Cautious Lender : Goldsmith Banks on Conservatism
Taking the pulse on the erratic behavior of commercial real estate in Southern California comes naturally to Bram Goldsmith, a developer turned banker.
He has parlayed the assets of City National Bank from $600 million to its current $2.6 billion since taking over the Beverly Hills-based banking operation as chairman and chief executive officer in 1975.
A question on whether the Federal Reserve Board’s recent lowering of its discount rate will substantially alter current real estate activity, emits a good-natured shrug from Goldsmith.
“We’ve been at almost zero inflation and actually heading for disinflation, so we needed some warming up,” he said. “The Fed’s actions are usually reactive, like a skipper who keeps a steady hand on the tiller. It was a move to ease up the money a little and to encourage stability and normal growth. Basically, I view it as a no-event event.”
‘Tough Cookie’ Label
He recently completed the maximum-allowed, two three-year terms as a director of the Los Angeles branch of the San Francisco (12th District) Federal Reserve Bank, and now, as an esteemed Fed alumnus, continues to participate in an ongoing en famille exchange of information.
In an interview, the debonaire Goldsmith also comes across as a maverick, with a no-nonsense, clear-cut approach and the label of a “tough cookie.”
He cares little whether his clients come to see him in a T-shirt or a three-piece business suit, but when it comes to closing a deal, the method is highly selective and the lending policy very conservative. A client’s most effective calling card is his or her good credit and a healthy collateral.
In real estate dealings, Goldsmith has a distinct advantage. When he entered banking in 1975, he was president of Buckeye Realty & Management Co., then the largest privately held real estate development company in Southern California.
Built Bank Buildings
During the 1950s and 1960s, in a booming period of Los Angeles, Buckeye graduated from building homes in Downey to constructing downtown office buildings. The firm built several City National Bank buildings, including its headquarters at Roxbury Drive and Wilshire Boulevard, Beverly Hills, and the downtown office tower at 6th and Olive streets.
By the 1970s, with the Buckeye organization in partnership with George Konheim proving highly profitable, Goldsmith’s fascination with putting together real estate deals had begun to wane.
His career took a sharp turn in 1975, when Alfred Hart, founder and former chief executive officer of City National Bank, agreed to sell Goldsmith his 259,800-share interest in City National Corp., the bank’s parent company, for about $3.6 million.
Goldsmith already owned 20,000 shares of the company and had served as a CNB bank director since its inception in 1954. Since then, CNB has become the third largest bank headquartered in Southern California, with an added key role in data processing bank services to independent banks throughout the Western states.
‘We’re Renting Money’
In a 1986 report by Shearson Lehman Brothers, CNB ranked second among the nation’s five top “pure banks.” Pures, as opposed to “pit banks,” are described as outperforming normal banks, offering investors psychological comfort levels, rapid earnings growth and superior management.
“We’re in the business of renting money,” is Goldsmith’s simplistic explanation of the complexities of his profession, noting that more than 80% of the CNB’s activity is business oriented, with very little emphasis on retail banking. Its 24 branches are heavily concentrated in the Los Angeles area.
Of that 80% activity, 25% is focused on real estate for both high-net-worth clients who include scores of movie celebrities, rock stars, film producers, agents and others in the entertainment industry, and middle-market clients with revenues of $150 million or less.
As head of one of California’s premier business-oriented banks, Goldsmith moves cautiously, subscribing to the theory of high initial equity and low leverage.
Eastern Reputation
“I don’t generally finance anything for more than $15 million. That doesn’t give you any landmarks--just some solid bread and butter business. I am of the old school, stemming from my development days,” Goldsmith said.
“When I moved to California from Chicago in 1951, I built some houses, but as I got into office buildings, I found that the major insurance companies I was dealing with in the East still thought we had Indians in California, and they wouldn’t lend money to anyone for an office or an industrial building without personal guarantees for the life of the loan.
“I had made a study of commercial properties during the 1930s, and I noticed that even in the depths of the Depression period, nearly all office buildings remained at least half full. So I convinced the lender that if one could design the financing so that one could make the mortgage payments with 50% occupancy, one could survive in the worst of times.”
CNB supplies only the “bridge money,” Goldsmith said. “If a customer wants to build a commercial structure, our role is to tide them over from the beginning to obtaining permanent financing.
“We control the funding and we are very selective in determining whether a client has solid equities. Some institutions, in their anxiety to earn fees, sometimes lend too much money.”
Loan Amounts Limited
City National Bank’s real estate involvement is primarily in commercial and industrial buildings up to $15 million, and apartment buildings up to $7 million in areas “that make sense.”
One particular “good sense” success story stands out in Goldsmith’s mind. “It was a project we got involved with about eight years ago in Canton, Ohio. The Quaker Oats people had three obsolete silos in the middle of the city and someone finally came up with a novel idea.
“Instead of destroying these concrete silos, why not create a hotel complex, utilizing the existing structures?
“The city of Canton agreed to put the three silos in a redevelopment plan, then asked local banks to finance the project but none would agree to loan the money, even though the city had been willing to issue tax-free bonds against the property. None of the local financial institutions had enough confidence in the developer’s proposal.”
Learning of the developer’s plight, Goldsmith approached a group of investors in the entertainment industry and asked if the group would be interested in buying the investment revenue bonds on a tax-free basis if the bank would guarantee the bonds and sign for them.
Not Developers
“The result was a hotel project incorporating the silo structures which was running an 85% occupancy rate within two years,” the banker reported.
Banks by law cannot be participants in development, Goldsmith explained. “We cannot be developers or enter into joint ventures. We are not like the non-bank banks (like Sears), which can do either of two things, take in deposits or make commercial loans.
“They can’t do both, so what we have is an uneven playing field, which must seem very confusing to the consumer and the world at large. Understandably, people have great difficulty knowing who is doing what.”
There have been considerable changes in the savings and loan industry, Goldsmith noted. “They now have been allowed to take 5% of their assets and to put them into commercial loans.
“Some have gotten into that and gotten out, and in the process, have been burned heavily. What has happened in the last five or six years has dramatically changed that perspective, not only in California, but nationwide,” Goldsmith said.
Balance Wheel Gone
Commenting on the status of urban office space, Goldsmith said that historically, real estate office space has been like a roller coaster, always either oversupplied or undersupplied.
“There used to be a balance wheel that to a reasonable extent would limit an oversupply of product,” he said. “On the one hand, you had the developer--an optimist who believed in the product he had to sell--and on the other hand, the lender, who held back because he wasn’t sure that product was going to be successful.”
What happened, Goldsmith continued, is that the pension funds, the life insurance companies and the savings and loans began wanting a piece of the action and got into the joint-venture business; they too had to assume the same philosophy as the developer--the position of the optimist.
“Now there was no balance wheel,” Goldsmith explained, illustrating his point with what happened along the Wilshire Corridor, when so many condominium projects ended up with involuntarily owners--the lenders.
Cautious View
“When the developer is in a joint venture with a pension fund, he is getting 100% money without putting up anything, except for his creative ability. If the project works, the developer gets an interest. If it doesn’t work, this other fellow has just bought the farm.”
Goldsmith views new construction with caution.
“In Los Angeles, overall, we now have approximately a 4 1/2 years supply of vacant office space. What that does each year, with each building you build, and as new codes come in and with everyone wanting a fancier bell and whistle on each new structure, is that the cost of producing the product is more expensive.
“The result is that we have a lessees’ market. Tenants are driving hard bargains and some of the downtown buildings have ended up with major tenants having a piece of the equity, which represents the inflationary value of that building 10 or 20 years from now.” The same thing is happening in New York, he added.
Getting Top Pay
Goldsmith, reportedly the highest paid bank officer in the country today because of a far-sighted contract which pegged his compensation to the appreciation of the bank’s stock, lists his favorite pastimes as golf and gin rummy. But what he apparently most enjoys is his role as a philanthropist, actively involved in a variety of charitable works.
In 1985 Goldsmith received the prestigious Weizmann Institute Award in the Sciences and Humanities. In addition, he serves as co-chairman of the National Conference of Christian and Jews, Southern California Region, and as a director of its national board, and is a former chairman of United Way, Region IV.
