Ripple effect from developer Carinalli's financial woes

Over nearly two decades, Clem Carinalli positioned himself as a central deal maker in an intricate web of money flowing through Sonoma County?s real estate community.

He was both investor and developer, buying so much property he became the largest individual land owner in Sonoma County and fueling developments ranging from wineries and vineyards to strip malls and subdivisions.

So pervasive is Carinalli?s influence that when he confirmed last week that he could no longer pay some of his lenders, it raised lingering questions about how his financial troubles would ripple through the larger community.

An examination of public records reveals ties between Carinalli and some of the most recognizable names in Sonoma County real estate investment ? Jim Keegan, Harry Polley, David Madsen, James Madison ? as well as others well known in various fields: vintner John Balleto, urologist James Palleschi and retired dentist Robert Oliver.

Land records also reveal a lending pattern that began a dramatic shift in 2008.

After five straight years of lending an annual average of $14.2 million to land buyers and aspiring developers, Carinalli has not made a single real estate-backed loan this year.

Even as Carinalli started ratcheting down this lending in 2008, he began borrowing heavily from individuals. Most are reluctant to talk about their investments with Carinalli, and the records do not show how far he has fallen behind and to which investors.

Carinalli declined comment Friday on his financial difficulties and how his creditors have been affected. Earlier in the week, he said he intended to pay them all back.

He has hired a Roseville-based law firm that specializes in working with companies to restructure debt ? an alternative to seeking bankruptcy protection.

Carinalli?s bustling real estate empire began staggering as the economy went into a tailspin in 2008, according to land records. By this spring, he had stopped paying some of his creditors, telling them he needs time to restructure his business and asking them to accept less money.

His financial difficulties appear to have begun at the same time as the calamitous downturn in home values and commercial real estate.

Some of those who are not receiving payments from Carinalli say it has left them with less cash and wondering how their investments will fare as the restructuring unfolds.

?There?s a certain amount of effect on me for sure,? said Robert Barbieri, founder of Redwood Coast Petroleum in Santa Rosa, which he sold in November to retire. ?We?re all kind of waiting to see what he comes up with on his restructuring plan.?

Barbieri said he has been investing with Carinalli for about 20 years, receiving 8 percent to 12 percent on his loans.

?It?s a way for a person like myself to invest in the market and get a return on my money,? he said.

The money he recently loaned Carinalli was invested in vacant land in Lake County with plans to develop it, but then the real estate market collapsed and the deal died, he said.

?It?s plain dirt. There is no income off it at all,? Barbieri said.

Until last year, Carinalli had relied heavily on bank loans backed by his property holdings. At the end of 2008, Carinalli and his wife owned about 300 parcels in their names valued at $65 million on the tax rolls.

But banks, which have been devastated by land deals gone awry, have become leery of loaning more money to developers.

While he has continued to raise money from some banks, including a pair of loans totaling $3.6 million in October from Exchange Bank, public records show he has turned to private lenders to infuse his business with cash.

Carinalli has borrowed more real-estate secured loans from private lenders in the past six months than he did in all of 2007, 2006, 2005 and 2004 combined, according to county records that show loans where he mortgaged his property.

Two prominent Sonoma County Realtors, David Madsen and Harry Polley, loaned Carinalli and his associates more than $1 million this year and added an extra document to protect themselves in the event of a Carinalli bankruptcy.

Calls made to Madsen and Polley were not returned.

One of Carinalli?s associates on the loans is John Balletto, owner of Balletto Vineyards and Winery in Sebastopol and one of the largest vegetable growers north of the Golden Gate.

Public documents do not show if Carinalli continues to make payments on loans co-signed by others, such as Balletto, who did not return a phone call requesting comment.

Carinalli has taken out additional loans from local banks over the past year ? Exchange, North Valley, North Coast and Savings Bank of Mendocino.

He borrowed $3.6 million from Exchange Bank in October in return for a deed of trust on two of his commercial properties in Santa Rosa, including the building on Mendocino Avenue that houses Community Market, The Last Record Store and Govinda?s Restaurant.

But to receive the loans the bank required he sign an additional document that entitled the bank to ongoing inspections of his business financials.

The loan was issued at a time when Exchange Bank was reeling from losses on development-related loans, especially in the Sacramento area, that had forced the bank to suspend its long-running Doyle Scholarship program for Santa Rosa Junior College students.

The bank in general has become more conservative with loans to developers, bank President William Schrader said Friday.

But he added the additional documentation that Carinalli was required to sign was ?normal.?

The documentation, known as a ?Financial Information Rider,? gives the bank full annual access to Carinalli?s balance sheets and profit-and-loss statements during the course of the loan contract.

Exchange Bank did not require that same documentation of other organizations receiving mortgage loans during the same period, according to court documents.

Carinalli said last week that he continues to make payments to Exchange Bank.

Schrader declined to comment specifically about Carinalli?s loan and whether there was concern he would stop making payments, saying it was a matter of privacy and that banking regulations prohibit discussion of an individual?s loan.

?But I?ll give a personal comment, I believe Clem will do everything he can to work through the tough issues he?s going through,? Schrader said.

Carinalli, a Sonoma County native, started as an accountant in Santa Rosa serving real estate professionals. By the early 1980s, he had expanded into institutional lending as a co-founder of Sonoma National Bank.

In 1989, he devoted himself full time to deal-making when he sold his accounting practice. Already a major landowner and increasingly savvy developer, he assumed his role in the center of the Sonoma County real estate world.

Public documents reveal only a portion of his financial dealings.

He owns other property in other business names or jointly in partnerships. Some property is owned in his children?s names.

The extent of his difficulties came to light last week when he publicly acknowledged he has hired a firm that specializes in reshaping debt to get his business in order, work with investors and eventually resume payments.

A partner in the firm, Steve Huntley, who is working with Carinalli and his lenders, said it?s a matter of time.

?The markets will correct themselves, they always do,? said Huntley, a partner in Huntley, Mullaney, Spargo & Sullivan, which has worked with Sears, Delco Homes, Boston Market and many other cash-strapped businesses.

?But nobody knows when,? he said. ?It could be one year. It could be two.?