Leventhal & Co. Accounting Firm Plays a Major Role in Real Estate

When Kenneth Leventhal was a 10-year-old hawking newspapers in the Depression, he met a man who unwittingly set him on the path to building one of the nation’s most influential and profitable accounting firms.

The man, a newspaper distributor who was taking a correspondence course in accounting, “reached in his pocket and pulled out a pencil and said ‘this is all you need to be in the business,”’ recalls Leventhal. “I figured I could always raise a nickel for a pencil.”

Countless pencils later, the Century City-based company that Leventhal founded and co-manages and that bears his name is the 15th largest accounting firm in the nation with $63 million in fiscal 1984 revenues.

Although smaller and far less known within the general business community than Arthur Andersen, Price Waterhouse and other Big Eight firms, Kenneth Leventhal & Co., with a 700-person staff, is a powerhouse in its chosen niche--real estate.

Rescued Many Firms

Companies that the Leventhal firm has helped rescue from financial ruin read like a who’s who of real estate: Cabot, Cabot & Forbes, Carma Developers, Redman Industries, Daon Corp., Arlen Realty & Development Corp., U.S. Financial Inc., Levitt & Sons and Trammell Crow.

And the two top men at the Leventhal firm--64-year-old Kenneth Leventhal and 49-year-old Stan Ross--have built national reputations: Leventhal as a bail-out artist for debt-ridden real estate development and investment firms, Ross as a real estate deal maker.

Because the Leventhal company sells imaginative problem-solving to its clients as well as more traditional accounting services, it has been able to avoid the intense price wars currently being waged by accounting firms that are competing to perform routine audits for publicly held companies.

From the very start of his career, Leventhal said he was forced to provide special accounting and financial consulting services because his then-small developer clients had no stockholders and thus no need for quarterly audits.

Ross, who joined the Leventhal firm in 1961, says that the company also consciously sought out more interesting assignments “because we realized that accounting as it is usually practiced isn’t a lot of fun.” Ross said he once worked for a more traditional accounting firm and was appalled to see the accountant next to him fall asleep out of boredom.

Offers Fast Service

But Leventhal accountants have no time to be bored. The company has gained a competitive edge, industry analysts say, by dropping everything to respond to a client’s call. Clients who phone Kenneth Leventhal’s office say that he is often ahead of his secretary in answering the telephone.

In a new book titled “The Accounting Wars,” the Leventhal firm was rated No. 1 by corporate executives for having “the most attentive client services.”

Art Bowman, editor of the Public Accounting Report, a monthly industry newsletter, said it is such quick, personalized service that so far has enabled Leventhal to keep at bay the larger accounting firms, which have established competitive real estate divisions. “The real estate baron spends seven days a week at his business and he expects the same from his accountant, Bowman said. He added that the larger accounting firms, “would love to take Kenneth Leventhal’s work from him, but he devotes his whole time to it.”

Higher mark-up services translate into greater profitability for the Leventhal firm. The Leventhal company, which boasts a roster of 8,000 clients, generates more revenue per partner than any of its large competitors, Bowman said.

Last year, Bowman said, the Leventhal company produced $1.4 million in sales per partner, while runner-up Arthur Andersen reaped $927,000 per partner.

Fastest Growing

Moreover, Bowman said that Leventhal is the fastest growing accounting firm in the nation, with a 31% increase in revenues last year, compared to an 11% average for the Big Eight firms. Over the years, Leventhal said, his firm has rejected merger proposals from several Big Eight accounting firms, in part because the Leventhal partners earn higher salaries on average than the partners of any other accounting firm.

An industry survey shows that new Leventhal partners earn $100,000 a year on average, compared to $90,000 paid to beginning partners at the largest firms. And after 10 years, they earn on average $235,000 annually, compared to $160,000 for their Big Eight counterparts.

A Southern California partner of a Big Eight accounting firm, who didn’t want to be identified, said it has been his “personal hope” that Kenneth Leventhal would retire. He said that whenever the Leventhal company “is about to lose a client or engage a new one, the other partners stand aside and Leventhal comes in” and usually saves the day for the firm.

The firm’s clients are particularly loyal to the firm and its founder.

William Lyon, Southern California’s biggest home builder and chairman of AirCal, the Newport Beach-based regional airline, counts Leventhal among the handful of persons who have most influenced his career. Lyon says he seeks Leventhal’s advice before embarking on “any deal over $22.” Lyon brought in Leventhal to play a pivotal role in the dramatic financial rebound at AirCal, even though it was far afield from his real estate specialty.

Santa Monica-based builder Raymond Watt says Leventhal is responsible for half the growth of his highly successful development business, which has seen its annual revenues burgeon from $132,000 to more than $300 million since the two men met 25 years ago. Watt said that Leventhal’s advice eased his tax burden and thus gave him the extra capital he needed to grow.

Loves His Work

“He’s a person whose work is his world and his love,” Watt said of Leventhal. “He goes seven days a week, whenever the bell rings.”

Ross, expected to be Leventhal’s successor, has an equally impressive fan club among high-ranking executives. Former Irvine Co. President Raymond Watson said that in 1977 when the huge land company was the object of a furious bidding war, the winners--a consortium of businessmen who ultimately outbid the Mobil Oil Corp. and bought Irvine Co. for $337 million--owed its victory to Ross’ advice.

“He (Ross) replaced the computer that Mobil spent $1 million on,” Watson chuckled, describing Ross’ ability to cut through a morass of data to determine the long-term value of a landholding as extensive as the Irvine Ranch, which encompasses about a sixth of Orange County. When Watson later became chairman of Walt Disney Productions and was under the gun to decide whether to buy Arvida, a major Florida-based real estate firm, he summoned Ross for assistance.

A self-styled financial innovator, Ross came up with an idea for helping small home builders obtain needed funds during the credit-tight 1982 recession. At his urging, and with the guidance of other staff members at the Leventhal firm, a group of builders banded together to form the American Southwest Corp. in Phoenix, which so far has raised $530 million by selling bonds.

Self-Made Men

Both Ross, who grew up in a rough Bronx neighborhood, and Leventhal are self-made men. Both say they had to learn to fend for themselves after their fathers died when they were very young.

Leventhal said that as a youth he was driven to work hard for fear of returning to poverty. One of “the greatest thrills” of his life, he said, was when he first drove home through the gates of Bel Air. He had come a long way.

After graduating from UCLA and working a short apprenticeship with a small local accounting firm, Leventhal set up his own business in 1949 in the two-bedroom apartment he shared with his new bride. After surveying the market, he decided that real estate would be his specialty.

At that time, Leventhal recalled, returning World War II veterans were triggering a surge of home building in Southern California.

Leventhal said he figured that a “boy accountant” could make his mark by serving local builders who were being virtually ignored by the larger accounting firms who had more profitable fish to fry.

Like the young builders he assisted, Leventhal learned the real estate business from the ground up. And like his clients, he grew and prospered.

Carl Reichardt, chairman and chief executive officer of Wells Fargo Bank, who has known Leventhal for 25 years, said that Leventhal’s company has developed into “the preeminent accounting firm for real estate people.”

While praising Leventhal’s accounting prowess, Reichardt also observed that Leventhal “happened to be in an area where there was more home building than anyplace else in the world.”

Sought Tax Breaks

From the start, Leventhal’s builder clients were interested in sheltering their profits from taxes. In the 1950s most builders were dividing their individual businesses into hundreds of corporations in an effort to lower their tax rate.

But the small, modestly capitalized companies that resulted from the split-ups subsequently had difficulty borrowing money for day-to-day operations from the banks. Leventhal said he solved that problem for his clients by combining all the assets of their various firms in a consolidated financial statement to present to the banks.

“We convinced the Southern California banks that a home builder was no different than a garment manufacturer and he should be entitled to unsecured credit to finance his inventory,” Leventhal said.

Ross recalled that in the early days the Leventhal company was unknown nationally and therefore had difficulty recruiting top accounting graduates from universities. That problem was solved in the 1960s, he said, when the company hired bright graduates whom other accounting firms rejected because they wore long hair and beards.

Also in the ‘60s, the Leventhal firm rocketed to national prominence by arranging numerous mergers of home building companies with publicly held conglomerates such as Boise Cascade, CNA Financial, Singer Co., Signal Cos., Castle & Cooke and American Standard.

“We probably were involved in more industrial company-builder mergers than anybody in the world,” Leventhal recalled.

Arranged Merger

The icebreaker for the Leventhal firm came in 1966 when it arranged for Ray Watt’s development company, Watt Industries, to be acquired by Boise Cascade.

It was no small undertaking, Ross recounted, since Watt Industries consisted of 800 corporations and partnerships, all with real estate deeds that had to be transferred and recorded at various county seats to meet a tight deadline. “Boise even had planes standing by and we were flying deeds up and down California to record the transaction,” said Ross, who missed his 30th birthday party to see the enterprise through.

The successful closing of the Boise Cascade transaction, Ross said, finally gave the Leventhal firm credibility needed to start competing in accounting’s major leagues. When Leventhal helped private building firms merge into public corporations, he said, the corporations kept Leventhal on as their own real estate accountants. Subsequently, the Leventhal company exchanged its marriage broker’s hat for a divorce consultant’s when the real estate industry took a dive in the 1970s and many public corporations bailed out.

Over the years, Kenneth Leventhal & Co. has expanded to 52 partners spread throughout 12 offices, the busiest of which are in Los Angeles, Newport Beach and New York. In addition, Leventhal is affiliated with accounting offices overseas.

Responds Quickly

An advantage to maintaining a relatively small and specialized firm, Leventhal says, is that it can more readily respond to sudden shifts in the economic winds, whether an upturn or downturn in the real estate cycle or a change in the nation’s tax laws. “In this company you get an idea and the next day all the offices are doing it,” he said.

Leventhal said in recent years he has begun to wind down, taking more time out for recreation.

But he still wakes at 4:30 each weekday morning, runs four to six miles on a track at UCLA and works out at a gym before starting his business day between 8 and 8:30 a.m.

When he is in town, he continues to put in 60-hour work weeks “out of habit,” he said.

Leventhal strenuously denies that the Leventhal company depends on his leadership. But he said he has no plans to retire until he reaches 72--when he will be required to under the company’s partnership agreement--because he is “having too much fun to quit.”

Stan Ross, left, and Kenneth Leventhal in Century City headquarters of Kenneth Leventhal & Co.