Property Near Toxic Dump a Symbol of S&L; Misdeeds

It’s only a barren patch of land on the outskirts of town, but the 1,200-acre tract will long be remembered in local lore as a monument to the financial misdeeds of Silverado Banking, Savings & Loan and the business associates of President Bush’s son Neil.

Over the last 10 years, the land on Gun Club Road was used to generate millions of dollars of paper profits for Silverado, where the President’s son served on the board of directors. It also produced a few million in real profits for Bush’s friends and business partners.

But like so many other real estate properties that Silverado acquired during its heyday, the Gun Club Road land was clearly overvalued by the institution and may prove unsuitable for any development. Among its many drawbacks: It is located on the edge of a toxic waste dump.

Although Silverado officials paid about $25 million for a part interest in the property, local officials estimate that the land is worth no more than $5,000 an acre in the current real estate market--or about $6 million for the entire site.

Today, the vacant lot on Gun Club Road still sits idle--part of the massive portfolio of Silverado holdings that was taken over by the government after the $1-billion collapse of the Denver S&L.;

Other seeming white elephants in the Silverado investment portfolio include a historic landmark in downtown Denver, a variety of vacant lots and several bad loans--including one loan that financed a giant indoor amusement arcade known as Funplex.

While the landscape here is littered with such remnants of Silverado’s portfolio, many analysts believe the Gun Club Road property typifies the kinds of questionable real estate ventures and other improprieties that occurred during the thrift’s go-go days in the 1980s.

It also demonstrates the gnawing difficulties that federal regulators face as they set about the task of selling the properties that Uncle Sam has inherited from the collapse of the thrift industry.

The President’s son had no personal financial stake in the Gun Club Road deal, but he was serving on Silverado’s board between 1985 and 1988 when two officers of the thrift received $4 million in loans as a direct result of transactions involving the property.

As a director, Neil Bush was privy to information about this and other questionable transactions.

Moreover, Bush’s business partner, real estate developer Bill L. Walters, was the original owner of the Gun Club Road property and still retained a small interest in it when he defaulted on about $100 million in loans made by Silverado.

According to records and interviews with federal regulators and key figures in the case, the Gun Club Road saga began in 1984, when Silverado’s holding company bought a majority interest in the property by providing Walters with $10 million of preferred Silverado stock.

The venture appeared to be a good deal for Walters, who had paid only $3 million for the land in 1980 and 1981.

At the time, it was widely believed that Gun Club Road might be chosen as the corridor for the eastern leg of a proposed new beltway to be constructed around Denver. Known as E-470, the road will someday lead to Denver’s new Front Range Airport.

In what was widely viewed locally as an attempt to influence the decision, Walters provided officials of the E-470 Authority with free office space during their deliberations and served on the advisory board. Nevertheless, the authority chose a different path for the new superhighway.

Things changed again in 1986, when the land was annexed by the city of Aurora, a Denver suburb.

Silverado officials figured the annexation had increased the value of the lot by another $8 million. In lieu of a cash payment, they upped Walters’ partnership share in the Silverado holding company to 51.9%.

At the same time, Silverado also bought an increased interest in the Gun Club Road property and another Walters property. In exchange, Walters received $16.5 million in cash, $7 million of which he invested in Silverado stock.

But the deal did not stop there.

With a portion of the $7 million that Silverado received from Walters, the holding company paid preferred stockholders $2.4 million in dividends--including $1.4 million to Walters.

It also made $4 million in loans to Silverado Chief Executive Officer Michael Wise and to James Metz, a principal stockholder and Silverado consultant.

Federal regulators have described these dealings as “among the most egregious of the abusive insider transactions” undertaken by Silverado officials. They said the deal was cleverly designed to circumvent federal laws that were intended to limit lending to insiders.

Walters has said he was surprised by the land-for-stock arrangement when it was proposed to him by Silverado officials.

“I wondered, you know, what’s this stock all about?” he told the House Banking Committee last month. “I’d never done anything like that with an institution. So I set about discussing it with my counsel . . . and finally decided that I thought it was not as good as cash, of course, but I thought it was a reasonable deal for us.”

For Silverado, the land-for-stock arrangement helped to shore up the thrift’s financial position. As the thrift got deeper and deeper into trouble by making bad loans, Silverado stock would become an integral part of many transactions involving the thrift--including loans.

Under what became known among its officers as the “quid pro quo” program, Silverado would lend would-be borrowers more money than they were seeking--on condition that they would use the excess to buy Silverado stock.

Some borrowers also were required to purchase a bad loan that already was on the thrift’s books.

Like most of the real estate involved in these transactions, the Gun Club Road deal was based on a significantly inflated estimate of the property’s value. Moreover, the real estate market in Denver has collapsed. A similar situation prevails in many other cities.

As a result, analysts believe it is highly unlikely that the government will be able to recoup the money that has been lost in financing such deals, even if the property eventually can be sold.

Although the Gun Club Road area is ripe for residential development, city officials say the southern half of the property has been ruled unsuitable for home-building because it is too close to the toxic waste dump.

Likewise, the northwestern corner of the property is off-limits for housing because it is in the flight path of a military airfield, making it too noisy for residential use.

John Winslow of Dresco Co., a real estate information service, said the existence of the toxic waste dump is likely to make potential buyers unwilling to pay anything near the going rate for similar properties in other sections of the city.

On a normal weekday, the traffic on Gun Club Road is dominated by garbage trucks on their way to the dump. A for-sale sign posted on a neighboring property along the road has been altered with the legend: “Price Reduced.”

Peter Grosshuesch, a planner for the city of Aurora, estimates the current value of the Gun Club Road property at $5,000 an acre, or about $6 million. He says real estate speculators have shown no interest in the Gun Club Road area in recent years, even though it seems likely to be developed eventually.

Officials of the Federal Deposit Insurance Corp., which is still trying to sell the property, say they have not yet decided what the asking price will be.

But the irony is that, for all of its problems, the Gun Club Road land may be one of the easier dilemmas to resolve among the many overvalued properties and bad loans that Silverado left to the government.

“At least we own that one,” said Norman L. Neece, assistant managing liquidator for the FDIC.

In many other cases, FDIC officials are still struggling to resolve a plethora of legal difficulties that stand in the way of foreclosing on these properties and reselling them.

Here is the story behind some other Silverado ventures that are now in the hands of federal regulators:

* Aurora Galleria

Aurora Galleria, designed by Walters, who is an architect, was to have been an upscale retail, hotel and office mall adjacent to a busy interstate highway in the southeastern suburb of Aurora. Silverado granted Walters a $44-million second mortgage to help finance the deal.

But the Galleria also was part of Silverado’s “quid pro quo” program, so about $6 million of the money that Walters borrowed for the project was reinvested in Silverado stock.

The project appears to have been troubled from the start. According to Aurora officials, Walters was unable to win approval for an interchange on the interstate that would serve the Galleria. He also was fined $15,000 for destroying protected wetlands on the property.

Shortly after Silverado was seized by the government in 1988, Walters defaulted on his first mortgage on the Galleria property--a $32-million note held by the Cherry Creek School District, the original owner. The school district foreclosed and took possession of the land.

Today, the Aurora Galleria is nothing more than an open field of clover, sandwiched between a golf course and a dilapidated shopping center. The Cherry Creek School District still owns the property, except for 2.7 acres that federal officials claim belongs to them.

Leo A. Gerst, associate superintendent, asserts that the school district hopes to sell the land for no less than the $27 million that Walters had agreed to pay. “We are not going to have a fire sale,” Gerst declared.

Neece said federal officials hope their 2.7 acres will be part of any sale as well.

* Neusteter’s

Once the home of a thriving department store in the heart of downtown Denver, the Neusteter’s building was converted into apartments, with retail space on the street level, in 1986. The renovation was completed with a $26-million “quid pro quo” loan from Silverado.

In exchange for the loan, the borrowers were required to reinvest $3.75 million to buy an interest in one of the bad loans that was already on Silverado’s books and to spend another $1.25 million on stock in the thrift’s holding company.

The loans were based on an inflated appraisal that valued the property at $29 million, according to federal officials. It is estimated that the property currently is worth about $6.5 million.

The borrowers, Jeff Selby and Allan Gerstenberger, are trying to hang on to the building by negotiating a deal with the FDIC. They also recently filed for bankruptcy in an effort to stop the government from foreclosing.

Nancy D. Miller, a lawyer representing the pair, said her clients have become frustrated by the many levels of bureaucracy at FDIC that are involved in the negotiations. “Part of the difficulty is getting a decision from them,” she said. “It is a very difficult process.”

Miller said in an interview that if the negotiations fail, her clients are prepared to challenge the foreclosure in court on grounds that the loan was tainted from the start by the “quid pro quo” agreement.

The FDIC’s Neece said Selby and Gerstenberger will not be given preference if the government can find a buyer willing to pay a higher price. He also said the government must consider the “political ramifications” of selling it to a borrower indebted to Silverado.

Meanwhile, many of the apartments and shops at the Neusteter’s building are empty. A big “Now Leasing” sign hangs at the entrance.

* Guaranty Bank

It was to have been a gleaming, 35-story office tower in the heart of Denver’s financial district--the new headquarters of Silverado Banking, Savings & Loan.

That is what CEO Michael Wise had in mind in 1986 when he purchased an abandoned bank building and parking lot from Walters for $38 million. It was a “quid pro quo” deal. Walters was required to buy stock with the money, representing his appraised equity in the property.

As usual, the property was overvalued by Silverado, according to federal officials. Although Walters had acquired the property for $33.5 million, the appraiser set the value at $54 million--even though the bottom was falling out of the Denver real estate market at the time.

When federal regulators ordered a reappraisal of the property in 1987, Silverado was forced to realize $21.6 million in losses on the deal.

Shortly after Silverado’s collapse, federal officials were quoted as saying they hoped to tear down the abandoned bank building in order to make the property more valuable for resale. But that prompted an outcry from historic preservationists in town.

Karen Patterson, an official of the Colorado Historical Society, said preservationists protested that under federal law, the FDIC could not demolish the Italian Renaissance-style building unless it could prove that restoration would not be economically feasible.

The FDIC said it intends to abide by the law protecting such buildings.

* Funplex

The son of a professional acrobat, J. Robert Chado spent most of his life operating roller skating rinks in the Denver area. It had made him a millionaire, but his lifelong dream was to own a giant amusement arcade. Funplex, he planned to call it.

In 1985, Chado obtained a $12-million construction loan from Silverado to build his dream arcade. His partner in the venture was an old friend, Bill Walters.

Located on the western edge of this metropolitan area, Funplex bills itself as one of only three such amusement arcades in the United States. It offers bowling, roller skating, miniature golf, rides and games.

Although Chado was not required to buy Silverado stock in exchange for his loan, a soft economy has left him unable to keep up the payments. Moreover, his partner has defaulted on all of his Silverado loans.

Today, Chado is trying to sell other landholdings in order to buy down the principal on his Silverado loan. He says he has been trying to negotiate the arrangement with the FDIC for nearly three years.

Sitting behind his desk in the basement of Funplex, Chado lamented how the Denver economy has deteriorated since he borrowed the money. He noted that Walters, Wise and others involved with Silverado have since left town.

Choking back tears, he blurted out: “Bill is gone, Wise is gone, but I’m still here. I’m still working an 80-hour week. I’m still trying to hold this thing together.”