It was 2007, and the Southwest was in the grips of speculative fever.
The land frenzy was particularly acute in Las Vegas, where major casino companies were in the middle of ambitious expansions, feeding the demand for housing and driving prices skyward.
Danny Tarkanian, now a leading Republican candidate for U.S. Senate, was looking to share in the good times.
With the development industry booming, a friend and partner in TarkanianÕs real estate firm approached him about an investment opportunity: Dignitary Downs, an Òequestrian destination resortÓ in Anza, Calif., complete with a 200-room hotel, restaurant and jockey school, all on land once owned by Dodgers great Don Drysdale.
Tarkanian wouldnÕt be a traditional investor, though. His familyÕs company, Vegas Diamond
|Properties, would become a Òhard-moneyÓ lender, borrowing money ? using its own property as collateral ? to then lend to the developer at a premium interest rate. The practice, common during the boom, helped fund projects that couldnÕt get conventional financing.
Intended to fund his familyÕs retirement, the plan backfired when the developer ran out of cash and the project stalled. Now, as Tarkanian enters the final days of the Republican primary, heÕs on the hook for $14.5 million and, in a strange twist, is suing the federal government to save his Las Vegas land from foreclosure.
Tarkanian says the failure is an aberration in a long and otherwise successful career. Indeed, the crux of his lawsuit is that he was defrauded by the developer and bank executives, who he says conspired to solicit loans on false premises.
His actions in the case, however, raise questions about whether his conduct squares with the image of the successful businessman he sells on the campaign trail.
According to TarkanianÕs lawsuit, the deal had suspect beginnings.
Two years earlier, Doug Johnson, TarkanianÕs friend and business partner, had extended a hard-money loan to the horse resort developer, Robert Dyson.
Dyson failed to repay the $7.5 million note when it came due, claiming that it would have meant a Òmassive reshuffling of his various assets and projects,Ó according to the lawsuit. Still, Dyson assured Johnson the horse tourism project was healthy and arranged for what amounted to a replacement loan from La Jolla Bank.
Johnson then approached Tarkanian about doing another hard-money loan to Dyson. In an interview, Tarkanian said he had rejected a similar pitch in 2005, but over the course of several months, warmed to the idea, convinced by DysonÕs presentations, which included detailed financial statements.
ÒIt wasnÕt an easy decision,Ó he said. ÒWe went back and forth for months. We went down to Anza. Dyson showed us the horse stables. It was an impressive place.Ó
The size and terms of the loan were significant: $14.5 million, secured by nearly nine undeveloped acres near M Resort and guaranteed by Tarkanian and his extended family.
And yet, according to his lawsuit, Tarkanian signed the paperwork Òwithout ever meeting, discussing or negotiating with anyone affiliated with La Jolla Bank.Ó Instead, he relied on Dyson and DysonÕs accountant to handle the logistics, including land appraisals.
Financial and real estate experts said that kind of passivity represents a failure to perform basic research.
ÒThe company thatÕs making the hard-money loan has to go out and do its own due diligence,Ó said Paul Habibi, a professor of real estate at UCLAÕs Anderson School of Management. ÒUltimately, you have to do your own homework ? pricing the land, placing the money accordingly and mitigating the risks. If you are giving money away, it becomes your problem.Ó
For his part, Tarkanian said he trusted Johnson, who, having worked for Dyson in the past, vouched for the developer. He also said DysonÕs records, including appraisals and financial statements, appeared to be in order.
Attempts to reach Dyson were unsuccessful. He is not named as a defendant in TarkanianÕs lawsuit because he has declared bankruptcy.
As for his passive role in the loan negotiations, Tarkanian said Dyson told him that he could leverage his friendship with La Jolla BankÕs president to put the loan together. ÒIt was the way Dyson set it up. He said he knew the guy,Ó Tarkanian said.
The bank has since been shuttered and seized by the federal government.
Less than a month after the loan closed, Dyson defaulted on the first interest payment, according to the lawsuit. Within six months, Dyson told Tarkanian and his partners that he had run out of money.
The loan, the suit says, had been used to pay off other loans Dyson had with La Jolla Bank.
ÒWe made a bad deal with a guy that gave us some bad information,Ó Tarkanian said.
His company, Vegas Diamond Properties, in turn defaulted on its loan to La Jolla, and the bank initiated foreclosure on the Las Vegas land.
In January, Tarkanian sued La Jolla in U.S. District Court to block the foreclosure and seek damages. The suit alleges the bank withheld facts about the Anza project, such as community opposition, disputed water rights and the existence of DysonÕs other La Jolla loans, and conspired with Dyson to Òshore up (its) somewhat shaky financial posture.Ó
The case took a turn in February when the federal government closed La Jolla and placed it under the supervision of the Federal Deposit Insurance Corp., making the FDIC the de facto defendant in TarkanianÕs lawsuit. Both parties are fighting over the federal governmentÕs appearance in the lawsuit and the appropriate venue for the case.
Nevertheless, the governmentÕs review of La Jolla seems to lend merit to some of TarkanianÕs arguments. In taking over the bank, the government said the bankÕs board had failed to act on an internal investigation that revealed Òsignificant evidence of malfeasance,Ó including Òpotential self-dealing and other misconductÓ by the institutionÕs officers.
It also cited the bankÕs Òminimal reviewÓ of real estate loans. Management, it said, relied on the borrowerÕs stated net worth, not documents reflecting the borrowerÕs financial condition.
In an interview, Tarkanian said he regrets the deal, but noted that he was hardly alone in embracing the real estate market during the boom.
ÒItÕs easy to ask in retrospect, ÔWhy would we do it?Õ But in 2007, things were going very well,Ó he said. ÒYou couldnÕt buy land fast enough. Developments were sprouting out all over the place.Ó
ÒA lot of people got caught up and made a bad decision. It was one bad decision and I have to pay the price for it. ThatÕs what this country is about. You pick and choose the investment. You make a good decision, you profit. You make a bad decision, you pay the price.Ó
Tarkanian said he has bought and sold real estate off and on since the 1980s, while working as an attorney and college basketball coach. He declined to provide details of those deals, but noted his role as developer of the Tarkanian Professional Center, a 150,000-square-foot office complex in Las Vegas, and Clovis Town Center, a 9,000-square-foot retail space in Fresno.
ÒIn 48 years, IÕve worked hard,Ó he said. ÒI invested well. I donÕt spend recklessly. IÕve made good decisions ? until this last one.Ó
michael.mishak@lasvegassun.com / 259-2347
Copyright 2010  Las Vegas Sun
