Feds' sell-off of seized Southland properties, mortgages to continue.

The local real estate market remains at a standstill for most commercial and residential real estate brokers and developers. Nevertheless, there is some buying and selling activity taking place as the Resolution Trust Corporation continues to divest itself of California loans and properties.

Investors involved in buying troubled assets from the RTC said they see potential for profit in Los Angeles properties once the local economy turns around.

But in the short term, local real estate is expected to soften further, as lenders unload a lot more troubled assets at bargain prices. Industry observers pointed to the recent takeover of Marina del Rey-based Western Federal Savings and Loan Association and the possibility of other takeovers as evidence that a lot more California real estate will be up on the bidding block in years to come.

Assets being marketed most pervasively right now by the RTC are portfolios of non-performing real estate loans from failed savings and loans. Purchasers of such loans are faced with the decision of either restructuring the loans or foreclosing on the properties and then trying to resell those properties.

The assets, which are sold to the highest bidders, have been bundled into very large portfolios in the past. Institutional investors have purchased some of the portfolios for hundreds of millions of dollars. All told, the RTC had sold nearly $12 billion worth of land, loans and commercial and residential properties as of June 22, 1993.

Presently, the RTC has real estate assets with a combined book value in excess of $11 billion that must be sold off, but it plans to package those assets in smaller portfolios than in the past. According to Michael Fulwider, spokesman for the RTC, the portfolio size is now no larger than $50 million in combined book value. The RTC's maximum portfolio size had been around $400 million before the middle of April. Additionally, the assets in the portfolios are now more geographically concentrated than in prior times.

According to several industry sources, RTC assets are now selling at discounts of 35 to 50 percent off the "derived investment value" of the loans and properties. Derived investment value is a calculation used by the RTC to determine the market value of a loan based on such factors as the historical cost of the property and current real estate market conditions.

Mike Van Konynenburg, a principal with Los Angeles-based loan advisory firm Secured Capital Inc., said that, although the prices the RTC is fetching is deeply discounted, the properties securing those loans have suffered tremendous devaluations since the loans were first issued, in most cases.

"The big question is what the real value of these properties is," he stated. "The properties have been losing value, so it is hard to say how much they really are discounted."

Ascertaining the true market value of L.A. properties has become exceedingly difficult in recent months because very few properties are being sold. In such an environment, property appraisers do not have an adequate number of comparable sales, or "comps," to use for establishing current property values.

John Cross, a spokesman for Alexandria, Va.-based GE Capital Asset Management Corp., a firm that has been acquiring non-performing residential loans from the RTC, said that there is still a lot of risk involved in investing in real estate in California.

"Housing prices are not stabilizing in California, and that makes the market risky," he stated. "If you can invest at a low enough price, you can eventually make a profit. You just need to know when that price has bottomed out."

Signaling its interest in the future of the California real estate market, Colony Advisors, a Century City-based affiliate of Colony Capital Inc., heads an investment/management team that recently purchased a large share of the RTC's National Land Fund. The complete Land Fund portfolio had a book value of $1.7 billion. The pool that Colony purchased contained primarily California real estate and real estate loans. There were some pieces of Arizona real estate in the pool as well. The pool carried a book value of $470 million, but was purchased by Colony for $165 million.

Colony spokeswoman Ann Kazel said that Colony considered its investment an exceptional value. "The company obviously believes that there is a real possibility of making a profit on this venture," she said.

Gene McQuown, senior vice president of J.E. Robert & Co., an Alexandria, Va.-based asset management firm that has purchased in excess of $3 billion worth of RTC assets, said that, although the California real estate market remains in a slump, there is potential for profit.

McQuown pointed out that real estate is a cyclical industry and that California real estate will inevitably turn around. "What is going on in California now is what went on in Texas in the mid to late 1980s," he said.

The Texas real estate market was overbuilt and overpriced in the 1980s, and now the tables have turned in Texas -- the over-capacity is being absorbed and the market is firming.

Meanwhile, in California, real estate investors and lenders are anxious about the recession and movement of companies out of California. "But that will change," McQuown said.