MICHAEL MEYER : Managing partner, Kenneth Leventhal & Co. in Orange County
When the federal government created the Resolution Trust Corp. three years ago, it gave the RTC a formidable task--to get the maximum return for taxpayers on the sale of real estate assets of seized savings and loans, and to do it in one of the worst real estate markets in history. Michael Meyer, managing partner of Kenneth Leventhal & Co. in Orange County, is a financial adviser to the RTC and spoke recently with correspondent Carol Smith about innovative ways the RTC is marketing tough properties in Orange County.
Can you give us a brief history of how the RTC ended up owning property in Orange County?
Basically, the savings and loans were deregulated in the early ‘80s and were allowed to aggressively lend money for real estate investment, or even directly invest in real estate. As a result, there was an excess of development across the country during the ‘80s. When the problems of the savings and loans started to become evident, with too many buildings and not enough tenants to justify their costs and pay back the loans, Congress formed the RTC and gave the government new powers to take over savings and loans that had inadequate capital. It’s just a gigantic dilemma to organize the forces to be able to manage the assets and dispose of them.
Where does the RTC stand now in the process of selling those assets?
The RTC has taken control of almost $400 billion in assets, and it has sold more than two-thirds of the assets that it has taken control of. But of the $116 billion of assets that the RTC still holds, 78% are described as “hard-to-sell” assets. These are projects that are maybe not even complete, or projects that are still in their early stages of lease-up, or land parcels that are not developed, or land that is partially developed.
Does Orange County have a larger percentage of those hard-to-sell assets than other areas?
Statistics aren’t published as to exactly how much there is in each county, and some of the assets are still in associations that have been taken over by the RTC, but have not yet been liquidated. But California had very liberal rules for its savings and loans and its S&L;’s were very active in real estate lending and development in California. Since the California economy was the last to slide into recession, the California assets are the last ones for the RTC to be actively handling.
There was a concern three years ago when the RTC was first formed that because of the volume of properties involved, they would get dumped on the market and depress prices even further. Has that happened in Texas, Arizona and Colorado where the RTC has already sold many of its properties, and do you anticipate that happening in Orange County?
Yes it has happened. The birth of the RTC and the instructions the RTC has to dispose of its assets as quickly as it can came at the same time that the banks were withdrawing from real estate lending, Japanese and other foreign investors were withdrawing from real estate, and jobs were being lost because of the slowdown in the economy. So there was a compounding effect with more capital being removed from the real estate industry than has ever happened before in the history of mankind. It was the worst time to sell properties, and there were properties, like raw land, that were sold for as little as one-tenth of their original asking prices. But hopefully some new initiatives that the RTC has developed, that are really very innovative, will cushion the impact of disposing of the assets in California.
Tell us how the RTC is trying to market its more difficult properties in Orange County.
What they’re doing is they’ve developed a land fund and they are also developing multiple investor funds. The RTC will contribute large blocks of loans or properties into these funds, and will then bring in groups of investors or developers to expend the funds to bring the properties up to their most marketable condition.
So it’s like a joint venture--the RTC and private investors go in together to put more money into the properties before they’re sold in order to get top dollar?
Yes, in order to say, complete them if they’re not totally constructed, or in order to expend the management time and funds to lease them up, or to rehabilitate them, or if there’s deferred maintenance, to get it done. And also to properly package them and find the buyers who would be the most interested and willing to pay a reasonable value for them.
What kinds of lessons can others in the commercial real estate business learn what you’re doing?
The real lesson is that there are good opportunities for real estate professionals, but they have to be innovative to take advantage of the current market conditions. The old tried and true ways just don’t work anymore. And one of the largest challenges is to obtain capital.
Can you describe how the capital markets for real estate have changed over the last few years?
Basically the entire capital market for real estate is undergoing basic structural change. For example, banks are under pressure to restrict their real estate lending, but I’ve been predicting that large banks will become conduits for other institutional investors, such as pension funds and life insurance companies, that wish to invest in real estate. This is now starting to happen. In the past, the banks have primarily lent their own money, and now they’re conduits lending out primarily other investors’ money.
What are some other ways real estate companies can be successful in this kind of a tight market?
Some companies are moving more toward managing properties for third parties. That gives them the stability of a flow of income and allows them to keep their core employees in place so they can take advantage of opportunities as they arise. There are opportunities for people with capital and flexibility.
On the outlook for real estate in Orange County.
“Real estate in Orange County, especially the housing aspect, will start to recover in 1993. There is already a pent-up demand of people who want to buy.”
On the outlook for the Orange County economy.
“After the elections, consumer confidence will pick up. With most job losses behind us, improved tourism next summer, low interest rates and good affordability in housing prices, we should see a pickup.”
On the formation of the RTC.
“In the last three years, the government has become the largest property owner in the world by taking over all these S&Ls.;”
On competing in today’s real estate market.
“What we’ve been preaching to clients is that there will be a flight to quality. Financial backers want to back the companies they feel the most comfortable with.”
