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Invasion Of The Bottom Fishers



The real estate market these days looks like a bottomless pit. The glut of unsold homes and unrented commercial space has led to ungodly declines in value. But some venturesome investors view the pit as a wellspring of opportunity, a time to buy cheap. They are scarfing up holdings that foreclosing lenders or pressed owners want to unload, then waiting for a market rebound. Says New York investor Arthur Shapolsky, who is buying what he sees as a bargain office building in Tucson: "In the next three years, new real estate empires will be created, and fortunes will be made."

That's the aim of financier Lawrence A. Russo, who's starting with Herald Center, a woebegone Manhattan shopping mall that once belonged to the late Philippine dictator Ferdinand Marcos. Security Pacific Corp. foreclosed on the mall, which had a paltry tenant base, and put it up for auction, hoping to recoup its $60 million mortgage. No dice. Russo and several partners bagged the mall in April for $25 million. He's busily attracting more tenants and expects an eventual recovery in property values to carry his investment heavenward.

'GREAT BUY.' Another active player is New York real estate mogul Bernard H. Mendik. A year ago, Mutual Life Insurance Co. of New York put its 28-story Manhattan headquarters up for sale at $180 million. Mendik was interested, but he wisely waited. He and a group of investors closed on the building in December for $105 million. "Now that," says Mendik, "was a great buy." MONY says it didn't ask as much as $180 million but concedes it came down in price.

Bottom-fishers such as Russo and Mendik seek to divine when the market has hit its low point, so they can buy, and when it is well on the way toward recovery, so they can sell or boost rents. They're all looking to be this decade's Paul Reichmann, the Toronto mastermind whose vast wealth derived from a knack for picking markets forsaken by less visionary souls. In the mid-1970s, when New York was mired in a horrendous fiscal crisis, the Reichmann family struck gold in then-lagging Manhattan office towers, which not long after turned around. Says Harold S. Singelaub, a smaller-scale buyer: "Reichmann sees stars where others see mud."

The canniest bottom-fishers usually have a good feel for all parts of the kaleidoscopic U. S. real estate scene. They're able to assess the merits of such diverse opportunities as warehouses in Winnetka, Ill., and garden apartments in Garland, Tex. (table). Bargain angler Ronald B. Bruder, head of New York's Brookhill Group, has bought 30 troubled shopping centers in 20 states in the past few years. His most recent purchase was in Griffin, Ga. "The owner was strangling," explains Bruder. "He washighly motivated to sell."The most prominent Reichmann wannabe is Samuel Zell, a motorcycle-riding Chicago raider who calls himself "the grave dancer" because his specialty is scavenging for distressed companies. Two years ago, he set up a $400 million fund with Merrill Lynch & Co. to buy office buildings and shopping centers that had fallen on grim times. With most of those dollars now committed, Zell and Merrill are raising money for another fund.

'VULTURE FUND.' Offshore contrarians also are sniffing around. Most foreign investors have pulled back from U. S. deals, and the ones still hanging in prefer well-known holdings in prime condition, such as Rockefeller Center or Pebble Beach properties. But the low dollar and low American prices are attracting bottom-fishers such as Swedish investor Lars-Erik Magnusson. Last year, Magnusson bought a three-building Dallas hotel-and-office complex for a low $65 million.

Although real estate values overseas are much firmer than in the U. S., investors are looking for bargains in spots such as London and Sydney, where office overbuilding has badly undercut prices. Jones Lang Wootton, the British real estate company, has set up a $3 billion "vulture fund" to swoop in on vulnerable properties.

As U. S. bottom-fishers see it, there should be good bargains for at least the next two or three years. The inventory of real estate markdowns should swell as banks, thrifts, pension funds, and insurers suffer under increasingly heavy loads of foreclosed real estate. To them, the properties are merely a drain on earnings. With a few exceptions, lenders are not property managers or speculators, and they often want to be rid of the problems at almost any price. "Real estate is a dirty word with them, so that's when you make an offer," says investor Martin D. Sass, who last summer paid a cut-rate $49 million for six Houston apartment complexes sitting in the foreclosure files of Aetna Life & Casualty Co.

Resolution Trust Corp., the federal agency charged with cleaning up the savings-and-loan mess, is sometimes even more eager to jettison foreclosures. It has a $16 billion property portfolio that must be sold. In November, the RTC auctioned off homes in the Phoenix area at prices 40% below what original owners had paid. Big-league bottom-fishers are interested in the RTC's large commercial holdings. But they are very selective, dismissing a lot of the buildings as poorly constructed or badly located. Yet potential gems can be found: In December, Japan's Maruko Inc. bought a large tennis resort near Palm Springs, Calif., for $66 million. A new supply of choice foreclosures from the Bank of New England, which failed Jan. 6, may come onto the market.

Other toothsome prey favored by bottom-fishers are properties whose developers were pressured to sell to pay off lenders. That's how AMB Institutional Realty Advisors, the San Francisco pension managers, recently picked off a thriving, fully leased Houston shopping center on the cheap. The owner, says AMB partner Hamid Moghadam, was scrambling to meet debt payments for a newer project and had to sell--quickly.

LIGHT ON DEBT. If being a successful bottom-fisher requires savvy, it also takes a good supply of cash. These days, badly burned lenders are seldom willing to provide much in the way of financing. In mid-1988, a limited partnership run by Value Properties Inc. bought a Rochester (N. Y.) office building it hoped to overhaul to attract tenants. Yet, according to Value Executive Vice-President Arnold Adlin, the 10-story structure is still mostly vacant, partly because financing for the overhaul was delayed.

Not surprisingly, many bottom-fishing deals are heavy on equity and light on debt. Mendik's group paid cash for the MONY building. J. Steven Manolis, a Salomon Brothers Inc. managing director, believes financing difficulties will spawn a new arrangement: More and more buyers will ask tenants to help them meet debt obligations. In exchange for paying above-market rents, he says, tenants will get equity stakes in bottom-fishers' buildings.

Wherever the money comes from, bottom-fishers are going to proliferate. Many feel the market still isn't low enough and have yet to put their money on the line. New Plan Realty Trust, a New York real estate investment trust, is sitting on $140 million in cash. Says President Arnold Laubich: "We're holding back until we hit the bottom." Easy to say, of course, but hard to do. The art of bottom-fishing is knowing just when to stop cutting bait and start casting your line.Larry Light in New York, with Robert D. Hof in San Francisco

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