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RTC, one year later: going nowhere fast.

It has become almost axiomatic that governmental bureaucracies are difficult to work with. The Resolution Trust Corporation (RTC), in existence for less than two years, is proving to be no exception.

"Overall, I give them very poor marks for being responsive," says Dick Wade, partner in Wade-Gribble Commercial Real Estate in San Antonio. "Their lack of response has cost them a lot of money."

Of course, one reason for the RTC's lack of responsiveness is its very youth.

"It's not that government people are stupid," insists David W. Jefferson, president of Burdell Properties, a real estate investment company in San Rafael, Calif. "It's that the government agencies are new and inexperienced. First off, they've inherited a large number of assets that no one else wanted. Then they've had to go about hiring people with real estate expertise who know how to handle those buildings. There's a learning curve that's involved."

In addition, notes Jefferson, as with any organization, the startup period has also involved a fair amount of jockeying for position. "There's always a gestation period when people in a new hierarchy fight out their fiefdoms," he claims. "With RTC, that's taken a little longer than many people are comfortable with."

Making it up as they go

Unlike many agencies where hidebound policies built up over decades stifle coherent action, RTC appears to suffer more from a confusion of goals and lack of experience than from intransigence. Many people who have had dealings with the agency, in fact, wish it would lean a bit more toward the intransigent end of the scale, charging that procedures change rapidly and vary from one office to another.

"There was a lot of concern about extraordinary scrutiny," said Deborah Kops, an analyst with GA/Partners, a subsidiary of Arthur Andersen Real Estate Services Group in Dallas. A former asset manager for the FSLIC, Kops has kept a close eye on RTC's progress, even though to this point her firm has opted not to compete for contracts with the agency. "The rules kept changing every few

weeks, and you never knew where things stood. It has not been an encouraging situation in which to do business."

Wade concurs with Kops' assessment, adding, "Each individual RTC office is overseen by a particular individual, and the operation of the office varies with the personality. Too much so, I think."

Wade's firm has been on both sides of the fence with the RTC. "I owed S&Ls money I wasn't able to repay," he relates. "I'm what is technically known as a defalcator. But we've also set up a corporation to do contracting with RTC."

No longer the need

to be squeaky clean

That Wade can contract with the agency is itself an indication of the changes in RTC procedures. Initially, the agency refrained from dealing with any firm that had been in any way tainted by the S&L scandal. But the scope of the crisis and the need for assistance has forced a shift in position.

As Caryl Austrian, a spokesperson for the Federal Deposit Insurance Corporation (FDIC), pointed out in a recent press conference, "All of a sudden you find yourself with very few horses in the corral that aren't lame in some way."

The fact that an individual firm may have defaulted or in some other way been a part of the S&L debacle does not necessarily impugn a company's integrity, asserts Wade. "Making a poor decision is not the same as making an unethical one," he points out. "There areare a lot of really bright guys out there who did things in the atmosphere of the '80s they wouldn't have done at another time. Plus there are quite a few companies who just got caught up in the crisis. Being careful was not a guarantee of being safe."

Recognizing the

value of knowledge

Apart from the issue of ethics, there is also the issue of expertise. "There are so many of us who have been involved at some level," continues Wade, "if they exclude us, they've lost a lot of talent they're going to need."

"The procurement process is different now," assures Kops. "It used to be far more charismatic, a matter of personal marketing based on how much someone liked you. Now there's a more detailed procurement process with identified rules and regulations."

In August 1990, the Resolution Trust Corporation awarded its first major asset management contract. It was signed with Lowe Enterprises, based in Los Angeles, for management of Banning Lewis Ranch, a 25,000-acre planned-unit development in Colorado Springs.

"The good news is, we were the first contractor," said Lowe principal Theodore Leary. "The bad news is, we were the first contractor. We're kind of a guinea pig."

Subsequently, the RTC has awared several more contracts, the largest of which (as of November 1990) went to the J.E. Roberts Company of Alexandria, Virginia. It won a three-year, $41.4-million contract to manage and sell $1.5 billion in nonperfoming commercial loans and $835 million of commercial real estate (mostly raw land) previously held by a failed Houston thrift.

In addition to his work with Lowe, Leary is chairperson of the Real Estate Capital Recovery Associeation (RECRA), an independent organization formed in 1989 to assist RTC on real estate management and disposition. Currently composed of more than 100 members who represent leading asset management firms from all across the nation, according to Lowe, RECRA is working closely with the RTC to develop procedures for the orderly disposition of the S&L assets.

Lowe describes RECRA members as "honest and ethical with a staff capable of handling significant asset management, experienced in a particular product type or types, and with a proven track record." He says the organization was formed to give the government the benefit of the members' private-sector experience.

"One of the benefits of the private sector," he explains, "is experience with producing a business plan. We attempt to bring a voice of market reason to the process. The government is highly dependent on market appraisals, and we have some experience in evaluating appraisals."

According to press reports, the RTC is now signing on about 1,000 new contractors a week and could soon rival the Defense Department as a lucrative source of government contracts.

Avoiding the political battlefield

Given the complexity and scope of the crisis it was created to rectify, it is hardly surprising to find the new agency struggling to define itself and establish both clear and workable procedures for accomplishing its state goals.

The difficulty of the task is multiplied when consideration is given to the uncertain political and social climate within which the RTC has to work. Fears of recession, simmering conflict in the Mideast, and the unsettling battle between Congress and the administration over the current budget--itself only an emblem of deeper and potentially more-distributing political division--have only added to the complications.

The goals of the Resolution Trust Corporation are, on the surface, unequivocal: to dispose of properties acquired from failed financial institutions at the highest possible net realizable value.

But as with any politically instated organization, there are secondary goals as well, many of which have little to do with the stated purpose--and may even be contrary to them. Contrary and obstructive goals can range from maintaining a particular person's power base to trying to prove the validity of some political or economic theory. They can be as personal as attempting to extend an assignment in order to keep a paycheck coming or as philosophical as undermining the current order to demonstrate that government regulation does not work.

Quite apart from any obstructionist efforts that may occur, there are debates over appropriate methods. In the case of the RTC, the past provides minimal guidance under which to work.

The federal government has not previously found itself in its current position. In the past, the number of properties it acquired through foreclosure was comparatively small. Its property management experience, by and large, had been confined to taking care of government-related lands and buildings, properties maintained either for public use or for government operations.

While some of these properties have at various times come on the block, their sales were not primarily looked upon as profit-making ventures. Although this has changed somewhat in recent years, as legislative and citizen watchdogs have pressed harder for accountability and "bottom-line" thinking, few people would claim the federal government has consistently adhered to the most fiscally beneficial practices.

The intrusion of reality in pricing

Ironically, many observers contend that in this case the seemingly sound mandate to get maximum dollar out of the sale of its assets is undermining RTC's effectiveness. Everyone interviewed for this article believes RTC price expectations in general are unrealistically high. Initially, the RTC adhered to a strict 95 percent of appraised value as its selling price for a piece of property. Recently, the agency has become more flexible, but in many people's opinions, the prices are still too high.

Declares Jefferson, "I think it will be another year before RTC prices drop to salable levels. There aren't enough buyers to justify the prices they're asking."

The agency's reluctance to lower its expectations has, some charge, lost it considerable time and money. Wade points to an instance where clients of his firm made a cash offer for a San Antonio highrise. The offer was below the RTC's official appraisal.

"We would send offers and never get anything in reply," he recounts. "Finally, my client gave up. Two years later, they finally dropped the price, and it's well below what my client originally offered. If they had not held so staunchly to their price at the beginning, they would have both got a higher price and saved money on operating the building in the interim."

A sum of many failings

Two broad factors account for the failure of the RTC properties to achieve the values the government has set on them. The first is the decline of overall real estate values. The S&L crisis has had a snowball effect in the market. Even in the best of times, selling off many billion of dollars in properties would not be easy. In the current market, the task is truly daunting as more and more properties are placed on the market by nervous investors.

Because nobody wants to be caught holding worthless real estate, owners are anxious to rid themselves of any holding that entails the slightest doubt--with the result that at the same time the market is glutted with properties for sale, the players all want to be sellers rather than buyers.

For example, the FDIC and its auditors have been shaking up already fragile markets by an almost fanatic concern for bank stability. Many otherwise solvent banks are being forced to look warily on their real estate holdings, no matter how conservative.

"The Feds have come in and reviewed a lot of loan portfolios," explains Jim Werle, southeast region director for Ernst & Young. "Their extremely cautious approach has prompted banks to re-examine their stance towards real estate. They now regard it as causing too much trouble."

One upshot is that banks are having to boost capital reserves well beyond what, even by conservative estimates, would have been deemed adequate a few years ago. To accomplish this, they are trying to cast off real estate.

"The pendulum may have swung all the way from laissez-faire to the ultra-conservative," says Werle, adding, "Even when loans are being paid back, if they're what the FDIC considers the wrong kind of product, a bank is having to put up additional reserves."

Jefferson believes the banks would have wanted to relieve themselves of their real estate even without the current crisis, stating, "By and large, the large insitutions were unwilling buyers and are not enthusiastic owners."

On top of this, according to John F.C. Parsons, strategic consulting partner for Ferguson Partners Ltd., a real estate advisory services company in Chicago, Wall Street is also looking to leave the real estate business.

Predict Parsons, "Small investors, stung by bad experience in limited partnerships and some real estate investment trusts (REITs), will abandon real estate investments in publicly traded vehicles. The collapse of companies such as Integrated Resources and VMS has shown investors the real risks of highly leveraged real estate deals."

A lack of management


The second factor in the drop in values on RTC properties is the agency's lack of expertise in property management.

"Government-controlled buildings can't respond quickly and correctly to the market," contends David Jefferson, "The government is singularly unqualified to do property management."

As an example of the government's ineptitude, Jefferson points to two comaparable office buildings in north San Antonio, one the ward of a "brain-dead" New Mexico S&L now owned by the RTC through its Denver office, the other in private hands.

The government-owned building hasn't signed a new lease in over two years, reports Jefferson. Built at a cost of $12 million, the RTC has it on the market for $6 million. "Its actual value is $4 million or less, I'm sure, mostly because it's been so mismanaged."

In contrast, Jefferson says the building in private hands is 95-percent leased and beginning to raise rents. "The two buildings are not that different," he asserts. "But good management, handled locally, not out of an office in Denver, has increased its value even in today's market."

According to Wade, small tenants--which form the backbone of a market like San Antonio's--shy away from RTC buildings. "They don't know who their landlord is going to be. It's the RTC now, but they know the building is going to be offered for sale, so the future is uncertain. There are too many unknowns."

Picking the wheat from the chaff

Exacerbating the agency's situation is the number, variety, and quality of properties it is holding. Most private investors--and even the banks and S&Ls that caused the crisis in the first place--concentrated their portfolios in a few distinct property types and geographic markets. The RTC, on the other hand, owns just about every type of real estate imaginable, from snake farms to luxury resorts, and in every corner of the nation, including obscure rural outposts and major urban centers.

The scope of the portfolio is mindboggling. What is worse, the properties tend to be the most undesirable on the market. Which is why the government is stuck with them in the first place.

A seeping influence

of private management

The government's belated recognition of its inability to cope with the situation has at last prompted the RTC to turn to private asset and property management firms.

The firms that have entered--or attempted to enter--the bidding process have been finding the experience puzzling and complex. Gary Hediger, CPM [R], of Shelter Management, Greenville, South Carolina, reports that his company has registered with the RTC, but so far has not received a solicitation of service.

"We haven't been lucky enough to win one of their mysterious lotteries," he says, his words revealing the confusion that many people are experiencing with the agency's methods of selection.

On the other hand, Shelter is managing property for a failed S&L whose operations have been taken on by another financial institution under the supervision of the RTC. Hediger's firm had been handling the property before the thrift's failure. In this instance, Hediger reports, the RTC has not interfered with how his company is running the property.

"There's been no change," he says. "I can't even tell they're there."

Jack Gallagher, CPM, a Shannon & Luchs in Bethesda, expresses dismay with the poor communication on the part of the RTC and the lack of opportunity to explain daily management problems to officials.

"I can understand their concerns about selling properties," says Gallagher," and from what I've seen, everybody at RTC is working hard and trying their best. But they don't realize what it takes to make the sticks and bricks work in the field. And they're so busy, there's not enough time to educate them."

Compounding the problem, he adds, is a rapid turnover in personnel at the agency--whether through promotion, turnover, or transfer.

"It means you have to explains things over and over again," he laments. "It can be discouraging."

Gallagher and Hediger had problems with the amount of paperwork needed to get into the RTC pool initially. "There are an enormous number of forms," says Gallagher. "And the management agreement is extremely onerous."

Beverly Roachell, CPM, of RPM Management Company, Little Rock, says that her attendance at a regional RTC bid conference helped clear up some of the questions about application forms. But it did not end the frustrations.

"They're expecting extremely low prices for a great deal of work," she says.

According to Roachell, the RTC would rather see lower management fees and higher disposition fees than the reverse. "Their goal," she notes, "is to motivate you to get the building sold. We structure our bids to break even with a marginal profit on management, anticipating a profit from the sale."

Gallagher has less problems with the rates, but is concerned that the RTC is slow to provide money to pay vendors and maintenance contractors. "To keep tenants, you have to take care of things right away," he says. "You can't wait around for 90 days for a check to come through. That is where communication comes in."

Although Roachell reports that RPM has been registered with the RTC for some time, it was only after the company formed a joint venture with a loan servicing company that it began to get RTC interest.

"The RTC is putting REOs and loan servicing in one package, which means there are very few companies able to bid," she says.

Ironically, forming the partnership has created new obstacles to getting RTC contracts. "You're required to have insurance or a letter of intent for insurance on any contract you bid," says Roachell. "We've got insurance, and our joint-venture partner has insurance, but the partnership doesn't have its own insurance. What do we do?"

Another stumbling block might be experience. Roachell explained that the Baton Rouge office of the RTC recently told her that contractors must have at least seven years of experience to qualify. While each partner has that much experience, the new joint venture does not. "Whether that means we won't qualify, I just don't know," she remarks.

Another complaint of Roachell's concerns RTC's requirement that a firm identify every staff member working on an assignment--even those not yet hired. "We can identify the senior personnel who will be in charge," she says, "but we don't have a roomful of people just sitting around twiddling their thumbs, waiting for work to come in."

Roachell also believes that the RTC does not give enough information on its packages to enable realistic bids to be made. The agency provides book value and number and categories of assets by city, but does not describe actual properties.

"You don't know if you're getting a 200-unit apartment in Dallas or a strip center," she comments. "It makes it very difficult to put a viable bid together."

Whatever the overall course of the current crisis, the actions--and inactions--of the RTC will obviously have a major impact on the property management profession, affecting both the opportunities available for contracts and the way management is conducted. What the RTC does with its properties will influence what happens nearby.

For example, poor management of an RTC-owned building will send tenants to non-RTC sites. On the other hand, it may also further depress values in that market area, endangering otherwise sound investments. Widespread mismanagement by the RTC, with resultant bargain-basement sales prices to investors who can subsequently offer sub-bargain-basement lease rates, could force rents so low that previously well-performing buildings begin to lose their viability.

As a consequence, property management, both management of day-to-day operations and the maximization of end-term value, assumes a vital role in the entire real estate crisis scenario. Property and asset managers will shoulder a significant share of responsibility for making RTC-owned properties as salable as possible, protectding other properties form the ravages of the market, and finding ways to turn properties around once investors acquire them.

At this point, RTC's major strategy--at least for commercial properties--appears to be to contract out various portions of its portfolio to private asset management firms. These firms will; then have responsibility for hiring the property managers, leasing agents, architects, engineers, and so forth needed to bring a holding up to its greatest potential in the current market.

"The idea," explains RECRA's Lowe, "is that RTC will hire the coaches, and we, in turn, will hire the players. Those are the terms the RTC is using. I tend to look on it more as, we are the general contractors, and the fee management firms are the subcontractors."

Asset managers in particular will also play consulting roles at various other points, evaluating properties before purchase to determine long-term viability and devising lists of alternative strategies for creating profitability. At some point, it seems probable that one set of asset managers will be brought in by the government to evaluate the performance of previous RTC-contractees.

The process of becoming a player

According to Leonard A. Saz and Robert H. Ledig of Fried, Frank, Harris, Shriver & Jacobson, a real estate law firm headquartered in Washington, D.C., the RTC has divided the processing of its real estate and other assets into three phases: an initial review of the characteristics and value of the property (asset review), the development and implementation of a plan for management of the property, and the disposition of the property. Contractors will be hired at each phase.

To obtain contracts, firms will have to register with the agency and pass a qualifications and ethics review. But to register, a firm will first have to receive a solicitation of services (SOS).

"You have to be asked to the dance, as it were," explains Kops. "Once you've been aked--and I suspect that's not too difficult if you make yourself known--you have to fill out RTC's forms. Then if you're approved, you go into the database."

To be hired by an already contracted asset management firm rather than be contracted by RTC directly, a company or individual may not need to have received an SOS and been entered into the database.

"It's a little uncertain in this regard," says Kops. "The tendency has been to relax standards as things move along."

Uncertainty seems likely to pervade RTC workings for a while to come, say Zax and Ledig, who report, "The RTC is still in the process of completing the development of important elements of its contracting program.

"For example, while the RTC takes the position that its contracting process is not subject to the federal acquisition regulation that governs the award and administration of most government contracts, it has not yet established procedures for challenges by disappointed bidders or for resolving disputes involving contact administration."

The bottom line affects us all

One thing that is certain, whatever procedures the RTC establishes, whatever changes in direction it takes, whatever decisions it makes, the effect on the real estate industry will be sizable.

As Zax and Ledig remark, "The RTC opportunities come at a time when other alternatives in the real estate sector appear to be narrowing. As a result, all across the country, the business of distressed real estate is attracting major real estate players, including many that have previously stayed away from troubled and government-assisted projects.

"After a series of fits and starts, the RTC is moving forward to implement its policies, and we can expect the policies to evolve in light of increased experience in working with the private sector."

John McCloud is a San Francisco-based writer specializing in real estate and development. He is a regular contributor to the New York Times real estate section and is a correspondent for Shopping Center World.
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Title Annotation:Resolution Trust Corp.
Author:McCloud, John
Publication:Journal of Property Management
Date:Jan 1, 1991
Previous Article:Tenant retention: making it hard to leave.
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