Loan doc: George Smith quit a job in the aerospace industry because he wanted to become rich--and he did, putting together mortgage transactions.

GEORGE Smith created his own real estate investment banking firm--twice. After working for a decade in the West Coast office of Sonnenblick-Goldman Co., an old-line New York firm, he decided to set off on his own. Grubb & Ellis quickly gobbled up his company, George Smith Partners Inc., in the early 1980s. With the real estate market crashing in 1992, Smith was forced to start over again. Last year, George Smith Partners placed $2.35 billion in loans and completed 70 transactions. In some quarters, Smith is mostly known for gathering 2,000 clients and real estate professionals each year to raise money for the A-T Medical Research Foundation, which is searching for a cure for ataxia-telangiectasia, a degenerative genetic disorder that afflicts his daughter, Rebecca, now 26. Smith recently raised $1 million to endow a chair in her name at UCLA.

Question: What's your view of the real estate market?

Answer: The outlook is very uncertain because of the huge federal deficit and trade deficit, and with the Federal Reserve raising the Fed Funds rate, and cost of living increases rising because of huge increases in most basic commodities. But real estate is still considered a long-term investment. For clients who are most comfortable with fixed-rate financing, we are urging them to finance now. The good news is that the supply of money far exceeds the demand.

Q: What does your company do?

A: We are the middleman between developers and investors. We're primarily a one-office company with about 30 professionals. During the week, we have lenders coming in here like a parade, pitching their wares. They're all selling the same refrigerator with some small nuances. One will be tighter on pricing another will give interest-only loans. They walk in here because they know we always have an inventory of loans that have to be placed.

Q: Tell me about some of the loans you're handling?

A: I'm working on a Ritz-Carlton timeshare in Santa Barbara where I'm arranging a $115 million construction loan. I also have a land deal in Murietta, where I'm bringing in private investors to do a $10 million second mortgage on 55 acres that are being re-titled to residential. I like this deal so well that I'm investing in it myself with my partner.

Q: How often do you do that?

A: Whenever I can, which isn't often enough. But as a broker, every deal looks good to you, so you have to watch against getting too enthusiastic.

Q: How hard do you have to pitch some of your clients?

A: We do a whole book with all the pros and cons, and enough due diligence to prepare the lender. One loan we're doing is for an animation company that has outgrown their space, and they're buying a building that's about 40 percent vacant. So we lined up 38 lenders and we're pitching to the banks. This is a company with weak financials. But I know there's going to be a lender out there that will buy into their story.

Q: How do you get paid?

A: We're paid by the customer, never by the lender. It's negotiable. The rule of thumb is income property brokers get 1 percent, but on a $15 million deal, with lenders competing, you may wind up with a half a point. We get paid for the value we bring to the deal, which is finding the fight lender. We're smart enough to know when we have to tighten up our pricing because it's a vanilla deal, basically a commodity. There are other times when we know we're creating value where if we didn't find the lender, the developer or borrower couldn't put the deal together.

Q: Do you have a specific advantage in the market?

A: I'm 69 year old and that's my advantage because none of the lenders are my age. Even if they've been through several market changes, they always accord a certain amount of respect to their elders. Everybody in the firm knows how to use me to play a role when we're in a meeting. I tell people that when I got in the business, they were in the third grade. I play every edge I can get.

Q: What do you think of efforts to curb the amount of loans issued by Fannie Mae and Freddie Mae?

A: Because the federal government guarantees their loans, it gives them an unfair advantage because they have the highest credit rating. On the other hand, they were put in business to create an orderly housing market and to make home loan mortgages available at the best possible price. They've been attacked because their competitors don't like that they have an advantage.

Q: Ten years ago, you bought your company back from Grubb & Ellis after the real estate market crashed. Describe what happened.

A: I had worked at Sonnenblick-Goldman for 11 years and they were sold to Lehman Brothers. That was in 1979. I went out on my own and in 1982 we merged the company into Grubb & Ellis. Then, in 1992, every brokerage firm went into the toilet. I can remember the president of Grubb & Ellis' southwest region telling me that they were recapitalizing the company in order to survive and they had to get rid of all non-core groups, and I was non-core. I asked how long I had. They said 30 days.

Q: What did you do?

A: We had 12 people in our L.A. office and six in San Francisco. So I told them I'd make a deal. I'd sublease the office space and warehouse the furniture--which was my old furniture--and I'd take over the phone and copy equipment leases. Then I took all the employees out to lunch and told them I was setting up a new company and I was willing to sell five of them a 14 percent piece of the company for $2,000 each. And I told them if they didn't have the money I would lend it to them. I said we'd run it tight, keep overhead down and close a couple of deals to keep the doors open. The first year we made $400,000 profit and everyone earned a living. Last year our revenue was $14 million.

Q: Do you have a philosophy about success?

A: I decided our company would have the best commission structure, starting at 56 percent (of salary) and going up to 90 percent. Second, when people show leadership, or are involved in charities and professional groups, we let them buy into the company. Finally, two-thirds of the profits we distribute at the end of the year are based on the partners' production relative to each other. So even though I'm still the largest stockholder, I don't necessarily get the most profit. I'm willing to give up most of what I've created so I can have an environment where nobody leaves.

Q: How did you get to Los Angeles and into real estate?

A: My father was a Russian Jew who grew up in an orphanage on the lower East Side (of New York). We moved to California in 1948, when I was a teenager. It was a small town then, right after World War II. My first job was at the Aerospace Corp. in El Segundo, where I became director of administration for one of the company's four technical divisions. Basically, I was a babysitter for a bunch of brilliant engineers and scientists. But I thought to myself, "I'm never going to get rich, this is as high as I'm going to go." So I quit my job and went job hunting. I decided I would either be an investment banker, because they made a lot of money, or I would work for a real estate development company, because they made a lot of money.

Q: When did you get your big break?

A: In 1967, a fellow at Sonnenblick-Goldman pitched me on a loan. I needed $1.55 million and he said he could get me $1.65 million. That extra $100,000 was the amount it cost us to run our company for a year. I spent every day working on the loan for him. I ran the numbers with a little adding machine. After about a month, he gets me a commitment on the loan. I paid him a commission that was $2,000 more than I earned in the entire year. At that time, I said to myself, "I'm in the wrong business." So, I quit my job and went to work for him. He gave me a telephone and a desk, no training, no nothing. That next year, I made $91,000.

INTERVIEW

George Smith

Title: Chairman

Company: George Smith Partners Inc., Century City

Born: New York, 1935

Education: Bachelor's degree in engineering, UCLA; master's in business administration, Harvard Business School 

Career Turning Point: Quitting a job in the aerospace industry and becoming a commissioned mortgage broker

Most Admired Person: Richard Ziman, chairman, Arden Realty Group Inc.

Hobbies: Family, collecting art, traveling, charity

Personal: Second marriage, four adult children, two grandchildren