Koll Group to Seek Chapter 11 Reorganization

Ending months of speculation about its financial future, Koll Real Estate Group Inc. said Friday that it will file a voluntary bankruptcy reorganization petition Monday.

A Chapter 11 reorganization plan already has been approved by the Newport Beach-based company’s bondholders, who will become KREG’s majority shareholders as they swap $210 million in debt for 90% of the company’s stock.

Executives and industry analysts said the action is not expected to affect the company’s operations, including its controversial plans to build up to 2,400 homes just outside Huntington Beach on the highlands adjacent to the Bolsa Chica wetlands.

Years of delay in developing the environmentally sensitive project, which was debated in court and before numerous government agencies, have put a tremendous financial strain on Koll Real Estate. A court decision last week delayed the start of construction at least six more months.

The bankruptcy petition also won’t affect company Chairman Donald M. Koll’s substantial real estate interests in other privately held companies that bear his name, executives and analysts said.

Publicly traded KREG, they said, should come out of bankruptcy debt-free and able to borrow millions more to fend off environmental challenges and finally develop the Bolsa Chica highlands.

Koll said the bankruptcy filing will preserve $200 million in tax benefits that would have been lost had KREG arranged a private debt-for-equity swap with its bondholders. Koll had been trying to engineer such a swap.

He called the bankruptcy reorganization “only a financial engineering,” yet hailed it as “the final step in restructuring the troubled Bolsa Chica Co. we inherited in March 1993, when we took over management and control.”

However, opponents of KREG’s plans for Bolsa Chica, the company’s biggest single asset, see things differently.

“In high-stakes finance, quite often a reorganization will help a company finally develop a project,” said Marcia Hanscom of the Sierra Club, one of several environmental groups that have joined in a suit to halt the Bolsa Chica development.

“But cash isn’t everything they need,” Hanscom said. “The fact is, they have some serious legal and environmental problems that have been upheld in court.”

The Bolsa Chica Land Trust, a grass-roots group that also is a plaintiff in the suit, wants to keep Bolsa Chica pristine and says it would like to raise enough money to purchase the highlands area from KREG.

Whatever happens to Koll Real Estate, its bankruptcy woes will be looked at as “a totally isolated event,” said industry analyst Ken Agid of Irvine.

Another industry analyst, Alfred J. Gobar of Placentia, said the company may now be able to “break the cycle of these problems, take a deep breath and move forward.” He said the company should have no problem borrowing the money it needs.

“The real estate industry has a pretty short memory, and investors have already reacted to KREG’s decline,” Agid said, referring to its consistently anemic stock price.

The company’s stock has rarely topped 30 cents a share during the last five years. On Friday, it closed unchanged at 13 cents a share on Nasdaq.

Though analysts have speculated that a bankruptcy filing could further tarnish Koll Real Estate’s already lackluster image, Koll said the deal will eliminate the company’s quarterly losses and should help revive its moribund stock.

KREG was paying about $6 million a quarter in interest on its bonds by issuing new debt securities and writing off the payments as a loss each quarter. Delays in the Bolsa Chica project prolonged the interest payments and kept Koll Real Estate from earning enough money on its huge land investment to offset the interest payment losses.

The bonds that pushed KREG into financial hot water were issued by a previous Bolsa Chica Co. owner, Henley Properties in New Hampshire, four years before Koll acquired the company. Many of those shares eventually were acquired by large investment groups, though thousands of individuals also hold shares.

As part of the negotiated plan, Koll Real Estate stock will be dropped from the Nasdaq national market during the bankruptcy and traded instead on the one of the less visible Nasdaq over-the-counter markets. Bondholders will take six of the 10 board seats, but Koll will remain as chairman and chief executive.

KREG is a small part of Donald Koll’s real estate empire. He is owner or part owner of three privately held companies that carry his name: Koll, a real estate services and property management firm; Koll Construction, a major industrial and commercial builder; and Koll Resorts International, which develops resorts in Mexico and is a resort industry consultant in the United States and Mexico.