Bank of Japan encourages lending.
The speaker, Masaru Tanaka, head of economic research for Japan's central bank, said the U.S. branches could take advantage of the established market for distressed debt and lead the way.
The bank's annual review of the economy, that was released in May, calls for the development of due-diligence and valuation standards in Japan necessary for portfolio dispositions.
Also addressing the conference, which was sponsored by E&Y Kenneth Leventhal Real Estate Group (E&YKL), was Lamar C. Kelly, Jr., the former deputy executive director of the Resolution Trust Corp., the U.S. agency set up by Congress to dispose of some $500 billion of assets that was folded into the FDIC last December.
The Japanese people had been resisting the establishment of such an agency even as the Japanese government had been trying to make it easier for lenders to write down losses so they could dispose of assets.
At the end of May, Tokyo police arrested a leading property developer whose company, Togensha, is in default on about $700 million in loans. He allegedly interfered with blocking the auction of land by the Industrial Bank of Japan, among other charges. As the target for public anger over the Japanese banking crisis, his arrest helped clear the way for the passage of the measures.
The Japanese Parliament, the Diet, soon enacted bills to create the Japanese Resolution Trust Corporation (JRTC) and the Housing Loan Asset Management Institute that will resolve the real estate portfolios of failed credit cooperatives and jusen, the housing loan companies.
Initially, the legislation allows $6.5 billion in taxpayer's money to be used in liquidating the jusen companies.
Joseph B. Rubin, managing director E&Y Kenneth Leventhal Real Estate Group, said his firm advised the Japanese government on how to set up such an entity. '
E&YKL and its Japanese affiliate, Showa Ota & Co. are bringing together key real estate experts in Japan to work with the central bank and Ministry of Finance to develop guidelines for the activities of these new agencies.
The most important lesson of the RTC, Kelly told the bankers, was the necessity of providing comprehensive data on the assets to the investment community in a user--friendly, standardized format. "You cannot maximize value unless you thoroughly understand what you're selling," he said.
Japanese Public Unhappy
Setting up such entities was not welcomed by Japanese people who were worried that they would end up subsidizing the unfavorable business decisions of their countrymen.
"The Japanese public is against an RTC--type entity because they don't want to be taxed because of bad judgements made by the banks,' said Jeff Landers, an office broker who represents Japanese companies in the U.S. "If there was a mass bailout, who was going to pay for it?"
In the 1980's the Japanese were taking big bites out of Manhattan, gobbling up trophy and landmark properties such as the Tiffany Building, Rockefeller Center, the Mobil and Exxon Buildings, the Algonquin Hotel, Hotel Inter-Continental and even buildings with plain 'ole numerical addresses. Their appetite for condominiums was insatiable but understandable when they could pay a half million dollars for a midtown apartment that would cost them $5 million in Tokyo.
By 1989, the Japanese had invested over $35 billion in the United States, with $7 billion of that in the New York area.
Jeffrey W. Baker, principal and co-director of the real estate investment banking and capital markets group at Peter R. Friedman, Ltd. formerly worked at Eastdil during the time the company was affiliated with Nomura.
"We put up a map of New York City office buildings, and our partners had tracked all the Japanese investments and there were a lot of pins on that map," said Friedman. "Nearly every investment made between 1986 and 1991 is worth 50 or 60 percent of what was invested. In one form, they were fine pieces of real estate but values dropped precipitously. You haven't seen much of any of those assets come to market because there weren't motivated to write them down to market.
The bubble has long burst into droplets in the Atlantic as well as the Pacific, and now, the Japanese investors are delicately trying to extricate themselves from their originally over ambitious investments.
As individual investors are bow out of the way of their lender banks, those lenders are methodically selling off the investments.
"I don't think I see it in a tidal wave," said John Somers, senior vice president of TIAA. "It's a developing market. Real estate is fundamentally a better asset class and if the stock market corrects, [as it was doing last week] it will even be better."
Somers says because the Japanese bought good quality assets and didn't buy inferior products, their assets are appealing to investors. And while the real estate market is recovering in New York to early 1980's levels - and on condominiums certainly near pre-crash levels - it has not yet, nor is it likely to, come anywhere near a run-up to trophy prices for the commercial buildings.
Investors, therefore, are working off the history of the past, as well as making intelligent investment choices based on current, and not anticipated, rental levels.
Many of the Japanese loans were made to Americans, says Landers, who is primarily involved in leasing office space to Japanese companies.
"A lot of the purchases that Japanese investors made were all cash deals or were financed with their banking relationships in Japan," he said, "but a lot of the problem loans in the United States were to U.S. companies."
The vast majority of the assets, however, are in Japan. "We're taking about a problem that has been measured at $400 billion to $800 billion of non performing loans," explained Rubin.
According to an E&YKL report on Japanese investment from 1985 to 1993, the entire Japanese investment in the U.S. was $77.1 billion but they disposed of only 15 percent or $11.8 million in assets by the end of 1995.
In New York City, the investment was around $12 billion. New York assets sold in 1995 amounted to some $2.7 billion, up from $583 million in sales in 1994. Of the $12 billion total, Rubin says $4 billion has already been sold.
"Eight billion dollars in a market the size of New York is a huge amount of property [to sell]," Rubin observed.
Jack Rodman, director of national accounts and a managing partner of E&Y Kenneth Leventhal says the Japanese will look to the strongest place to sell assets and will come to the U.S.
Most recently, the Japanese lenders have had to get permission before completing any sale in which they will realize a loss from both the Ministry of Finance and tax authority. "Clearly they are becoming a bit more lenient," said Rubin about recent transactions.
Colleen Sheridan, senior managing director Gordon Financial Services, said, "They needed presidential approval before they sold their assets and they have that now," she said. "It didn't just affect real estate, but a whole gamut of assets that were held by the Japanese. It was a very encompassing change."
Rubin says the banks have to do something simply because their balance sheets are burdened by non-performing loans. "It's squeezing their capital," he said. "Most are barely making their BIS [Basel] International Standard] capital."
While many are thinking of issuing preferred equity to get their capital back, Rubin says this would be merely a short-term fix.
In late Spring, when Rubin was in Japan, he found a shift in the attitude of the Japanese officials.
"The guys in Tokyo aren't discussing specific assets, but there is a general shift [in attitude] that disposing of assets is an appropriate goal. The portfolios are enormous." Rubin says they have to come up with strategies of disposing assets but they can't do that until they understand the enormity of the problems.
The Japanese lenders are still not sure of the tax losses but they took $108 billion collectively in March, which is the end of their fiscal year.
"Clearly that is changing their attitude," said Rubin. "That is opening their world."
Other cultural changes are also taking place as a response to the bad loans. Japanese banks are downsizing and firing employees and are breaking longstanding relationships with clients who have not been profitable. While those strategies are common in the United States, Rubin says they are something new for the Japanese.
Most of the problems involving real estate are in the form of loans and there is very little REO [real estate owned] relative to loans because Rubin says the Japanese banks have a great difficulty in foreclosing legally.
Rubin believes that over the next two years, many assets will come to market and there will be sales at an accelerated pace being made by the New York branches of the Japanese banks.
That step up in pace has already started to hit the New York market place where several recent transactions have involved debt owned by Japanese leader.
The E&YKL report states properties sold in 1995 at about 60 percent of acquisition costs, and those under contract or for sale were expected to sell for 60 to 65 percent of that cost. In 1993 and 1994 by comparison, properties sold for 50 percent and 56 percent of acquisition costs respectively.
Sheridan said there is some activity among Japanese banks that are selling notes and mortgages they have foreclosed on.
"It's an orderly disposition of selected properties as it's appropriate to sell them," said Sheridan. Although the Japanese hold a number of properties in New York, she believes that percentage-wise, it is not significant.
"Not all of those are in trouble or for sale," she said. "You may see some notes being traded and may see [American lenders come in], but they are just swapping debt. It has no impact on the occupancy of those buildings as long as the note is performing."
Many of the deals in the 1980's were structured as quasi-equity investments as debt with a participation, or debt with a convertible feature into equity. Because of this, Baker says many of the assets that are going to be converted won't be a straight sale but merely an entity coming in and buying a note that effectively captures the asset.
"In most cases the existing equity owner has no equity left," said Baker. "They are acceding control and there is a new entity coming in and buying the mortgage note and taking control of the building."
Fuji recently transferred the Winthrop portfolio of four buildings, including 1372 Broadway, 575/85 Fifth, and 757 Third, all to Apollo.
That same bank is now disposing of 260-261 Madison, a Mendik property, to an investor group led by David Werner. He also bought the note at 342 Madison Avenue.
Nippon Credit Bank recently appointed Cushman & Wakefield to handle 45 Broadway, a Ronson property.
Dai-ichi Kangyo Bank is currently selling a group of four Soho properties through Garrick-Aug.
"It is an orderly sale of properties and notes that are well positioned to be sold in the New York market," said Sheridan.
Warren "Woody" Heller senior director of Jones Lane Wootton, says while the Japanese were slower to enter the sales process because of the internal government issues, they have benefited greatly because the market has had a chance to improve.
He said many of the deals between institutions and borrowers are resolved in Japan, "so there are many more deals that happen than any of us know because there would be no third party transfer."
Nevertheless, he believes the Japanese and the domestic insurance companies are going to be the most prevalent sellers in 1996.
Because the Japanese purchased or loaned money to many high profile trophy properties, Heller believes the venture capital and opportunity buyers would like to get these properties but may not, given their return profiles.
The exception to that, he said, would be where there is a turnaround scenario, where its been in foreclosure, the lease level is down and the buyer is more likely to be an operator with equity or mezzanine financing from investment funds.
"The value creation scenario will involve opportunity funds," predicted Heller. "Those buildings that are stabilized or where there is no element of distress will be less likely to trade.
Baker of Peter R. Friedman noted that a $200 million office building in New York City is not the easiest thing to find a loan for or sell because many of the capital sources, whether conventional or securitized, are concerned about putting all their dollars in one crate.
"It's an awful lot of concentration of risk in a single asset," Baker said. "So there are not many players. But so much capital earmarked for real estate is having a hard time finding product, so we are seeing more of an interest."
Baker says there is also a lot of general interest in New York again because the fundamentals have improved.
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|Publication:||Real Estate Weekly|
|Date:||Jul 17, 1996|
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