Posted on 09/19/2004 10:01:15 AM PDT by lelio
The company responsible for building the $150 million Downtown Dadeland and several other high-profile projects in South Florida is closing operations after five decades in business.
Miller & Solomon, one of the state's oldest and most successful contractors, has laid off 43 employees and will not take on any new building assignments. After finishing its remaining four projects, the builder plans to fold its tent -- permanently.
One of Miller & Solomon's two partners has already left the troubled company. A week ago, Donald J. Kipnis moved to the The Trump Group, a Williams Island-based developer operated by Jules and Eddie Trump. The other partner, Lawrence A. Kibler, said he would continue running the company until it has finished its current projects, expected to conclude by the end of next year.
The company's abrupt demise has caught many real estate insiders by surprise, given the current construction boom. Miller & Solomon has built scores of high-profile buildings across South Florida and appeared poised for continued success. It won the bidding to be the general contractor for the seven-acre residential and retail Downtown Dadeland project and is currently putting the finishing touches on the luxury condo Bellini on the Ocean in Bal Harbour.
''It comes as a big surprise because they do such quality work,'' said Martin Margulies, developer of the Bellini, his third project with Miller & Solomon.
The builder has constructed dozens of high-profile projects across South Florida. It built The Floridian residential tower and Regal South Beach Cinema 18 in Miami Beach, Grove Hill Condominiums in Coconut Grove, Grand Bay Residences on Key Biscayne, the Wayne Huizenga School of Business at Nova Southeastern University in Davie and the Dolphins' training facility.
The root of the company's woes, Kibler and Kipnis say, is that, after its previous bonding company decided this year to stop underwriting large construction projects, Miller & Solomon has been unable to find another company to bond future projects.
For the past eight years, Miller & Solomon used The Hartford to bond projects. But at the beginning of this year, the Connecticut-based company chose to stop bonding large-scale construction projects, Kibler said.
The Hartford could not be reached for comment.
Lenders sometimes require general contractors to take out a bond to insure a construction project. When a general contractor does not have bonding capacity, that can severely limit its ability to win projects.
After eight months of searching for another bonding company, such as Chubb or Travelers, Kibler said they had given up.
But why a five-decade-old company is suddenly unable to win bonding remains a puzzle in some quarters.
''I have not heard of it being a problem with others,'' said Michael Cannon, managing partner of Integra Realty Services in Miami.
Kibler explained it was due to a confluence of events he dubbed ''the perfect storm.'' He said that the bonding market had tightened significantly, that the enormity of the company's current projects scared risk-averse bonding companies that fear underwriting added projects and that a recently concluded divorce between Donald and Nancy Kipnis had reduced the net worth of Miller & Solomon, which is a partnership, to the point where it could not make the cash demands now required by bonding companies.
''There was no one death blow,'' Kibler said. ``We had some joint-venture people we were talking to. We kept working and working and ultimately realized we were not going to find that solution.''
Kibler stated that the company would not seek bankruptcy protection.
Kibler said the size of the Downtown Dadeland project had prompted bonding companies to take a warier eye toward underwriting additional projects. The project is more complex than is usual in South Florida because it requires the use of scuba divers to seal shut an underground parking garage 10 feet below the water table.
In July, meanwhile, the Kipnises ended 22 years of marriage, their divorce settlement sealed by Miami-Dade Circuit Judge Sandy Karlan. Kibler and Donald Kipnis said the settlement impacted Kipnis' net worth significantly enough that the two lacked the capital to meet bonding companies' cash demands.
''We have the experience and track record, but the thing we don't have is the capital to make them happy,'' Kibler said.
In 1985, Kipnis and Kibler bought the company from founders Bob Miller and Joe Solomon. They took it from $15 million in annual revenue to $160 million, Kibler said.
Kipnis said he had decided to leave now because it had ``been part of my long-term strategy to move over to the development side.''
"... a recently concluded divorce between Donald and Nancy Kipnis had reduced the net worth of Miller & Solomon, which is a partnership, to the point where it could not make the cash demands now required by bonding companies."
There's a reason, if I ever saw one. They apparently became overleveraged because of a loss of assets. No one will be anxious to bond that. My guess is, the principals were not willing to sign securitized personal guarantees. Better to take move on to greener pastures.
Divorces will do that to a business. Good catch.
How about Bonding Companies desire to reduce their exposure in Florida. Hurricanes can do a lot of damage in a hurry.
Undoubtedly there is part of that currently, although I believe that the original search somewhat predates the last month's slew of hurricanes in Florida.
What I am suggesting is that could have raised the bond money in the capital markets, not by going around hat in hand to each bond company and "joint venture" groups. Those are what small businesses have to do; bigger businesses have access to more efficient mechanisms.
Instead, this company could have issued something a lot like a "catastrophe bond", where the holder of the bond could potentially lose 100% of his investment, and in return, would have received a bit of a premium on that additional risk.
For that matter, the bonding companies could even more easily raised the money in the capital markets at probably a better rate than the company if they were willing to aggregate this project with some lower risk projects.
Securitization; slice and dice the risk, and squeeze out the inefficiencies of doing everything one-off. It's been what's happening for the last 20 years, to the great benefit of the consumer with the GSEs (though the GSEs haven't really demonstrated that they understand how to lay off risk properly), as well all types of consumer loans such as automobile loans.
It uses it's funds to hire another GC or sometimes the same GC to complete the project.
Large companies like this one never call in the bond company, since they always finish the job.
These guys just don't want to do this anymore, they're both multi-millionaires who don't need to do this anymore.
The business is extremely stressful.
What happens if one of their projects falls over a week after it is "finished" (in quotes as what determines if a project is finished)? Is the bond issuer in any sort of financial trouble?
These are surety bonds; they are a performance bond, so that there is no harm to someone else if the insured fails to perform. The performance bonds in question are those of the contractors and sub-contractors, and only are against the completion of a job; if the building falls over a week later, the only recourse I believe would be a law suit.
There is a good article here on the whole situation, with quotes from none other than the Mr. Kipnis about the whole situation. Doing some googling, it turns out that Mr. Kibler does a good bit of teaching in this area.
Believe it or not, even Enron pops up in all of this, in the reinsurance market.
I believe that our whole insurance system is flawed; the biggest problem is that we have 50 different insurance systems, regulated by 50 different regulators. Frankly, we should regulate them more like the securities companies, which in a more modern view of the world of risk, is really what they should be viewed as. The current inefficiencies in the insurance market are expensive and frustrating for the purchasers of insurance products.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.