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On the Block: Golf Courses, Other S&L-Crisis Relics

ABOUT 150 people have come to the Sheraton Meadowlands looking for bargains: unfinished housing developments with exotic names, partially filled office buildings, golf courses, undeveloped land.

The bargains, if there are any, are all in "pools" to be sold by the Resolution Trust Corporation (RTC), the arm of the United States government responsible for disposing of the assets of failed thrifts.

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This particular sale is part of a change taking place at the RTC; it has sold most of the easy-to-sell assets such as loans that are current and junk bonds of on-going companies.

This year the goal is to sell $70 billion in assets, including "some of our most distressed assets," says Albert Casey, the RTC's president and chief executive officer. Mr. Casey estimates the sales this year will net the government $55 billion, or 79 percent of the book value, the original cost less depreciation, of the original properties. The government estimates it now holds about $100 billion in hard-to-sell assets.

There is no question that most of the loans and real estate in this sale fit the description. Of 183 loans, only six are up to date. Many are in the depressed New England or New Jersey/New York regions. By the government's own estimate, which it calls "derived investment value," the assets are worth $148 million or 25 percent of their $583 million book value.

In an attempt to interest bidders, RTC asset-market specialist William Schainker says: "There will be good returns to people willing to put in a little sweat and equity."

Such low valuations are attracting buyers. In September of 1992, the RTC held an auction in Los Angeles of 6,996 non-performing loans with a book value of $390 million. The auction attracted 163 companies registered to bid on the loans. The government received $236.8 million, or 60.7 percent of book value.

Since its first sale on August 9, 1989, the RTC has become the largest seller of real estate in the country. As of January 11, the RTC estimates it has sold $298.7 billion in former thrift assets - a significant portion real estate.

The RTC is scheduled to "sunset" on September 30, 1996. By next year, its asset sales operation is supposed to be taken over by the Federal Deposit Insurance Corporation (FDIC). The RTC expects to pass about $40 billion to $60 billion in assets from failed thrifts to the FDIC to sell.

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In the past the RTC has put together large pools of loans and property. This diversified pool has attracted sophisticated investors such as GE Capital, Goldman Sachs & Co., Morgan Stanley & Co., and the Blackstone Group. "There were a lot of complaints that moms and pops were being frozen out," says Bert Ely, an industry consultant based in Alexandria, Va.

For example, the Southern Finance Project, an advocacy group on banking issues, believes the government has relied too much on millionaire investors and a handful of Wall Street firms.

"It's been a concentrated and select group of beneficiaries," says Tom Schlesinger of the project, which is based in Charlotte, N.C.

In a study of the RTC's first three years of operation, the project found the government sold property for an average of 55 cents on the dollar. Mr. Schlesinger says the government may have been able to save money if it had warehoused the real estate. "Can the government manage the real estate until prices tick upwards? That would have been the better approach," says Schlesinger.

The RTC says it simply is selling property at what the market will pay for it. "We had to get market acceptability by offering realistic prices, not artificially high prices," says Lamar Kelly, senior vice president, division of asset management and sales.

However, the RTC does appear to be reacting to some of the criticisms.

For example, in the East Coast sale, the agency has put together smaller regionalized pools that are likely to attract a different group of buyers.

"We're hoping to interest local developers," says David Faeder, a vice president at First Boston Realty Incorporated, the investment banker hired by the RTC for the sale.

In addition, the RTC is developing a "Land Fund," which will hold about $2 billion (book value) of raw and partly developed land assets. The RTC will have at most a 75 percent equity interest, while a general partner will have a 25 to 40 percent stake. The general partner, who will be selected in March, will put up the capital and manage the fund while the RTC acts as a passive investor. The two partners will share in the proceeds. "This structure allows the RTC to privatize the management of part of its

land holdings while retaining the opportunity to recover funds for the taxpayer in the future if land values rise," Casey says.

The RTC has also steadily refined its techniques. Mr. Kelly compares the effort to crossing the Atlantic in a dinghy but building a battleship part way across. The battleship, in the RTC's case, is a valuation model called "derived investment value" (DIV) to replace traditional appraisals.

DIV looks at realistic cash flows for nonperforming assets. But it also looks at other factors such as anticipated marketing costs, environmental issues, the expense of forcing a borrower into bankruptcy and closing expenses. "They are very conservative, with high discount rates," says Elizabeth Haberkorn of First Boston. For example, the DIV for the assets in the land fund is about 25 percent of book value.

When the RTC started using its DIV model, bids came in at 70 percent of the DIV. Now, the prices are getting closer to 100 percent. "It tells me the market has come to accept that evaluation," says Kelly who notes that Westinghouse Financial is now using the RTC's DIV model to market its own distressed properties.

Part of the goal of the DIV is to level the playing field. "By eliminating the uncertainty, we eliminate some of the discount, which increases the return for the taxpayer," says Schainker. "We want to take away some of the mystery," Schainker tells the potential investors at the pre-bid meeting. Those who enter sealed bids should find out in late March if they were successful.

* For more information about RTC sales call: 1-202-416-4200 or write the RTC at 801 17th Street, Washington D.C. 20434.

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