred, people listen to what he has to say, and I don’t know of anybody who has ever had an open fight with him,” Spinola said. “They’d all like to beat each other out, but I have never heard a negative thing said about Fred Wilpon.” William Rudin, the chief executive of Rudin Management, said, “Fred’s reputation in the real estate community is top tier. He couldn’t be more of a gentleman.”

The struggle of SAP V certainly takes some shine off that golden reputation. Before it launched SAP V in 2006, Sterling was opening a new fund every three or four years. It hasn’t launched another fund since.

It’s impossible to know exactly what kind of financial shape the Wilpons are in without getting a direct look into their books, although the $150 million Sterling American Property has in SAP V isn’t chump change. The faltering of SAP V is just another tile in the incomplete financial mosaic, fit snugly against the $550 million that burned up with Madoff, the $80 million they were eventually forced to pay Irving Picard, the payroll slashing, the $25 million loan from MLB, Picard’s claim that the Wilpons were flat broke in 2012, and the $950 million worth of loans against the team that have been recently refinanced to stretch into the next decade.

Last week, the Mets signed Yoenis Cespedes to a three-year, $75 million deal that will edge the team’s total payroll close to $140 million, the highest it’s been since 2011. This was an important move for a team that didn’t make any bids on the offseason’s biggest free agents. It’s a move that could signal that the days of suppressing payroll in order to pay off debts are over, and that the war chest needed to finance a perennially competitive team is finally open. Or maybe the Mets just got lucky and scooped up Cespedes—who reportedly got a bigger offer from the Washington Nationals and could probably fetch a much higher price in a less-crowded outfield market next offseason—on the strength of the contract’s one-year opt-out. Again, unless the Wilpons want to crack open their accounts for all to see, there’s no telling what they have in store for the Mets. If the war chest does exist, though, it’s not likely to be filled with any money from SAP V.

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GIF by Jim Cooke

Photo via AP