Big Columbia S&L; Real Estate Deals Turn Sour : Thrifts: The Orange County office towers built with Koll Co. in ’88 are still half empty. The S&L; needs to sell its interest to raise capital.
When one of the nation’s largest and most profitable thrifts teamed up with the biggest developer on the West Coast to construct office buildings in the early 1980s, it probably seemed like a very good idea indeed.
After all, the two companies had a lot more in common than fashionable addresses. Columbia Savings & Loan Assn., based in Beverly Hills, had lots of money to invest. And the Koll Co. of Newport Beach had years of experience building offices, factories and warehouses.
But that was before the junk bond market crashed in 1989, forcing Columbia to report huge losses. It was also before the office market started going downhill in Orange County, which also began in earnest last year.
Now Columbia has told the Securities and Exchange Commission that the office towers it built in 1988 with Koll in Irvine and Orange are still half empty. The thrift has been forced to sink more cash into them to keep them operating and now needs to sell its interest in the buildings to raise capital.
And that’s not all. The remaining land that Koll and Columbia own in Irvine may not be worth nearly as much as the two had thought, since the city may not allow them to construct as many buildings as planned.
Altogether, Columbia told the SEC it has put aside $49 million to cover potential losses on its real estate investments. Sources said as much as $30 million of that amount has been set aside for the Koll buildings, some of it to cover continuing operating expenses but most of it in anticipation of losses when the thrift sells its interest in the buildings.
Officials of Koll Co. did not respond to requests for comment, so it is impossible to determine Koll’s percentage of the partnership with Columbia or its potential losses on the buildings.
Still, Columbia’s recent filings with the SEC provide an interesting glimpse at how the market downturn has affected the intensely private Koll Co.
Columbia told the SEC that its two 12-story office towers at Koll Center Irvine North near John Wayne Airport--which opened in 1988--were only 56% leased by the end of last year. (Until recently, developers expected to fill new office buildings within a year.) The problem was even worse at Koll Center Orange, where an office tower constructed in 1988 was only 47% occupied.
In Orange County alone, a fifth of the nearly 50 million square feet of space in larger, newer office buildings is empty, commercial broker Coldwell Banker reported recently. Even though tenants took nearly 1 million square feet of office space off the market during the first quarter of the year--a very healthy amount--there’s still lots more space out there, and rents remain flat. And while construction has slowed, there’s still plenty more office space coming out of the ground.
According to the SEC filing, the city of Irvine is pondering how much more development to allow around John Wayne Airport, including the remaining land at Koll Center Irvine North owned by Columbia and Koll.
Until the city makes up its mind whether to allow Koll to build three more office towers and other buildings on the land, “the liquidity and marketability of this investment will be substantially impaired,” Columbia told the SEC. And if the city imposes new conditions or restrictions on the project, “the market value of this investment is likely to decline substantially.”
Those buildings and the land make up about a third of Columbia’s real estate portfolio, for an investment of about $81 million.
Just how serious is all this? The $62 million Columbia lost last year on its real estate investments is dwarfed by the more than $500 million it lost in the last five months.
Real estate, in fact, wasn’t the cause of Columbia’s problems, as it was for a lot of thrifts. What hurt Columbia was its $3.5-billion junk bond portfolio, which plummeted in value when the market for the risky high-yield bonds dropped last year.
The losses wiped out its capital; the thrift acknowledged in another SEC filing Thursday that it might be seized by the government.
But what to do with the real estate remains a persistent problem: Columbia is under pressure from new federal thrift regulations to sell its real estate by 1994. If the market doesn’t improve soon, it will be hard for the thrift to get top dollar.
In fact, Columbia told the SEC, there is no assurance “the association will recover its investments with respect to any of these projects.”
For Koll the problems aren’t as serious. The giant developer has amassed billions of dollars in real estate holdings and isn’t likely to be affected much by taking on a new partner when Columbia sells its interest in Koll Center Irvine North and Koll Center Orange.
Koll has already had several other partners bail out of the high vacancy rates and low rents of the Orange County market by selling their interests in buildings. In fact, the big developer is rumored to have a partner already lined up for the Columbia buildings.
Koll still faces an office market that is overbuilt; even while the stream of tenants looking for office space remains steady, there is still way too much space to fill.
And with the thrifts out of the action thanks to the new federal regulations, experts say it’s getting harder to find financing for real estate deals, even for big players such as Koll.
One of Koll’s biggest deals, in fact, recently fell through when Union Pacific Corp. said the developer did not come up with adequate financing to complete the $532-million acquisition of the railroad’s massive landholdings.
