Textbook Lesson in Liquidating a Failed Thrift : Savings and loans: When Downey S&L; bought Butterfield, it set some goals--getting assets out of government control and into private hands, and at the least cost to taxpayers.

The lemon grove was a bad investment, and the prospects for its future seemed dim. The 144-acre site in Riverside County was only partially planted and had not turned a profit in 10 years.

It was one of 16,430 soured assets on the books of the failed Butterfield Savings & Loan when federal regulators sold the Santa Ana institution in late September, 1988, to Downey Savings & Loan.

Downey’s purchase of the once high-flying S&L; came with $281.1 million in federal assistance and a government promise to make up any losses incurred in getting rid of $239.2 million in bad Butterfield assets. Downey also obtained $241 million in tax credits.

Now Downey executives say they have liquidated most of Butterfield’s money-losing loans and investments at minimal cost to the government and, ultimately, taxpayers. Even the lemon grove turned out to be a sweet deal, reaping a $50,000 profit.

Downey’s success with Butterfield comes at a time of growing scrutiny of about 100 thrift sales in 1988. Some of the S&L; sales have been criticized as sweetheart deals--federal giveaways benefiting wealthy institutions and corporate wheeler-dealers at taxpayer expense.

What sets the Downey-Butterfield deal apart is that it appears to have worked the way it was designed--getting assets out of government control and into private hands, and at the least cost to taxpayers.

“Downey has been highly successful in liquidating Butterfield,” said Edward J. Carpenter, a Santa Ana-based industry consultant. “It’s been successful because it has real estate expertise, financial expertise and familiarity with dealing in the regulatory environment.”

Many other 1988 thrift sales, however, have not led to a quick disposal of troubled assets, partly because the real estate market is sagging. More importantly, many buyers have little incentive to sell because they continue to collect tax-free government payments for holding on to bad assets.

A recent government report also said that the deals, which are expected to cost taxpayers $69 billion over the next decade, were mismanaged and that regulators failed to take advantage of competitive bidding. The White House recently authorized the Resolution Trust Corp., which manages and liquidates failed S&Ls;, to try to renegotiate some of the transactions.

The RTC is compiling a priority list but already has said it will try to renegotiate provisions in the sale of American Savings & Loan in Irvine to the Robert M. Bass Group in Ft. Worth. That sale came with $2.7 billion in federal assistance.

The RTC also wants to change the terms in many transactions stemming for its so-called Southwest Plan, a special effort to dispose of hundreds of failed thrifts in Texas and neighboring states.

Regulators refuse to say whether they want to renegotiate the Downey deal, but an RTC-commissioned audit of the transaction last year makes that doubtful. The audit, conducted by Price Waterhouse & Co. and mandated by federal law, found little wrong with Downey’s handling of Butterfield’s assets.

It did suggest that the government should provide more incentives to Downey to sell assets even faster and should refinance a promissory note to save $9 million. The accounting firm also said that regulators should reduce red tape so Downey could act faster.

Audits of other 1988 deals have been much more critical. In the American Savings case, for example, the auditors concluded that numerous provisions should be renegotiated to significantly lower the cost to taxpayers.

Butterfield took advantage of industry deregulation to grow rapidly, buying restaurants and investing in apartment buildings, shopping malls and office space around the country. It even had a stake in a college in a remote area of Newfoundland, Canada.

But many of its investments were risky and many loans quickly went bad. The S&L; had more than $800 million in assets when it collapsed in August, 1985; at that time, it was the eighth largest thrift to fail.

Regulators immediately retained Downey to manage the government-controlled Butterfield. Downey soon withdrew, but one of its executives, Anne Bacon, quit to take over the management contract at Butterfield. She helped dress up some properties and found buyers, including those for a 14-store Wendy’s franchise and the Love’s Wood-Pit Barbecue restaurant chain.

Still, industry consultants predicted that Butterfield was such a mess that the government would be forced to shut it down and pay off depositors. By 1988, Downey was viewed as about the only entity capable of effectively disposing of Butterfield’s assets.

Much of the reason was Downey’s management--co-founders Maurice L. McAlister and Gerald H. McQuarrie.

“I certainly have great respect for McAlister and McQuarrie and their abilities to get the job done,” said William D. Davis, commissioner of the state Department of Savings and Loan. “They’re the best guys in the business. If they can’t do a good job, nobody can.”

Industry analysts agree that Butterfield’s bag of bad assets could hardly have been put in better hands. James F. Wilson, an analyst with Montgomery Securities in San Francisco, said that Downey is “going out and getting full value where possible on these assets,” Wilson said.

Downey, with $4.2 billion in assets of its own, has not sat on Butterfield’s troubled assets. McAlister said the strategy has been to unload property as quickly as possible by selling, refinancing and otherwise working on the problem assets.

The job, in fact, is nearly done, he said.

Downey has worked out 98% of the troubled holdings. Regulators thus far have had to cover about $20 million in losses, an amount reduced to $15 million with tax credits that the thrift paid regulators. Downey put up $20 million to acquire Butterfield.

Most of the remaining loans are being paid off with few problems, McAlister said. But assets valued at about $12 million are proving difficult to resolve, he noted.

The workout duty has fallen on McAlister and Bonnie M. Lawson, a vice president. They have renovated properties, leased them out to produce earnings, worked with defaulting borrowers, and handled sale and refinancing negotiations.

“You don’t have to create a bureaucracy to do this,” McAlister said. “It just takes people who know what they’re doing and are dedicated to getting the job done.”

The hard work has paid off. Consider the lemon grove: The property near Temecula in Riverside County was appraised by regulators at $1.1 million. McAlister all but ignored the appraisal price.

“We expect too much from an appraiser,” he said. “What a property is worth is what someone pays for it. They always say, ‘If it hasn’t sold, the price must be too high.’ But that isn’t necessarily true. We had more than one person bidding for that lemon grove.”

Downey made the property look attractive by working the fields. When it was sold 17 months ago, it had turned in a $70,000 profit on the lemon crop that year. That helped to lure the buyer, a development firm that continues to harvest the lemons.

“I look at the income stream and counter offers with a price higher than the appraisal,” McAlister said. “Unless you try, you don’t get it.”

Downey sold the land for $1.85 million--higher than the appraised value and even higher than the $1.8-million value that Butterfield had put on it six years ago. The $1.4-million loan Downey made to the buyer should be paid off this month.

One of McAlister’s tenets in tackling tough-to-sell properties is to visit the sites. “There is no substitute for looking at the property,” he likes to say.

“If we have a loan request for over $500,000 on a home,” he said, “a top officer should go and stand on the front lawn and say, ‘Would I take $500,0000 out of my pocket for this home?’ If we get a loan here for $2 million or more, I’ll go look at the property. If you don’t have time to go look at a $2-million investment, maybe you don’t have time to be in business.”

On Downey’s money, McAlister visited Butterfield’s holdings in his home state of Texas, and Lawson went on exhausting trips to view the failed thrift’s properties across the rest of the nation and in Canada.

One trip took Lawson to a Cincinnati suburb, where she was awakened at 3:30 a.m. by a drug raid at the motel room next to hers. Another trip took her to Corner Brook, a remote town in Newfoundland, Canada, to review Butterfield’s investment in a 15-year-old, horseshoe-shaped building that houses Sir Wilfred Henry Grenfell College, a fine arts school.

The college’s main structure was in trouble. Wind-driven rain had damaged the inferior brick work on the building. Lawson had to approve a $150,000 repair job.

“I couldn’t believe anyone would have bought into this building without looking at it,” she said.

She then restructured the $1.1-million investment to take a 27.8% interest in the land lease until the year 2010, when the debt will be paid and the land will revert to English royalty.

McAlister and Lawson say they have minimized losses, never selling a bad Butterfield asset for less than 90% of the appraised value. But they both agree that it’s tough work.

“A lot of Butterfield’s properties were old--office and commercial buildings and hotels that were built in the ‘60s and ‘70s,” Lawson said. Downey has put money into the Butterfield properties--changing property managers at many sites, renovating structures and making repairs--to turn the holdings into income-producing properties or make them more attractive to buyers or other lenders.

Among the tougher deals to work out is the one involving the Wendy’s franchise. In 1986, the government-run Butterfield had sold the 14 hamburger restaurants to an Arizona investor group, providing a $4.5-million loan. The group still owed the money when Downey took over.

“They wanted to mail in the keys last year, but I told them to come in and restructure the deal,” McAlister said.

The group owned real estate or improvements at eight of the sites and leased the other six locations. McAlister suggested that the investors sell the parcels. They agreed but left it to Downey to do the work. All but one lease has been sold or is pending sale, and the potential $4.5-million loss has shrunk to about $650,000.

Among Butterfield’s other troubled assets were its consumer loans. Downey sold the credit-card operation for $25.1 million and split a $950,000 profit with the government.

The losses, McAlister said, would be much higher were the assets left in the hands of the Resolution Trust Corp., the federal agency that manages and liquidates failed thrifts. He chafes at much of the red tape that the regulators impose before deals can be completed.

He noted that a deal for a Butterfield-owned shopping center in San Antonio, Tex., for $100,000 over the appraised value fell through recently when the buyers could no longer wait for RTC approval. The agency, he said, had been reviewing the deal for six months without reaching a decision.

“What all this means to the taxpayers is that we’re saving them a lot of money,” McAlister said. “From observing the role of the RTC, it would cost the government at least 30% more for that agency to do the work.”

SQUEEZING A PROFIT FROM BUTTERFIELD’S ASSETS

In selling insolvent Butterfield Savings & Loan in 1988, federal regulators wanted the buyer, Downey Savings & Loan, to manage and dispose of a portion of Butterfield’s loans and investments that had gone sour. The government agreed to make up any losses Downey incurred in handling the troubled bag of 16,430 assets valued at $239.2 million, setting appraisal prices in some cases. Downey has sold, refinanced or restructured 16,081 separate deals for $144.1 million. Here’s what Downey has done with a few of those assets:

Of the 10 properties listed below, the top six were sold, and various repayment plans were arranged on the remaining four.

Figures in thousands

Book Appraised Amount Project Name Type Value Value Recovered Imperial Center, Shopping $10,815 9,400 $9,400 Brea center Lemon Hills, Lemon grove 1,800 1,100 1,850 Temecula Parkside, San Antonio, Apt. bldg. 1,600 1,390 1,600 Tex. Raintree, Pasadena, Apt. bldg. 3,241 1,500 1,340 Tex. Camelot Lakes, Fresno Single-family 203 88 89 home Valencia, San Antonio, Shopping 3,065 2,800 3,150 Tex.1 center Willamette Shores, Apt. bldg. 4,501 NA 4,501 Portland, Ore. 2 Delsea, Gloucester, Apt. bldg. 3,500 NA 3,500 N.J. 2 Chester-Harris, Commercial 1,361 NA 1,361 Irvine 2 bldg. Colony Plaza, Hotel 3,737 NA 3,737 Ocoee, Fla. 3

Profit Project Name (Loss) Imperial Center, (1,415) Brea Lemon Hills, 50 Temecula Parkside, San Antonio, 0 Tex. Raintree, Pasadena, (1,901) Tex. Camelot Lakes, Fresno (114) Valencia, San Antonio, 85 Tex.1 Willamette Shores, 0 Portland, Ore. 2 Delsea, Gloucester, 0 N.J. 2 Chester-Harris, 0 Irvine 2 Colony Plaza, 367 Ocoee, Fla. 3

Source: Downey Savings & Loan