Concern rises over commercial builder's stability.

Concern rises over commercial builder's stability

One of the Southland's largest and fastest-growing commercial developers and syndicators, Long Beach-based IDM Corp., confirmed last week it has suspended monthly income distributions to 7,500 investors in 43 separate IDM limited partnerships, setting off widespread concern that IDM might be crumbling.

Sales of new limited partnership units for IDM's current $100 million partnership offering were immediately halted on the news. And those sales are not expected to resume until at least after Aug. 23, when IDM plans to release details about the financial health of each of its 43 "income fund" limited partnerships.

Six of those partnerships are unsecured, with amounts ranging from $2 million to $40 million, meaning investors in those funds could lose their entire investments.

IDM is the latest in a growing list of developers worldwide being battered by a severe credit crunch on real estate. And its situation is being worsened by the severely overbuilt local market.

Rumors were rampant last week that IDM might soon put at least some of its troubled partnerships into Chapter 11 bankruptcy. But Jim McMillan, an IDM spokesman, insisted, "There is no substance to those rumors. Chapter 11 is not being considered as an option."

The simultaneous suspension of distributions for all 43 partnerships also prompted concerns last week that IDM might be commingling funds among its partnerships, which is illegal.

IDM officials last week adamantly denied any commingling.

"These (partnerships) are all related affiliates of IDM," McMillan explained. "So if IDM has a problem, then they (the partnerships) all have a problem."

Commingling questions aside, IDM's numerous partnerships are indeed loaning money to other IDM affiliates, according to an April 22, 1991, letter to the Securities and Exchange Commission by the accounting firm KPMG Peat Marwick.

Peat Marwick, which had been retained by IDM to conduct year-end audits on six of its major limited partnerships, became concerned that loans issued by the IDM partnerships to other IDM affiliates were shakey. Specifically, Peat Marwick said real estate that IDM affiliates had put up as collateral for the loans wasn't worth enough to cover those loans.

"We believe the current net realizable values of the collateral and additional assets which can be pledged by the affiliate as collateral are less than the carrying amount of the loans," Peat Marwick wrote in its letter to the SEC. "And the affiliated borrower has not demonstrated the financial ability to continue to service these loans through maturity."

IDM officials last week insisted Peat Marwick's valuations of its real estate were 20 percent too low. They also charged that Peat Marwick's valuations were based on an "inadequate" sampling of four buildings, and that the CPA firm's "methodology was inappropriate."

A Peat Marwick spokesman countered last week, "The information (IDM) provided you about our methodology and scope is totally inaccurate." Peat Marwick officials refused to elaborate.

In April, IDM fired Peat Marwick as auditor of the six major partnerships. The accounting firm of Hugh Saddington & Co. was brought in to take over.

Officials at Hugh Saddington agreed to do the audit, with the proviso that the disputed valuations be performed by another outside firm. IDM then retained a third accounting firm, Pannell Kerr Forster, specifically for the property valuations.

IDM spokesman McMillan last week told the Business Journal that Pannell Kerr Forster's valuation is in - and it's 20 percent higher than those performed by Peat Marwick.

"We asked them to look at the same four buildings, and our opinion held up," McMillan said. "The subjective call (valuation) was 20 percent higher (than Peat Marwick's), which can translate to as much as a 200 percent increase in net equity, which is why it's so important."

IDM currently owns 1.6 million square feet of commercial buildings, including the sleek World Trade Center in Long Beach, as well as 2,027 apartment units. All of its holdings are in California, and most are in the Long Beach area.

IDM also has entitlements to build another 8.5 million square feet worth of buildings, some of which are currently under construction.

The company appeared to be on solid ground as recently as January 1990, when Choppin restructured his fast-growing entrepreneurial venture into a more corporate structure segmented into a series of separate profit centers. Simultaneously, he brought in a corporate manager, Larry Uyeda, to take over day-to-day control.

In the fourth quarter of 1990, IDM launched its largest limited partnership offering ever, aimed at raising $100 million in two years. But now sale of that offering has been halted, with only $20 million having been raised.

That abrupt cessation has led IDM to put an indefinite hold on a 344-unit apartment project it had hoped to build this year in Temecula. It could also stall several other major projects IDM now has in pre-development, McMillan conceded.

Two major projects IDM now has in pre-development are:

* A 1.675 million-square-foot commercial center, to be called IDM Corporate Center, to be built on the former Orange Drive-In Theater site in Orange County.

McMillan reported last week that TRW has signed a letter of intent to prelease a proposed 345,000-square-foot office building there. That TRW lease is expected to be signed any day, McMillan insisted, and the project will break ground by year's end.

* A major IDM office/retail/residential project will be built on 120 acres of vacant land in Riverside County. That project would be done as part of a public-private partnership with Riverside Community College, which owns the land.

About 30 days ago, the city of Riverside granted its final approval for IDM to build 500,000 square feet of office space, 236,000 square feet of retail space and 200 seniors apartments on the site. But IDM will not break ground until it lines up financing for that project, McMillan said.

IDM currently has five projects under construction: a 450,000-square-foot retail center in Westminster, a 152-unit seniors complex in Riverside, a 120,000-square foot shopping center in Thousand Oaks, a 101-unit seniors complex in Oxnard and a 373-room Hilton Hotel in Long Beach.

How a 20 percent increase in valuation can translate to a 200 percent increase in net equity becomes apparent when looking at a hypothetical case.

Say a building with a $450,000 loan outstanding is valued at $500,000, which makes its net equity $50,000. If that same building's value is increased by just 20 percent, to $600,000, net equity rises to $150,000, representing a 200 percent gain.

The tremendous increase in net equity, in turn, leads to an even greater increase in the ability of IDM to leverage those properties.

On a related front, IDM's suspension of monthly distributions to the 7,500 unit-holders of its 43 income fund limited partnerships will not affect the other 7,500 or so investors who own units of the company's 47 separate "equity fund" limited partnerships, IDM's McMillan reported.

Equity fund stakeholders are not paid monthly distributions, but only receive payments when the partnership sells a property.

IDM has developed millions of square feet since the company was founded by local entrepreneur Michael Choppin some 22 years ago. The commercial developer's recent troubles stem in part from the fact that no buyers can be found for projects it has built.

"IDM is essentially a manufacturer," explained Allan Chiulli, vice president of research at Titan Value Equities, a Tustin securities firm that sells IDM partnership units. "Just like GM or Ford, if they can't sell their product, their revenues drop, and the cost of carrying that additional inventory causes overhead to rise."

PHOTO : World Trade Center: An IDM project