Mark Scagliuso is the kind of financial wunderkind who tends to be the envy of many; he always seems to find a way to make more money than you know who. When one of his newest best buddies, Zudi Karagjozi, needed a lot of quick cash to keep his high-end New Jersey home building juggernaut running at an increasingly faster pace during real estate's big run up, Scagliuso was all over it.
In June 2005, Scagliuso loaned Kara Homes $5 million. Ba-da-bing! Terms were good, very good—12.5 percent interest, sweeter than the market rates in mid-2005. For that moment in 2005, the nation's 127th largest builder, according to BUILDER magazine, seemed to be perched to soar into the vaunted top-100 stratosphere.
Classic high-stakes win-win plotline, right? Eleven months into the deal, Karagjozi proved to be conscientious, if not exactly punctual, as he paid the loan down. Inside of a year, he was a tad more than half way paid back. But by June 2006, the payments weren't just slow; they stopped. To get his $2.4 million plus interest owed, Scagliuso had to get in line with the dozens of other individuals, banks, suppliers, and laborers that found themselves in the same boat.
“He was generally on time. And when he wasn't, he paid the late fees and charges,” says Jonathan Bristol, Scagliuso's New Jersey attorney. Karagjozi was a terrific salesman. “He presented a great story,” Bristol says. “He makes a great first impression. He was energetic and enthusiastic. He had a great track record.”
What Scagliuso and scores of others didn't know was how hard Karagjozi was wangling to renegotiate major loans with bank partners for a year or more. While he paid some bills on time, it was the late fees that were getting the better of him. Kara Homes was in trouble long before it became evident. When the money coming in doesn't equal the money going out, it's called a problem. When the money that's supposed to be going out compounds with each passing day that it doesn't get repaid, and the $300 million treasure chest is locked up in 1,500 top-dollar New Jersey building lots that, thought highly coveted, no one wants to buy right now, that, my friend is called, “you didn't learn nothing from the 1980s.”
Kara is now mired in bankruptcy court in Trenton, N.J. It owes nearly $300 million to a long list of banks, individuals, subcontractors, suppliers, and manufacturers.
Among the nation's home builders and their investors and partners the questions have to be these: Is Kara an isolated incident or the first in a wave of private home builders that may collapse in the months ahead as their cash flows succumb to the weight of bank loan payments, vendor bills, taxes, insurance, overheads, and, most frustratingly, land that can't be liquidated? Is it a cautionary tale for all or merely the tale of one hot-shot entrepreneur who threw caution to the wind?
It would seem, had Karagjozi known the gory history of home building's casualties of the 1970s and 1980s, he'd might have adjusted his behavior to be spared their fate. What is clear now is that his first late payment to a creditor should have foreshadowed a far bigger problem.
Ernie Tretola, president of ADE, a heating and air conditioning company in Forked River, N.J., worked with Karagjozi for three years, and until about the middle of last year, Kara accounted for a third of his business. As the building company's problems with bills and such began to surface, Tretola gave Karagjozi some rope but insisted on monthly payments, though not at the full amount ADE was owed.
“If I was a wise man, I probably would have stopped working for him,” Tretola says. Kara owes ADE $300,000, a sum Tretola scarcely can hope to recoup in full.
In another case, from the beginning of their relationship, Karagjozi gave a personal guarantee to Pete Saia that he would be paid. But now Saia, the president of Century Kitchens in Colmar, Pa., is not so sure the $450,000 in outstanding bills will be paid. That's even in spite of the fact that his company, which does $35 million in business a year, has a lien on 30 to 40 of Kara's spec houses that Century Kitchens outfitted.
Two months before Karagjozi filed for bankruptcy, Saia attended a credit management meeting where Kara suppliers met to discuss what was going on. “It actually looked like it was going to be better,” Saia says. “He had sold two parcels of land and made cutbacks based on what the bank wanted. They had let half the staff go.”
Saia says he was not surprised when Kara filed for bankruptcy. Although Century Kitchens had done business with Kara for five years, “It wasn't very good from the beginning. We knew we were dealing with a volatile situation, but they kept promising and promising. In the end, they would always pay up,” he notes.
Robert Bressman, the warehouse manager for Kitchen King in Dover Township, N.J., another company that delivered and installed kitchens for Kara, recalls that Kara began falling behind on Kitchen King bills in 2002 or 2003.