Pebble Beach Deal May Be in Peril : Real estate: The growing slump in Japan’s property market could cause the transaction for the famed golf course to unravel.
The financing for the $900-million acquisition of Pebble Beach Co. by a Japanese developer could be jeopardized by the mounting financial problems of Itoman & Co., an Osaka-based trading firm.
If the complicated deal unravels, it could result in the first collapse of a major Japanese purchase of a trophy U.S. property caused by the growing slump in Japan’s real estate market. More likely, however, the deal will be refinanced and the property will remain in Japanese hands.
Controversial Japanese golf course magnate Minoru Isutani purchased Pebble Beach Co. and its famed courses last September from Los Angeles billionaire Marvin Davis, thanks to a loan from Mitsubishi Trust & Banking Corp. Isutani secured the loan with a promissory note from Itoman of about 85 billion yen, or $664 million, Mitsubishi officials confirm.
Mitsubishi’s Akio Utsumi said Itoman issued the note to Isutani’s Cosmo World Corp. in exchange for rights to sell memberships at four of Cosmo’s golf courses in Japan. Under the promissory note, Itoman must pay the $664 million to Isutani.
In turn, Cosmo World surrendered the note to Mitsubishi as collateral for the Pebble Beach loan, which the property’s deed of trust lists at $574 million.
But Itoman is now staggering under the weight of $10 billion in debt, most of it related to its real estate business, and is being restructured by Sumitomo Bank.
If Itoman cannot honor the promissory note to Isutani, then the Osaka golf course developer may in turn have problems repaying the loan for Pebble Beach, said Utsumi, general manager of Mitsubishi Trust’s planning and coordination division.
“If the business with Itoman does not go well, it will be a problem. At that time, we would have to restructure the whole (financing) scheme,” Utsumi said in a recent interview. “We watch this case with extreme concern.”
The fragile situation underscores the direct effect that Japan’s deteriorating real estate market has on the rash of U.S. investments made by Japanese in the past decade. Although scores of Japanese firms scooped up U.S. property at bargain-basement prices during an era of cheap capital and loose credit, the economic climate in Japan has abruptly changed.
A doubling of interest rates, a 40% plunge in the Tokyo stock market and declining land prices in Japan have sent several highly leveraged Japanese firms scrambling for ways to repay their loans.
Itoman may be the most visible victim of the crisis, but others include Shuwa Corp., Kyowa K.K. Nanatomi Corp., EIE International Corp., Yuho Chemical Co. and the Azabu group.
Isutani may also be vulnerable. Although he owns 13 golf courses in Japan and has begun to invest in projects in Los Angeles, Las Vegas and Hawaii, Japanese banking sources estimated that they are so highly leveraged that his net worth is only $100 million.
Utsumi disputed that figure. But he disclosed that Mitsubishi Trust had insisted as a major condition of its loan to Isutani that he first sell some domestic assets to lower his debt. The bank concluded that his debt level was too high to afford pricey Pebble Beach, Utsumi said.
“Before he invested in Pebble Beach, that was a condition: that he release some of his assets in Japan,” Utsumi said. “If he would sell some of his assets in Japan, then he could invest in Pebble Beach, because it has been his longtime dream to acquire a golf course with name value.
“So he sold (the right to sell memberships to) four golf courses in Japan, and most of that went into the promissory note,” Utsumi said.
Cosmo World officials in Tokyo and Los Angeles did not respond to requests for interviews. Itoman and Sumitomo declined comment.
The status of the promissory note from Itoman to Cosmo World is unclear. Itoman officials said they canceled the $664-million contract on which the promissory note is based because of criticism about the transaction from Sumitomo Bank, which is helping it restructure. The Sumitomo group is Itoman’s largest shareholder and has supplied many of its top executives.
Utsumi, however, said “there has been no cancellation. We were not asked to return the promissory note--and we will not if we are asked.”
In Japan, some have questioned the wisdom of Itoman’s contract with Cosmo World. Last month, a Japanese magazine quoted golf course membership salesmen as estimating that the memberships Itoman bought for $664 million were worth $35 million at most. The reason is that Isutani’s courses have been plagued by charges of excessive memberships--sometimes 10 times more than originally promised--and waiting lists to play as long as two months.
Utsumi said Mitsubishi Trust believed that the memberships were worth far more than $35 million but declined to place a value on them.
He also said that despite Itoman’s problems, the first of multiple payments on the promissory note was made last December. Mitsubishi Trust expects no problems with a second payment due this month, he said.
In any case, Japanese investment sources say, Mitsubishi Trust is not ultimately relying on the struggling Itoman to honor the note to Cosmo World. It is expecting Sumitomo Bank, as Itoman’s corporate godfather, to make good on the Cosmo contract. Sumitomo has already assumed some of Itoman’s debts to other creditors.
Sources close to Sumitomo said the bank has been approached by Mitsubishi Trust officials to negotiate an agreement on the Itoman note, but Utsumi denied that meetings have taken place between the two financial giants. He also ruled out future meetings.
Utsumi also explained why Mitsubishi decided to make the Pebble Beach loan to Isutani, an action criticized by some Japanese investors in the United States because of the golf course developer’s controversial reputation.
Although Mitsubishi Trust was concerned about Isutani’s reputation, Utsumi said, it decided that the deal met its conditions for the loan: that Isutani sell some of his domestic assets to lower his debt and that he retain the Pebble Beach Co.’s management to ensure that the deal would be welcomed by the employees and golf course members. In addition, Mitsubishi retained the law firm Baker & McKenzie to watch American public opinion about the deal.
Meanwhile, Itoman is fighting to stay afloat. Last month, the company fired its president, former Sumitomo Bank official Yoshihiko Kawamura, who was blamed for a series of questionable transactions and personnel decisions. Aside from the Cosmo contract, other controversial dealings involve Itoman’s purchase of more than $520 million in oil paintings and lithographs that art dealers estimate were worth half that amount, according to newspaper reports.
One of the firm’s managing directors, Suemitsu Ito, was also forced out last year. Ito’s house was searched by the Tokyo Regional Taxation Bureau last month on suspicion of tax evasion, the Yomiuri newspaper reported.
“Of course, we’re concerned about the (Pebble Beach) project, but our greater concern is the financial status of Itoman,” Utsumi said. “If Itoman goes bankrupt, I think it will affect the Japanese economy.”
Financial Data Sumitomo Bank Loans to Itoman 1990 loans in billions of dollars Dec.: $2.37 Oct.: $1.95 Sept.: $1.25 Itoman & Co. pretax profits For six month period (April-September) in millions of dollars 1990: $18.0 1989: $52.3 Source: Jiji Press
