TMI Owners Answer Allegations : Q&A;: They say recession, not fraud, has depressed the value of the real estate syndicate’s holdings but that the firm is profitable.
The owners of Teachers Management & Investment Corp., the Newport Beach company that raised as much as $1 billion from California educators, said Sunday that they inherited most of their troubled company’s problems and are doing their best to steer one of the nation’s oldest real estate syndicates out of one of California’s worst recessions.
In an interview with The Times, the two men responded in detail to a lawsuit filed Aug. 22 against them and their company. James R. Martin, 55, and Maurice Shuman, 56, both of Newport Beach, said the lawsuit’s allegations that they lost $100 million of clients’ retirement money through fraud and racketeering are simply not true.
TMI’s partnerships may have declined in value by as much as $100 million, the owners said, but that is because of the state’s real estate downturn, not fraud.
According to the lawsuit, filed by four investors, the 26-year-old fund marketed by teachers for teachers across the state is insolvent. The suit seeks immediate appointment of a receiver to take over management of the company and whatever assets are left.
Martin and Shuman insisted that their company is not insolvent. Rather, they said, TMI is profitable, though it is struggling to overcome not only declining property values but also what the two men characterized as poor investment decisions made by the company’s former owners.
And they said the amount raised from real estate partnership investors is closer to $500 million than the $1 billion estimated in the lawsuit.
Formed in 1968 by a group of educators and real estate specialists, privately owned TMI has been a vehicle for teachers and school administrators to sweeten their retirement funds.
Over the years, TMI has owned through its limited partnerships a number of commercial properties, including hotels in Northern California, office developments and the Parducci Winery lands in Mendocino County, as well as thousands of acres of undeveloped land.
While the state’s real estate market was booming during the 1970s and ‘80s, TMI investors often saw annual returns of more than 30%. But when the market skidded in the late 1980s, those handsome returns ended.
In an interview at TMI’s Newport Beach headquarters, Martin maintained that TMI’s “heart is with the teachers.” He and Shuman also answered specific questions about the company’s history and current status.
Question: Is $100 million of investors’ funds missing?
Answer: (Martin) Absolutely not. I think those kinds of statements are completely irresponsible.
Q: Is TMI about to file for bankruptcy?
A: (Martin) We are profitable. I cannot release the numbers. But we have absolutely no plans to file bankruptcy.
Q: The suit alleges that there was fraud at your company--an “undisclosed pattern of self-dealing"--that the management was siphoning off millions of dollars of investors’ funds to affiliated companies that you controlled. How do you respond?
A: (Martin) I want you to remember one thing. All these partnerships were audited by (KPMG) Peat Marwick. It’s pretty simple to follow the dollars here. This is not a maze. Every dollar we get is specifically set out in footnotes in the partnership reports, so every partner knows where the dollars went--whether it’s to TMI or an affiliate. There are no secrets. There is no hiding anything. It’s just a ludicrous statement that anyone is hiding anything. Now, you could argue over whether it was proper or not.
Q: Was it proper?
A: (Martin) Obviously, these people (the investors) believe that nothing should be spent on entitlements (permits or approvals to sell a property). And that’s absurd.
Q: You mentioned the Peat Marwick reports. Why did Peat Marwick say in its latest statements that it couldn’t issue an opinion, saying no current appraisal on your property values was available?
A: (Martin) I can’t answer for them. But I think anyone is concerned in this real estate market. Everyone is scared and cautious in this market. We certainly are.
Q: How did you decide to buy TMI in 1987?
A: (Martin) It was very exciting. TMI had the capability of doing a lot of positive things. They had an excellent rapport with the educator world. They had made a tremendous track record with investments with very high-yielding returns. They made a lot of people’s lives better. So that was the appeal. They had the portfolio and the track record in the past, and the marketplace still looked very. . . . It was a different picture then.
Q: You mentioned one of the things that attracted you to the company was its sales force: teachers. Wasn’t this the classic example of an affinity group that is marketed to people from their peers, or people they trust?
A: (Martin) I think that there is a personality to TMI. It was formed by educators who wanted to invest in real estate like the bigwigs. And they were pretty well prevented from doing that because of the net worth they had. So some forward-looking teachers formed this. And TMI has survived real estate cycles for 27 years with a community of teachers who were really the basic investors and a community of schoolteacher friends who generally also bought the product and sold it to their friends.
Q: Do you think the teachers truly understood the risks in investing in real estate partnerships?
A: (Martin) I think a lot of them didn’t. I think a lot were naive. There had been this pattern of incredible returns. . . . They are very good people, and I think they are very deserving. I wish we could deliver all victories for them. Unfortunately, we are not in control of the economics of the state of California.
Q: Why did TMI target teachers’ retirement funds?
A: (Martin) We don’t take anyone’s pension funds. We don’t specifically offer retirement investments. We don’t use the word “retirements.” These were just investments like somebody might have bought a share of stock, a mutual fund. They were limited partnerships, a pretty common investment vehicle in the 1960s, ‘70s and ‘80s. But they were not retirement funds. We don’t have any pension funds purchasing raw land. There were absolutely no pension funds at all invested in our raw land projects. Now, people might have intended these investments to be used to retire with, and many of our limited partners did that and made substantial returns, so it did help them to retire. But we weren’t selling retirement funds.
Q: Why not try and sell this company? I heard you were in discussions with Koll Real Estate Group.
A: (Shuman) We have had discussions with several people, and, yes, some were with Koll. But people are concerned about the liability.
Q: The state Department of Real Estate is investigating your company.
A: (Martin) I think that will be very positive for us. We are very happy they are doing it. . . . We’ve been totally cooperative, and we think they will find a clean bill of health. We are not aware of any SEC investigation.
Q: Many of your investors are understandably upset about losses they’ve incurred. What do you say to them?
A: (Martin) I think in fairness our limited partners are tired, they are beat up, they are confused and they are angry, some of them. They certainly don’t understand the entitlement world and the reasons why it takes so long to get things done. Why there is no money to buy anything. Why there are no buyers. I know why they are confused and angry, and we are too. We are just trying to do the best job we can for them.
Q: TMI had a dismal track record with hotel partnerships in the late 1980s--in fact, you had to put at least four hotels into bankruptcy. Although these hotels were purchased before you took over, investors I spoke with seemed especially angry that, after you put some of these partnerships into Chapter 11, you came back and asked for more money. What were you trying to do?
A: (Shuman) We hoped to save the hotels. If I had to do it over again, I wouldn’t have done it. Jim and I made every presentation. In two weeks’ time we went to 20 places. We didn’t buy these hotels, we didn’t like these hotels, we didn’t want these hotels.
A: (Martin) Our intent was to help. That same year, thousands of hotels went into Chapter 11. The values dropped dramatically. And we personally, ourselves and our company, lost $12 million to $15 million as a result of these hotels. So we were right there with the investors.
Q: In looking at court records, they show that you have not paid property taxes on some of your properties. Why is that?
A: (Shuman) When most of this property, but not all of it, was purchased, entitlements were not issued. And so they didn’t raise enough money to get the entitlements. And as I showed you on Columbia Square (a limited partnership), it had no entitlement money. Well, that entitlement money came out of not paying the taxes and of making new deals with the lenders or the people who sold them to us. So we have been slow on our property taxes, which is offensive to teachers because they are so conservative. They say, “Why haven’t you paid your property taxes?”
A: (Martin) It’s a form of borrowing. Ultimately, . . . you can work out a time payment program with the county, with the state. In some cases it was an extremely valuable way of financing because, as you know, you can’t finance raw land projects. You can’t go to the bank. And in this marketplace we had to get creative to protect the interests of our limited partners. Where can you get the funds to do the things you have to do? And that was the source.
Q: What about Otay Mesa International? This property is in Chapter 11 bankruptcy. Why did you need to raise $11.6 million from investors and incur more than $4 million of debt for property you bought at the height of the market for $5.7 million?
A: (Martin) We paid too much for the property given what the economic circumstances ended up being. Otay Mesa never lived up to its billing. As a result, the value of the property went down. So the money was used to buy the property, and the rest of the money was used for costs and paying interest over time--this property was not purchased for cash--and also entitlement costs. It was an unfortunate investment.
A: (Shuman) We hope to file a reorganization plan in the next 30 days so it can come out of Chapter 11. The plan asks for money from investors and asks for the mortgage holder to accept partnership units.