Roundtable on workouts.

ROUNDTABLE ON WORKOUTS

Therese Fitzgerald for Real Estate Weekly: Good morning, and welcome to Real Estate Weekly's round-table on "Workouts." My name is Therese Fitzgerald. We have called this round-table because of the current multitude of troubled properties and the need to find viable solutions for individual owners, partnerships, and institutions, and their lenders. You have all been asked to participate in this exchange because you have involved yourself in this rapidly growing field known as workouts.

Joining us are: * Ron Bruder, president of the Brookhill Group * Harold Siegelaub, president Harold Siegelaub Company * Tom Marino, partner, J.H. Cohn & Company * Felix Charney, president, F.T. Charney Company * Jordan Saper, HRH/Clifford * Stuart Troy, Esq., Stroock, Stroock & Lavan.

Joining me as moderator is Lois Weiss, contributing editor.

Starting on my left, please tell us who you are and in what capacity your company or firm is active in workouts.

Ron Bruder: My name is Ron Bruder. I'm the president of a company called The Brookhill Group. We're headquartered in New York, and we operate in 21 states. We have for the last 11 years specialized in turning around under performing properties. At this juncture, our business is expanding because we are doing that type of intensive workout management for lenders and owners - doing the day-to-day management and leasing of distressed properties. We have been doing all the various management roles that bring up the net operating income of a distressed property. We limit ourselves to three areas - shopping centers, office buildings, and multi - family residential.

Harold Siegelaub: I am the president of Harold Siegelaub Company, which is a real estate investment company. I am also the general partner of a real estate investment fund known as Realty Venture Capital Associates. My business in this particular environment is limited almost exclusively to seeking out and attempting to purchase under - valued properties located throughout the United States. Types of properties we're seeking include shopping centers, office buildings, industrials, multi - family and retail properties. We are not, for the most part, advisors to third parties, although we have done some consulting work. We act almost exclusively, as I mentioned before, as principals. The limited partnership which I manage is a venture capital pool, which is an investment pool involving 29 individual private limited partners who have been trusted with many dollars to go out and purchase approximately $75 to $100 million of undervalued properties. We operate nationally. In addition to that which I am seeking for the fund, in the past I have bought real estate nationally - probably 7,000,000 square feet of the type of properties I've just mentioned.

Tom Marino: I'm a partner with J.H. Cohn and Company. We're an accounting firm headquartered in New Jersey, serving the tri-state area. I'm also managing director of the Tom Cohn/Tucker Workout Group. Inasmuch as J.H. Cohn's practice is approximately 20 percent real estate and the workout area has grown as such, we formed a joint venture to handle this exclusively. Our main clientele is the builder/developer, although we've done consulting for the banks in the past year or so.

Felix Charney: I'm the president of F.T. Charney Company, which is a diversified development company based in Fairfield County, Connecticut. We've been involved in the development of an excess of 1.5 million, primarily high end retail and commercial, marinas, aviation, and a number of other diversified businesses. At the invitation of one of our lenders we, in response to the dramatically changing banking climate, were invited into the workout business, not through our own project, but through a failed project in our neighborhood. In 1988, we undertook our first redevelopment, which was a condominium, and since then we've been involved in about 12 different REO redevelopments or straight, traditional REO asset management, which is, frankly, our lifeblood today.

Stuart Troy: I'm a partner in the law firm called Stoock, Stoock, and Lavan. We have offices in New York, Los Angeles, Miami, Washington, D.C., and Hungary. We have an active workout practice in Miami, Los Angeles, and New York, which brings us to projects almost nationwide. About two and a half years ago we formed a task force to handle workout projects, both for developers and lenders, and it's very active today.

Jordan Saper: In the short run, we are the outgrowth of about a $1 billion dollar workout of Joe Newman/Berisford's New York portfolio property. As a company, we've been in business for not quite a year. However, our principals have been involved in real estate for their entire professional careers. We recently, about six months ago, entered into a joint venture with HRH Construction, who was of the mind-set that to stay alive today, even as general contractors, it pays for them to expand the scope of their activities to include restructuring, workout, asset management. So at that time Clifford, which is really now the marketing and operational arm for the entity, merged with HRH, and together we are going out and soliciting institutional workout business. Clifford itself today controls about 5 million square feet of property across the United States, principally in New York, about 3 million feet of secondary class lease space. We are leasing agents for construction managers. We're property managers, but principally we are asset managers. We're about to open a West Coast office, where we're going to work on about a $250 million workout in southern California, principally Orange County. We've got about 30 professionals working for us-accountants, contractors, real estate brokers, asset managers, portfolio managers, etc. For the most part, our clientele seems to be European institutions, who thought they we're little more than financial partners, passive partners, in U.S. investments, but have been forced because of the exposure of their guarantees to get more involved in the management of the portfolio.

Fitzgerald: As background for our readers, let's briefly review the reasons why there are so many troubled properties today; for example, over building, a depressed sales and leasing market, pressure on banks to write down non current loans.

Bruder: I think one of the biggest causes of the difficulty in the real estate market today - and I'm differentiating today - from two years ago where I think over building was a key factor - is two-fold. One, is the recession and the economy, and that's lowering demand, which combined with more than adequate available property on the market is forcing rents to decline and keeping vacancies high. But in terms of today and what is happening now, I think the biggest single problem we face is that there is not adequate capital out there to create liquidity in the marketplace to straighten out what is a difficult situation. There are lots of properties that are in trouble because lenders are in trouble, and therefore they don't have the capital to fix them, to lease them, to operate them intelligently. When mortgages are maturing, we see situations where perfectly good loans are becoming workout situations because distressed lenders are unwilling to roll the money over and renew a loan on a reasonable basis. So therefore you have conflicts, you have unnecessary filings of insolvencies. To me the problem in 1992 is the insolvency of the majority of our lending institutions and unwillingness to lend, that are creating an illiquid situation, which is compounding a problem that's existed for two or three years.

Siegelaub: I would agree with the first two factors. One is over building, which Ron mentioned, and which we're still seeing the results of. Number two, he said, demand being off, which I agree with 100 percent. I think the third factor which causes me the most concern, is the fact what is called the recession, which in the real estate business is clearly now a depression, not only in the context of an ownership position, but, the ability of tenants to pay - and I'm talking about paying full rent - has diminished to the point where you see buildings that appear to be fully leased where two things are happening. One, is some larger percentage of the building, increasing every month now, is falling arrears in payment of rent and operating reimbursements; and, number two, tenants in those buildings under longer term leases are walking into the landlord and even withholding rent. They'll try to renegotiate by not paying the rent. I think that if the economy continues to deteriorate, as sick as the real estate industry is, we're going to see a period of massive loans going back into what we call stages, and whatever problems we're having are just going to be exacerbated that much more.

Charney: Both Ron and Harold's comments are very accurate. In our New England area, but specifically in Connecticut, we've had, yesterday's New York Times pointed out, 21 banks fail that were Connecticut banks and Connecticut-based lending. That is the phenomenon that Harold was talking about where there's just no capital available and, as Ron said, properties performing, but the loans are coming up for renewal and there's no source of take-up financing. I know specifically from properties that we're currently operating and managing for banks, many of these properties are positive cash flow, and we're operating for the banks simply because they've taken them from a borrower in what they call mortgage in and possession, because the borrower's not paying his debt at the moment because they put the loan in default. And until there's some stability in the banking climate and there's some return of capital to the market, there are no lenders. There is no money available to buy.

It's further exacerbated where there are properties in some areas that have fairly good occupancy rates and those tenants are being sought by buildings that are now property of banks. The banks, in the inventory, are driving the rents down.

Marino: Therese, I think it goes beyond availability of money. That is a statement of fact. But also the fact of the matter is real estate is viewed now as a bad credit risk. There are banks that are solvent. There are investors with money. But until consumer confidence comes back, until real estate is viewed as a better credit risk, you're not going to see that infusion of money. In my opinion, I think is going to come from the government and the private sector, not the banking, community. But while all we say about availability of money is true - there is money out there - but real estate today is a bad credit risk.

Troy: I think that, going on with your foretell, banks as institutions have disbanded their loan departments, their lending arm, and even if they wanted to make loans today, their lending offices aren't there anymore. It will take a while for them as institutions to retool for the expertise needed to make real estate loans. I think Harold has the secret. It will come from the private sector in the next phase because they will team up with real estate professionals who have the ability to make judgments about good properties and how to redevelop them. For so many reasons, the banks are not able to support the market.

Fitzgerald: When you talk about the private sector, you're talking about pension funds and things like that or people like you with funds to invest?

Troy: The non-banking sector, I should have said.

Charney: Did any of you hear Mr. Trump's speech or, if you will, interview before the congressional committee on banking or something? I just saw a little bit of it. One of the things he said that I thought was kind of interesting kind of went back to what fueled, in my opinion, a lot of the boom that occurred in the 80's - the tremendous tax advantages of real estate ownership and the at-risk rules and things of this nature. He was shepherding a call to return to those sort of tax incentives, and if you were to adopt that theory and then apply it to Harold's thesis, I think that that would provide more impetus. Today one could submit the stock market is increasing, the CD alternative for those with cash. The earnings on CDs are so low so they're looking at equities. And those same people, at some point in time, will earmark a certain portion of their funds for higher risk investment. Therefore, if it were tax driven or supported by tax benefits, they may be more inclined to take risks in real estate, which was once considered less risky than other investments.

Marino: There's no doubt about it. That's what I alluded to when I referred to government support. A lot of our practice back in the early 80's was syndications. That's totally dried up. You bring back the incentive to have a tax-driven deal and you'll begin jump starting the market again.

Bruder: I think it's more than just the tax incentive. I think that will help, but I think part of the problem is analogous to when we go to take over troubled property. The biggest change that we have to create is the change of perception. When we take a property that's been vacant for three or four years, we have to impress the community with the fact that the property is going to change and that it's no longer a white elephant. Right now real estate, as you said, Tom, has the stigma of being an unsafe bad credit, and I think you have to do various things and change that. Investment - private and government - tax changes would all help, but you need to have a change in perception that real estate is safe, and it's almost as though if you have the perception, reality will follow. If people expect real estate to do well, I think it will start to do considerably better than it's presently doing. So you need a whole myriad of changes, all of which will push real estate towards a more favorable investment, and you'll start to see better yields and therefore more money will go to it and it will become somewhat of a self-fulfilling prophecy.

Siegelaub: I'm frankly hoping that tax laws don't change to draw money back into real estate totally. In raising the pool of capital which I manage, I found that there are enormous pools of private capital. When I say "private," I mean individuals with favorable money fortunes that have been accumulated over the past 10 to 15 years, what I call "new vogue" money, which is there to invest in real estate, ready to get not tax benefits, but perfectly willing to do it for the economic returns, which reflect the fact that, as mentioned before, CD's and money markets are paying under 5 percent. Real estate paying 8 to 10 percent, plus an opportunity upon full lease-up of to pay double that, is an extraordinarily attractive return. I think the syndication market is going to gear up again. I know that we're very active in raising additional capital. But what's good about what's happening - and there are a few good things that have happened - is that the promoter has been squeezed out of the market. He was driven because he understood tax consequences, but not real estate. He was the party who was feeding the developers the equity capital that was required to see the deal get started. He's out of business now. The ones syndicated were closed down or stopped for the most part. And I think in that context, a couple of years of their not being back in business will be healthy for all of us.

Marino: Yes. You don't want the promoter back in to take 5 percent off the top of any real estate project. I don't think that's going to accomplish anything. But I still do believe you need tax incentives to drive those private investors back to the market, as well as the economics. They have to be there first. The tax tail doesn't wag the dog. The economics and the deal have to be there. But certainly when you can bring back a capital gains, somebody will flip a property rather than hold it. It'll generate that buying and selling again. When you can take shortened depreciation lives and get your write-off, the good money, not the promoter's money, not the syndication in the bad sense of the word, the real estate partnerships will come back, with the tax laws. I think it has to go beyond capital gains depreciation. You're going to have to start giving incentives to first-time home buyers, and things like that, to really overhaul and jump start the tax end of the market.

Charney: If conventional lending would return, then one wouldn't be quite as reliant on trying to stimulate private funds. I'm not suggesting we return to the era of the K-Mart deal, where everything was terribly over financed and one was assuming that things were just going to continue to go up at two times the rate of inflation. But I know that listening to you, it sounds like you manage an awful lot of projects that were just real dogs. You know they've been vacant for a long time, they bring you in, and you perform whatever your special magic is and you attempt to make this property have some life. From the things that we're operating, we certainly see properties that are like that, but we also see some properties that aren't dogs. They are actually currently positive cash flow, the kind of things that Harold's buying - shopping centers that somebody has lost control of for some reason, but the properties are 75, 80, 90 percent occupied. And now they're trading at cap rates of 12, 13, 14, 15 percent, when they were trading at a whole other level. There will always be bad real estate projects that were poorly conceived, and then there are others that have problems for other reasons. I think certainly what I've recognized is, for the most part, unless you have a tremendous amount of personal and financial strength, if you own real estate, it is exposed today to being lost, no matter what its quality is, and that's a phenomenal concept. It's like somebody saying diamonds are no longer valuable.

Fitzgerald: Let's talk a little bit about trends. Do you see banks more willing to work out with owners? There have been some large office building sales in this area lately. Are banks choosing to sell assets, and end their involvement introubled assets?

Bruder: I see increasing pressure on a lot of lenders that we're dealing with, causing them to act in a less-than-economic fashion. We've worked as white knights with a lot of owners in the last 18, 19 months, two years, assisting them both as a management and negotiating arm on their problems, and we've encountered more and more so in the last year lenders whose decisions are based less on economic realities than a need to move forward with an asset. So we have seen lenders less willing. We've seen more properties get thrown into the morass of the Chapter 11 insolvency proceedings, when it was clearly not in the best interest of either lender or owner - only for the potential law firms on both sides. To get involved in all of that type of situation is bad for the property. Countless hundreds of thousands of dollars, millions, get depleted in legal expense, but, despite that, we see lenders that are taking a hard-line position with owners that are willing to work with them and even put in capital. Some of that is going on, a good percentage of it, due to the internal pressures of the lender itself, sort of a knee-jerk where they actually have to move so they either get paid in full or they're going to proceed with a foreclosure action, which is foolish in it's own nature.

Marino: I will say this. In '91, there was action. In |90, we found very little action on the part of the banks. They didn't foreclose; they didn't negotiate. In |91, I saw action. They either moved to foreclose or take a "deed-in-lieu" or they acted in the concept of a workout. I don't think, though - I'll disagree a little bit with Ron. You can put it in a cookie cutter mold and say they're acting insidiously. They're foreclosing and therefore they're ramming things down people's throats. It's an individual fact and circumstances. We found cases where banks will work with the developer, and we found banks that are going to take the property back and be done with it. But in |91 there was a lot more action on the part of the banks than in |90.

Charney: In New England, we have these new highbreds, if you will. They're like service companies. One's called Recall, which is a company that's coming to service all this real estate on behalf of Fleet, which is Bank of New England, a phenomenal amount of real estate in our area. There's another one called CARG, which is Chase, which is the city trust and M&F and some other assets. If you have the misfortune of having an asset with these particular entities, although they're very competent people, they are financially incentive-biased to liquidate this product. They have bonus mechanisms that are stepped up to sell this product. And if you have a building in a particular marketplace and are competing against a building that's for lease or for sale but belongs to one of these entities, they will sell at almost any price in that regard, and so it continues to erode the marketplace. If you happen to be a borrower, the ability to reach a workout arrangement with these entities is generally not good, because their incentive is to liquidate it. If you happen to be with a bank that's still in business, you have some opportunity to do so.

Fitzgerald: Has the RTC dumping properties really affected them?

Charney: These two particular acronyms that I've applied - CARG, which is Consolidated Asset Recovery Group; and Recall, which is an actual name - are like the highbred of the RTC. Instead of the assets of the seized institutions in these cases flowing through and going to the RTC, they're actually being held off and handled on a fee basis through these banks, through these new acquired banks, in this case Chase and Fleet. I've never had any dealings with the RTC. My opinion has been that the assets that end up at the RTC have been really the bones. They've really been picked. Maybe some of these other gentlemen have experiences.

Marino: We've had a number of experiences with the RTC. My personal opinion is it's the biggest mistake the country ever made, forming the RTC. They should have put the bad banks with the good banks and tell them to dispose of the loans regionally across the country and do away with this bureaucracy. I spent a lot of time down in Somerset where the Jersey office is and in Valley Forge where the northeast region is. Jersey had a building that they took over from City Federal, about the most gorgeous office space you'll ever see. I don't see any action there. I don't see any incentive on the part of the RTC to really move product. They're hiring people whose job is to do away with assets, and when they do away with assets, they're out of a job. To me that doesn't give them any great incentive. I do agree; it's bare bones. A lot of their product is the stuff that can't be worked out, no varying circumstances, a product without final approval. So I really have a lot of problems with the RTC.

Fitzgerald: Anybody else have any experience with that?

Saper: Well, not in relation to the RTC, but if one were to generalize our experience, much to our surprise, quite frankly, it's been that the foreign banks the capital sources have been more willing to restructure the loans than the U.S. banks, who presumably have a better sense of where the market is and are better equipped to evaluate a workout plan so as to determine the feasibility of this added-value concept that we try to promote. I don't know if it's because they're not regulated in quite the same way as the U.S. banks are, but in many cases we see ourselves, frankly, as the trustees for these lenders. And where we've been shocked is in the case of the Japanese, who we found, despite the fact that they're however many thousands of miles away geographically, light-years culturally, in a situation where their loan was for the most part current, except enormously exposed because of the rollover risk which they were facing in a couple of years, they were willing to face the music, rewrite the loans in exchange for a long-term recasting of the leases, bringing the rates much closer to market, impacting the bottom line today, perhaps to the tune of 20 or 30 percent. Where they had a loan where maybe they were 90 percent current, they recast the loan so that it reflected market rates, of a sudden they are only 60 percent current. Yet, they had effectively put a floor beneath their loan that, if they wanted to bury their heads in the sand, they could have suggested a need to be established by virtue of the likelihood that the tenant was going to renew. But today the Fortune 100 tenants are very sophisticated, and they came to the table first and said, "You have a choice. Maybe we will renew, but maybe we won't. The only way you have a chance is if you rewrite this loan today." So we countered with, "Well, we're not simply going to rewrite the loan. We need an exchange for that long-term extension." On one project in |91 we renewed about 250,000 feet out of 1 million feet that would have otherwise been exposed to 18 to 24 months from that. So we're, quite frankly, very pleased with the Japanese, but it's a long, arduous process.

The only other generalization that I would like to make is that where we had loans whose guarantees had expired by corporate guarantees having been settled in some manner, those were the loans where, when we were then left with the asset, we were successfully structuring with the lender. Where there were guarantees which could not be quantified and where we got into protracted negotiation, it wasn't able to be settled, those loans we were not able to restructure. So perhaps our ability to come in after the LCs are called - as the good guy who has some integrity, who's straight, who's willing to roll up their sleeves and perform the function, the banks were just as willing not to be in the chain of title and let us go forward. But where we were actively involved in the negotiation of the extent of the guarantee, we didn't have the same relationship after the negotiation with the bank, and we found that we weren't successful restructuring those types of loans.

Bruder: I think that the differential in terms of reaction on the part of domestic, as well as foreign lenders, isn't a function so much as to knowledge of the American market. More, I think, it's a result of more pressure on the American lenders to liquidate their portfolios and not do so in an orderly fashion. I think the foreign lenders are looking at it in more of the businesslike fashion. The lenders that we've encountered are going to continue to function irrespective of their American portfolio, and they're looking at minimizing damage and they're taking actions that will move the property towards an increase in value and hoping to stem further write-offs. Where the American lenders, a good percentage of them, are under such strong pressure, regulatory and otherwise, to liquidate their portfolio irrespective of future economics of either course of action, they're moving in the direction of a liquidation, even if it pushes towards an insolvency and all that that involves.

We also find similar situations to what you're saying, Jordan, in terms of if you have a loan that has a guarantee on it. We work with a lot of owners who have guaranteed the indebtedness, and the biggest problem that we have in representing these owners is the perception on the part of the lender that they still have a guarantee. I'm an ex-accountant and I've analyzed some of the financial statements of some of these virtue of letters of credit being called or borrower guarantors, and they have a negative net worth in most instances that's rather high, and it's not theoretical; it's real.

Weiss: I've heard from different people that when they've wanted to get the bank's attention, they've filed for bankcruptcy. Is that still a working concept?

Charney: I think a lot of people use bankruptcy as a flag. The way I understand it, and this gentleman would be better qualified to answer that sort of question, but in my opinion as a person in the marketplace, if you have a loan that's a term or you have a problem, you generally go to your lender and you have a discussion. If there's no opportunity to work it out, frequently you'll think you have a little better chance doing a plan in front of the bankruptcy judge. So you'll do it as a threat, and I think for most cases borrowers or individuals choose that as the last resort.

Troy: I would agree. I think the conjunction between guarantee and success in workout is important. I think most borrowers would be happy to trade the deed for the lease of guarantee in a troubled pocket situation. Sometimes banks are reluctant to do that. They think that they'll be criticized for giving up what looks like an important guarantee, but which has very little value. Yes, there are important tax considerations. If one were to give the deed to asubstantial property to a bank and be relieved of the guarantee or the indebtedness, there's an important tax consequence. That's seen as a sale for the mortgage amount of the lease, and often you're dealing with property that has a depreciated tax base, so that the owner will have a substantial tax. Obviously, the owner has lost money in a real sense and hasn't gotten anything. If you wanted to avoid years of litigation in the nation, perhaps there ought to be some tax relief on that end so that some kind of amnesty period, where people can come and turn in these properties, give them to the banks, let the markets restructure, and let new investment go forward by cleaning up legal title. And it's hard to do. It's very hard to do. I think that developers who are personally bankrupt don't have the problem, but personal bankruptcy is a terrible stigma. People want to avoid it, and it wouldn't be necessary in many cases if we could somehow work around this tax problem.

Tax Consequences

Bruder: There is a way of working around that tax problem that's been successful for us. As you said, Stewart, on foreclosure there is a phantom income tax to be paid. There is a real capital gains because these people have a strong negative basis. We have been able to go to both owners and lenders, bring in new capital, move the owner off to the side where he's no longer in operating control.

Troy: And keep the ownership?

Bruder: Right. They technically have an ownership position, although in reality on some of these properties they won't really enjoy any equity unless there's a lot of positive things happening. But what happens is that new money does come in. The owner moves off to the side in an operational sense. He maintains enough "equity" of the partnership so that then a taxable event has not occurred. The bank is satisfied because they now have operational control via a company who has strength. They see some new capital - coming in. The owner's happy because anything he sees down the road is gravy and, more important, as you mentioned, Stewart, they don't have a tax problem at that juncture. So we find that with a little bit of creativity and a small amount of capital - lenders aren't looking for huge chunks of capital on some of these distressed properties - we've been able to go in and take over property, restructure the debt simultaneously, because we're not going to put any money in a $40 million property that's not worth $20 million when the debt is $30 million, so the lender will simultaneously, in consideration for both the new management and the new capital, restructure the debt so there's a realistic upside to it. The owner moves to the side, and it's a win, win, win, without the necessity of a capital gain or a forgiveness on the part of the tax.

Troy: In fact, that is the very important value added that your group and Jordan's and Felix's brings to the market. The banks won't on their own be able to find that source of new capital in the time frame that these things happen, where action is demanded of the acquired institution. Without advisors like yours and Jordan's and Felix's, it doesn't happen often enough. That's a great solution, and I wish it would become more commonplace.

Bruder: It's not becoming more commonplace, unfortunately, because of the situation that Jordan mentioned with American lenders. They are not acting on what I'd consider to be a good businesslike basis. They have a $40 million, loan and the property isn't worth $40 million. They have to be prepared to come to the marketplace with a realistic expectation of what that loan can be, and they don't have the capability of writing down a loan in many instances without a foreclosure. Politically, they can't do that. They can't leave the owner in place, create a situation. For instance, we've done several where the loan is written down, but it's not written down for tax purposes. It's, let's say, a $40 million loan, but it's seen that the property is now worth $25 million. We pay debt on $25 million. We will participate in cash flow on $25 million, and there's a sharing up to the old $40 million level. So what happens is the bank becomes a joint venture partner to the extent of his original indebtedness. Theoretically, it should be a very easy thing to do for all parties. You figure out what the present-day value is, you fix the loan on today's value. The new group comes in and adds value and therefore participates with the lender on the new value, and everybody rolls forth with a smile on their face.

Troy: Ron, what we need in real estate is a no-fault law, the way we have it in automobile accidents. There ought to be a no-fault law, and the developers are not seen to be bad people. They're obviously the victims of the marketplace. That resentment that inhibits the kind of happy solution you put forward would go away.

Bruder: Very well said. That's very good.

Marino: I don't think a workout works unless both sides are motivated, and the developer, too, has to stop thinking the bank is the bad guy. It should be totally no-fault. Ron, as far as your comments, I agree with you. Your mechanisms for deferring, and that's what you're really doing, deferring that tax.

Bruder: You may not be deferring it. If the property lives longer than the developer, you have a stepped-up basis. For the next generation.

Charney: And it's still down the road. When all parties tend to agree, the workout generally will work. If the lender will express a willingness to, in certain cases, put money into a project to complete a project, to finish out a phase of development in condominiums, to do T&I work, to get tenants in, rather than to simply dump the project on the market at a sales price where they further erode the market, it can be terribly beneficial to the market, to the developer who is in the original deal, to new buyers coming into the market, to pretty much everybody. We've been fortunate to do a couple of these case study in Greenwich, and it was phenomenally interesting what occurred in their environments.

Saper: I think partly it's a function of the lack of sophistication of the workout arm of the banks. The banks have just been so besieged and have been forced to assimilate in a very short order massive amounts of people, establishing protocols, etc., that we find many times that we're up against REO managers who are 10 years our junior, much less sophisticated, not able to really understand the complexity of the transaction and the viability of the concept going forward.

Bruder: I think your point about a lack of sophistication on the part of a lot of bank workout departments is valid. I think it may go deeper than that. I find we do some of our best workout work with lenders that can act intelligently, and if you look at the background of those lenders, those are organizations that are not under the financial strain that others are. So what happens is they're able to sit back and look at the loan from the eye of an intelligent business person, and financial individual. Also, it goes back to what you said, Jordan. The less strained lenders are able to hire better people and are more of a permanent mode. We find, for instance, we can compete in the marketplace and get management people, leasing people, better than any workout department because if a person's background is sufficient enough to ensure him a place in today's marketplace, and he has the option of going to work for a workout department or a permanent entity in the real estate business, obviously he's going to choose to go to work for something that he sees as having greater permanence. The same holds true if he's going to look at banks. I find that the distressed banks, number one, pay less; number two, have a chaotic air about them; and they don't attract good people. The positions within these institutions are seen as being very short term. They're going to have fire sales, get rid of it, and those people that joined are going to be very quickly on the unemployment line again.

Troy: Let me speak for a moment in defense of the lenders' workout department and take some of the blame in the legal profession. In the legal profession we have to retrain some our rules of thumb and instincts. If we, as lawyers, advise banks and lenders and developers to litigate and to fight for their rights and to take aggressive postures, we will seriously inhibit the chance of a successful workout. I think that's why there are workout specialists and maybe workout lawyers.

Jordan and I were on opposite sides of the table on a billion dollars of property. I don't know if you were at some of our big meetings where the debtor's lawyers came and said, "We would like to give to each of you lenders what you would get after successful litigation and bankruptcy. We'll give it to you up front." I think it was that approach - even that made it possible to have a workout, with your billion and another billion behind it, about $2 billion dollars worth of property, get out of bankruptcy, and without litigation of anybody concerned. So we need an end to the cold war that we lawyers sometimes participate in, and a different approach, a very realistic business approach, to the underlying realities of these properties.

Charey: I'm sure the defense of the asset managers is probably warranted. At a minimum, they're our clients. Their level of sophistication, I have noticed, has increased. When this whole phenomenon first occurred, I would completely agree with Jordan. They are, for the most case, although they may not be 10 years younger than myself, they were fairly entry-level positions. They were not terribly well compensated. But I'm finding now that the unemployment in the industry is such that a lot of quality individuals with a lot of experience are now going to these REO departments, and the asset managers are getting more sophisticated and they have more market savvy. Specifically, in the two service companies that I mentioned before, these two companies have become significant employers and are actually paying more, in a lot of cases, more. They are competing for individuals in the marketplace, and so they are, if you will, attracting better and brighter because they are paying more dollars. But one problem that still doesn't affect these people is they are given so much. I know asset managers that have 80, 90, 100 properties. I know asset managers that have been employed for an excess of eight or nine months that have not seen 50 percent of what they currently manage and frequently will go to the map and say, "I've got something in a specific town," and not really know where it is. So they're still wrestling with the end result when they've got all this inventory to process but they are getting easier to work with and they are getting brighter.

Marino: And I think they're starting to acknowledge what you say. They lack certain expertise, and maybe they haven't hired the best people, but what I see them doing is contracting it out to workout specialists that heretofore only represented the developer, people like yourself that they'll bring in on a contract basis or project basis, do a feasibility, see if it can be worked out, on a project-by-project basis bring in that professional that they're starting to realize that they need. I think one of the most important things the workout specialist, whether he represents the bank, the lender, or the developer, can bring to the table is the ability to diffuse emotion, to calm the cold war, bring peace, and also bring objectivity to the table. He's not married to the project, as the developer may be. He's got more expertise than the bank may have. So that, I think, really is the role of the workout specialist, regardless of who he represents.

Saper: That's a good point, because there have been many times where I have been surprised to the extent to which personal relationships are a component of the process. Where a lender, if he has the feeling that the developer is straight and competent, will go that extra mile to get the deal done. Over and over again it amazes me. I'm talking about the senior-most people, the institutional capital sources, and some of the most prominent banks here in the city, and much of this relates to the situation that Stewart described before. Stewart was involved representing a promoter/developer who, in the end, had some $400 million worth of unsecured debt, $200 of which was institutional. And those banks, because they recognized that this was a decent man who did the best he could, who invested all of his capital back into the projects as they were on their way down, who was left with nothing at the end of the day, basically I think it's pretty much done. This man has been forgiven $200 - $300 - $400-million worth of unsecured debt by some of the biggest institutions in the United States. I think it's one of the most extraordinary workouts that is happened. Stewart was certainly a voice of calm and reason, but it really started with the original developer, who always maintained his equilibrium, despite the fact that his world was collapsing around him.