Housing Slump Gives Accountants New Direction : Real estate: Developers who have found themselves in financial trouble are turning to a new breed of consultant.
Amid the half-empty office buildings, the unsold homes and the unemployed, there is one group still finding lots of work in Southern California’s tattered real estate market: accountants.
When a developer lands in the soup these days, he’s as likely to call an accounting firm as anybody else. When the real estate market was hot in the 1980s, some of the big firms expanded into consulting for developers and their financial partners.
Now that the developers have built way too much office space and the market’s gone down the tubes, these same accounting firms and some new ones are repositioning themselves as the people to see in order to avert financial disaster.
It’s called “workout” business, and an example of a client might be a developer who owns a half-empty building that doesn’t generate enough cash to pay the mortgage and who needs to work out easier terms with his lenders.
Even developers who are in pretty good shape might still need advice on trimming costs and staying healthy through this down cycle.
“Real estate companies historically like to spend a lot of money and probably over-staff themselves when times are good,” says Don Dahl, a senior tax manager at Arthur Anderson & Co. “So they’re also taking a close look at their overhead.”
There’s not as much of this workout business as there was regular consulting work when times were good. But there’s enough that the accounting firms are elbowing each other for it.
And nowhere is the tussle more intense than in Southern California, where real estate is such a large part of the local economy and you need a score card to tell the hundreds of developers and home builders apart. Kenneth Leventhal & Co., for instance, recently estimated that as many as 50 developers in Orange County alone might need to renegotiate their loans before the end of the year or go out of business.
“I’d much rather be advising developers on doing transactions in an up market,” says Neil F. Dimick, Deloitte & Touche’s national director of real estate consulting. “Workouts are not fun and, frankly, they’re not as profitable. But when you go into a downturn like this one, it makes sense to redeploy your people.”
One reason real estate began to look good to these firms in the late 1980s was that there was starting to be much less work in other fields. Advising companies on going public or assisting in mergers and acquisitions was big business in the go-go 1980s. But as the decade wore on and the junk bond binge tapered off, these markets began to shrink, and the accounting firms’ consultants began to look elsewhere.
Take Price Waterhouse, long one of the nation’s largest accounting firms but a new kid on the block in real estate consulting. Gregory Lubushkin, a partner in the Newport Beach office, says he spends half his time pressing the flesh with developers and the banks and insurance companies that finance them, trying to get a foot in the door.
“It’s all networking,” says Lubushkin. “You’re trained to be an accountant, but you have to get out and be a salesman, too.”
It seems to be worth the effort. Doing audits and preparing tax forms--the accounting firm’s traditional business--is becoming a generic type of business. Many companies believe that it doesn’t much matter who audits their books as long as they do it more cheaply than the other guy. So accounting firms find themselves bidding against each other increasingly for this business and cutting their rates to get it.
Consulting, on the other hand, is more personalized, and prestige counts: If you’re thinking about spending $100 million to build a new office tower, you care a lot more about whom you’re hiring to do the market survey. And you’re less likely to quibble about fees in order to get the best.
The accounting firms told developers: We’ll not only audit your accounts and do your taxes; we’ll advise you on where to build and whom to seek financing from and how to structure the deal.
Consulting was also a way to retain clients in the bread-and-butter business of auditing and tax preparation: If a client goes somewhere else for advice, the accounting firms reasoned, what’s to keep him from eventually moving his auditing and tax business over there too?
Nobody knows that better than Kenneth Leventhal & Co., the Los Angeles accounting firm that grew up with Southern California’s postwar real estate boom.
Leventhal specializes in real estate, and now it specializes in workouts. The New York office, for instance, is advising Donald Trump on how to hold his shaky real estate empire together. Among its other big clients: the Irvine Co., owner of one-sixth of Orange County, the largest urban landholding in the nation, and the William Lyon Co., Southern California’s largest home builder.
Leventhal has built such a strong reputation over the years that even much bigger firms don’t have nearly the name recognition that Leventhal does in real estate. And that translates into a lot of consulting work.
“Our business,” says Michael L. Meyer, managing partner of the Newport Beach office, “tends to be counter-cyclical because the demands for help from our clients increase when things get tight. We’ve been on a roll; we’re really growing.”
Although far smaller than the Big Six accounting firms, Leventhal is growing much faster, says Arthur W. Bowman, editor of an industry newsletter called Bowman’s Accounting Report.
Leventhal’s revenues grew from $110 million in 1987 to $166 million last year, an annual average growth of 16%. Arthur Anderson & Co., the largest of the Big Six firms and dwarfing Leventhal at $4.3 billion in revenue, is also the fastest-growing. But it has been averaging only 14% a year, says Bowman.
“And we don’t go storming down doors or cutting fees to get new clients,” Meyer says primly.
In fact, Leventhal is doing so well it really doesn’t like to talk much about its partners’ salaries in these difficult times. Several years ago, Leventhal paid its partners between $300,000 and $900,000 a year, says Bowman, far more than Big Six partners, who averaged between $200,000 and $250,000 at the time.
How do you go up against that kind of reputation? One way is to get your own high-profile real estate star. That’s what KPMG Peat Marwick did when it acquired Sandy Goodkin’s consulting firm and added it to the La Jolla office in 1987.
“The motivation for Peat Marwick at the time was to immediately grab credibility in real estate,” says Goodkin. “They got name recognition and a staff that was ready to go.”
So, too, with Deloitte & Touche, which got into real estate consulting in the mid-1980s and three years ago allied with hotshot consultant Stephen Roulac. More accounting firms are likely to round up their own “gurus,” says newsletter publisher Bowman.
Another way accounting firms generate business is by staying in touch with accountants who leave the firm.
Many of these accountants take jobs as financial officers with companies and are in a position to throw work in the direction of their old colleagues. Many accounting firms even have dinners periodically for “alumni” to keep the old contacts up. The new chief financial officer at home builder Covington Development Group, for instance, is a Kenneth Leventhal alumnus. Leventhal got the account last year.
But losing talented young accountants is also a problem for the firms. Frustrated by the 10 or 11 years it might take to make partner at a place such as Leventhal, they often left to work for a developer or do their own real estate deals when times were good.
Now that the real estate market is in the dumps, though, far fewer accountants seem to be leaving the fold.
“In fact, a lot of the people who had left have come back,” say Leventhal’s Meyer.
