Japanese investors may soon sell off troubled Southland properties.

Japanese banks and investors, after years of hanging onto problem real estate loans and investments in Los Angeles, are finally ready to sell.

That's the consensus of real estate accounting firm Kenneth Leventhal & Co., local real estate attorneys and others who track Japanese investments in Southland real estate.

According to Jack Rodman, director of Leventhal's Pacific Rim Practice, Japanes investors are preparing to sell or financially restructure $17.6 billion -- or 23 percent -- of the $77.3 billion they have invested in U.S. real estate since the early 1980s.

Much of that $77.3 billion has been invested in Los Angeles-area properties, including downtown Los Angeles office buildings and other trophy buildings bought in the 1980s. Many of those Japanese purchases, however, were transacted at the top of the market, and the ensuing decline in Los Angeles real estate values has soured the investments.

"Most Japanese investors have been unable to effectively manage their U.S. real estate investments during the depressed market conditions these past few years, Rodman said. "They have to stop holding on to distressed properties that have little chance of appreciating significantly any time soon and redeploy the capital."

For years, as the local real estate slump has continued, there has been speculation that the Japanese would sell some of their investments or restructure problem loans in much the same way U.S. banks and investors have unloaded their problem assets.

But for the most part, the Japanese have held onto the U.S. properties they own and have not foreclosed on problem loans. The reasons have to do with Japanese corporate culture, the way the loans are structured and Japan's banking regulations, sources said.

Attorney Alan Weakland, a partner in the downtown Los Angeles office of Paul, Hastings, Janofsky & Walker, explained that many Japanese banks have not foreclosed on loans in default because the bank "has an extensive relationship with the borrower and is trying to work things out on a larger, global level."

Said Weakland, "If they have someone who is a good customer but has a troubled project or two, the lender is not going to be in a rush to foreclose." And according to Rodman, this determination to maintain relationships is important to borrowers as well.

He said some Japanese borrowers continue to make mortgage payments on U.S. properties that have declined so much in value that the borrower has no equity left and would be better off, financially, walking away from the deal.

Weakland added that the structure of the loans has also been a factor in Japanese banks' decision to forestall foreclosure because the big deals done by the Japanese in the 1980s often included a syndicate of lenders. "Often the lending group simply cannot come to a collective decision about what to do," he said.

Weakland added that there have also been regulatory roadblocks because Japanese regulators have traditionally made it very difficult for banks to take tax writeoffs on bad loans -- eliminating one of the advantages that U.S. banks hav enjoyed when clearing their balance sheets of bad loans. He said this has discouraged Japanese banks from entering into financial restructurings, better known as "workouts," that have been popular with U.S. lenders.

"Traditionally, even if the Japanese banks wanted to go ahead with a workout, they couldn't get the tax writeoff. Nobody wants to book the loss without getting the writeoff, so that has been one of the principal hangups," Weakland explained.

Now, however, Weakland said, "the regulatory environment in Japan is softening up and becoming a little more flexible." The combination of the softening regulatory environment and U.S. investors' interest in buying troubled Japanese assets are two of the factors fueling the growing interest in Japan's U.S. real estate holdings, he said.

According to Rodman, the tax issue is one of the crucial factors determining what the Japanese will do with their troubled L.A. real estate holdings. He sai one regulatory body, the Bank of Japan, wants to allow the banks to write off the losses. But the Finance Ministry and the National Tax Office have been concerned that huge bank writeoffs would reduce revenues for the national treasury. Some sort of compromise is likely, Rodman said, because there is immense pressure from the banks for permission to take the writeoffs.

Rodman said another factor influencing the Japanese banks to sell off assets is the intense interest among U.S. investors, many of whom have already reaped big profits by buying problem loans and foreclosed properties from the Resolution Trust Corp. and from individual lenders.

"There is a tremendous amount of surplus capital looking to buy assets. U.S. banks and the Resolution Trust Corp. already have sold most of their problem properties, and prices have turned upward. So the Japanese are well-positioned to take advantage of this situation in most markets," he added.

Weakland's firm has represented a number of the U.S. investors who bought RTC properties and foreclosed properties from U.S. banks. Many of those same investors are now asking the firm to devise structures for the deals that would meet the requirements of the Japanese banks. For example, a Japanese bank may o may not want to recognize a tax loss now. So the deal would need to be structured to allow the bank to take the loss at the most favorable time, Weakland said.

"Some of the potential investors have spent a lot of time in Tokyo making the rounds, but without much success. What they're asking us to do now is to devise a structure to acquire the assets, or an interest in the assets, that will allo them to realize the returns they want while at the same time meeting the needs of the Japanese institutions."

Despite the factors that have delayed the Japanese from disposing of their problem U.S. assets, they have already taken action on some properties and are planning to take action on more.

Rodman noted that Tokai Bank sold the Shutters At The Beach hotel in Santa Monica to a Goldman Sachs & Co. partnership after foreclosing on developer Sam Stein. Also, Dai-Ichi Kangyo Bank Ltd. is looking for buyers for the Ritz Carlton Huntington Hotel in Pasadena and the L'Auberge Del Mar Resort & Spa in Del Mar, Calif.

Earlier this year, a Dallas investment group called The Hampstead Group bought the Checkers Hotel in downtown Los Angeles from Sumitomo Bank Ltd. for about $1 million, and Long Term Credit Bank of Japan accepted a deed in lieu of foreclosure on the Bel Air Hotel.

Brian Kelley, vice president at Long Term Credit Bank, agreed that the Japanese are beginning to move on their problem U.S. real estate assets, but said the foreclosures and workouts will be nothing like the mountain of assets the RTC dumped on the market.

"Some reports would give you the impression that there is this whole mountain o Japanese debt that is soon to be unloaded in Southern California. I've heard terms like 'floodgates' used, or comparison to the bulk sale activities of Bank of America or the RTC. I don't think that will be the case because there are so many other factors involved when you're dealing with Japanese banks," Kelley said.

He cited the regulatory concerns mentioned by Rodman and Weakland, as well as the fact that the Japanese loans and properties tend to be much larger than those that were pooled together in many of the RTC deals and bulk sales by U.S. lenders.

"We are going to see activity by the Japanese banks, but it's going to be more of a stream rather than a torrent. It's going to be an orderly progression that will take a long time to work through, not like a portfolio of billions that will be unloaded overnight," Kelley said. "The banks will be encouraged to clea up their balance sheets and recognize losses, but they're still not under the same kind of pressure that the RTC was under in terms of what they were require to do by Congress."

When U.S. banks such as Bank of America and First Chicago Corp. disposed of their problem loans in bulk sales, it made sense because those were smaller loans that could be pooled together, Kelley added. But most of the Japanese loans involve large trophy properties and complicated deals that don't lend themselves to being pooled.

Rodman agreed with Kelley that, although the Japanese are getting ready to deal many of the deals will be loan workouts rather than the widespread foreclosures and sales that U.S. banks employed to dispose of their problem real estate assets.

Rodman estimated that, of the $17.6 billion in U.S. real estate loans and properties the Japanese are preparing to sell or restructure, about $15 billion will be in restructuring or "workouts." Still, the remaining $2.6 billion worth of assets targeted for sale could significantly affect the market, and the Japanese have another $12 billion of troubled U.S. real estate assets that are likely to be sold or restructured after the $17.6 million currently in the works, Rodman said.

When that happens, the Japanese would have sold or restructured 40 percent of all their real estate assets in this country.