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Originally published September 27, 2009 at 12:11 AM | Page modified September 27, 2009 at 12:11 AM

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Hundreds of local investors lose big as real-estate magnate falls

Michael Mastro's bankruptcy means his "Friends & Family Investors" could lose all of the $100 million they entrusted to the prolific Seattle real-estate developer.

Seattle Times business reporter

Michael R. Mastro didn't have to seek out investors. They came to him.

The veteran Seattle real-estate developer's reputation for making people money spread for 40 years by word-of-mouth, from friend to friend and generation to generation.

One by one, the folks Mastro called his "Friends & Family Investors" would come to his inconspicuous office on Rainier Avenue South and listen to him talk about his pending projects. Then they'd write big checks and take home promissory notes pledging they'd earn interest of 8, 9, even 12 percent — and could pull their money out any time.

There was no hard sell, investors agree. "It was like he couldn't care less — he wanted our money only if this is what we wanted to do," said Dave Carlson, co-owner of Northwest Millwork, a Seattle firm that invested much of its cash with Mastro two years ago.

But Mastro's long, successful run came to a crashing end last month when three banks forced him into what may be Western Washington's biggest, most complicated bankruptcy ever.

And his Friends & Family — about 200 investors owed more than $100 million — are the creditors most at risk.

Most are local. Many are Italian-Americans, like Mastro. A good number are in their 70s and 80s, and some have invested with him for decades.

The investors include a church, the Italian Club of Seattle and the Seattle lodge of the Sons of Italy.

When Mastro's assets are liquidated, there very possibly could be nothing left for them. The financial statement Mastro filed with the court earlier this month reported total liabilities of $587 million — most of it owed to banks with first claim on his real estate — against assets of just $249 million.

"I'm certainly not holding out much hope," Carlson said when asked if he expects to get any of his money back. "Obviously, looking at it now, what we did was kind of a big mistake."

Golden geese

In interviews, more than a dozen Friends & Family spoke of their loans to Mastro as golden geese that kept laying for years — until the real-estate and credit markets collapsed last year.

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It worked like this: Mastro used the money he borrowed from Friends & Family and banks to buy, develop and then often sell real-estate projects — a billion dollars' worth, according to his Web site. He also loaned money to other developers. With the proceeds, he would repay the banks and his investors.

For years, Friends & Family Investors said, requests to withdraw money from their accounts were honored quickly. Fat interest checks arrived in the mail the first of every month, like clockwork.

Mastro acknowledged in a letter to Friends & Family this summer that he had continued to pay them in recent months while putting off some of his banks.

And now?

Some are angry with him. "He hung us out to dry," said Joe Colello, a former casino and grocery owner who stands to lose more than $2 million. "He's not a good guy."

But a larger number still speak highly of Mastro, who declined to comment for this article. They characterized him as an upright businessman who fell victim to unprecedented economic circumstances.

Some are more upset with Mastro's banks for pursuing bankruptcy instead of giving him more time to work his way through the crisis.

"He's no [Bernard] Madoff — he's real," said retired restaurateur Barry Bloch, who invested with Mastro about five years ago. "The biggest problem is, the marketplace is so atrocious."

Good recommendations

Northwest Millwork invested with Mastro on the recommendation of its accounts manager, who had been with him for more than 10 years. Another investor, an engineer who spoke on condition his name not be published, said he invested with Mastro because a friend, also an investor, was friends with someone in Mastro's office.

In recent years, the promissory notes typically guaranteed 9 percent annual interest, compounded monthly, for accounts of $100,000 or more, but allowed Mastro to reset the rate every six months.

One South King County investor who started with Mastro in the mid-1990s said she received 12 percent at first.

Some notes say they are secured by real estate — but don't specify any properties. Other notes say nothing about security.

In some cases, investors said they relied on Mastro's monthly interest checks to help pay living expenses. Others said they reinvested the interest, making withdrawals only occasionally.

The South King County investor said she withdrew some of her money several years ago for a down payment on a house. "Other than that, I just let it ride," she said. Joe Colello said he withdrew $150,000 last November for a golf-club membership in Arizona without any trouble.

Signs of stress

But by last fall, some investors said, they began to detect signs of stress in Mastro's operation.

On Sept. 30, 2008 — the month the wheels nearly fell off the U.S. economy — Mastro sent a letter to the Friends & Family, acknowledging times were tough but reassuring them that "our organization is strong and healthy ... "

He listed seven pending sales of local office and apartment properties he owned that were likely to gross $169.5 million and net $67 million. "... We are blessed with our position in the market," Mastro wrote.

But King County property records indicate that just two of those seven sales closed, for a total of less than $22 million. And Mastro transferred one of the remaining five properties to the bank in June to avoid foreclosure.

Constance Roberts said that after her husband Craig got sick, he told her in February, "You'd better go ask Mike for our money." But when she met with Mastro, she recalled, he said he couldn't cash her out.

"I told him, 'You have to help me. That's all the money I have,' " Roberts said last week. Mastro agreed to do what he could, she said, and over the next few months sent her $18,000 — a fraction of the Roberts' investment.

Craig Roberts died in May.

While the monthly interest payments to Friends & Family continued, Colello, Carlson and other investors said they, too, were turned down by Mastro when they started asking him to return some or all of their investment earlier this year.

Colello said he offered in January to take 50 cents on the dollar. Mastro said he couldn't comply, but insisted he'd recover, Colello said.

The engineer investor said that in the spring, his contact in Mastro's office quietly advised against investing more.

One Eastside investor said Mastro told him early this year that "if the banks leave me alone, in two or three years there will be enough equity built up that I can spin these properties and make some money."

But Mastro's several dozen banks weren't leaving him alone. They began filing lawsuits claiming he'd defaulted on real-estate loans. Some won judgments against him or got third-party receivers appointed to run properties secured by the unpaid debts.

On July 10, Columbia State Bank, First Sound Bank and Venture Bank filed an involuntary Chapter 7 bankruptcy petition — which leads to liquidation rather than restructuring — against Mastro.

The developer resisted at first. In a July 31 letter to Friends & Family, he said bankruptcy would result in a "fire sale" of his assets.

"Many banks strongly object to our payments of Friend & Family obligations while we do not service our unsecured bank debt," Mastro wrote. "This objection was a prime motivation for the bankruptcy petition."

The banks had moved to intercept his revenue streams, he wrote, so there would be no checks on Aug. 1.

Attorneys for the three banks did not respond last week to requests for comment.

Weeks later, Mastro reluctantly dropped his resistance to the bankruptcy petition. In an Aug. 21 letter, he told the Friends & Family Investors:

"This episode marks the unhappy end of the nearly forty-year history of Mastro Properties."

Hard-hit investors

Mastro's demise has hit some Friends & Family hard.

Without access to the considerable cash it had invested with Mastro, Northwest Millwork now is seeking a bank line of credit, Dave Carlson said. If the company can't get one, "it could have a very serious impact on us."

Constance Roberts said she's disappointed Mastro accepted more money from her husband last year, when he may already have known what was coming.

She relied on Mastro's interest checks to pay her bills, she said: "I'm in real financial trouble."

The Eastside investor said the loss "puts a big dent in my pocketbook," and noted that Mastro has testified he recently transferred his Medina waterfront home, a luxury car and jewelry into offshore trusts.

"Mike Mastro will walk away a wealthy man," the investor said.

But Mastro still has plenty of loyalists among the Friends & Family. "It was a very good investment, and I consider Mike a very upstanding and moral man," said Donna Rawlings of Issaquah, who first invested with him 25 years ago.

Seattle attorney Jerome Shulkin represents more than a half-dozen Friends & Family Investors. "They're not so much angry at Mastro as they are at the banks that forced him into this," he said.

That anger is misplaced, said Joe Colello: "If he didn't pay the banks, what are the banks supposed to do? They have shareholders to answer to."

Under investigation

As Mastro's bankruptcy unfolds, the state Department of Financial Institutions' securities division is investigating whether his contracts with Friends & Family violated state law prohibiting sale of unregistered securities.

The agency has sent a questionnaire to the investors and interviewed Mastro, division director Mike Stevenson said; the investigation should conclude soon.

Mastro referred to the probe in his July 31 letter to Friends & Family, saying he had done nothing wrong.

Some Friends & Family Investors said the only way they'll get any money back is if the trustee running the liquidation waits to sell Mastro's real estate until the market recovers.

But none are optimistic.

"My lawyer told me, 'The worst-case scenario is that you're going to lose all your money,' " the Eastside investor said, " 'and you probably will.' "

Eric Pryne: 206-464-2231 or epryne@seattletimes.com

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