A Sushi Special For Bottom Fishers

It looked a lot like any one of the dozens of real estate deals that Southern California developers Sheldon M. Gordon and Randy Brant see every month. But there was something special about the transaction that bankers at Morgan Stanley & Co. brought them last summer. Eager to rid itself of a defaulted $94 million loan on the 640,000-square-foot Scottsdale Galleria outside Phoenix, Morgan's client was willing to take less than $20 million in cash for the shopping center that had cost $130 million to build. "An incredibly good deal," Brant boasts.

As impressive as the price was the name of the seller: Mitsubishi Bank Ltd. Like most Japanese banks, Mitsubishi hasn't engaged in the real estate sell-offs with which U.S. banks have purged their balance sheets for the past two years. No more: Advisers to Japanese banks say their clients are accelerating efforts to unload big chunks of the more than $50 billion in U.S. real estate loans they now hold (chart). In fact, their total exposure to U.S. real estate, including loans made by parent companies in Japan, comes to about $200 billion.

MULTIPLE SALES. Japanese banks have some real losers on their hands. Jack R. Rodman, managing partner at accounting firm Kenneth Leventhal & Co., estimates that the value of hotels and office buildings--which back the bulk of Japanese real estate loans in the U.S.--has fallen by as much as 40% since 1985. Sales by Japanese banks of such troubled assets, he says, could reach $20 billion over three years.

Even the biggest Tokyo banks are feeling pressure to clean up their U.S. acts. The Japanese government is urging lenders to get rid of problem real estate assets so they can make new loans to help revive the moribund domestic economy. "The soundness of the Japanese financial system is in question," says Hideki Mitani, director of First Boston Corp.'s Japanese financial-institutions group. New Federal Reserve rules, moreover, require foreign banks with U.S. offices to quickly write down nonperforming loans.

The pace of activity already has picked up. Real estate investment banking firm Sonnenblick-Goldman Co. is currently peddling office buildings in Boston and Rochester, N.Y., for Sanwa Bank Ltd. In November, Colony Capital Inc. and Hilton Hotels Corp. paid Mitsubishi Bank an estimated $52 million for its $360 million loan on the ultra-luxurious Hyatt Regency Waikoloa resort. Two months earlier, a partnership including Morgan Stanley Real Estate Investment Fund bought the Doral Telluride Resort & Spa from Sumitomo Trust & Banking Co. for $27 million. Japanese banks "are a lot further along in addressing this than people think," says Robert E. Upton, vice-president for real estate at Sakura Bank Ltd.

Investment bankers also are structuring deals to sell off multiple assets at once. Last June, Union Bank, a U.S. subsidiary of Bank of Tokyo Ltd., sold more than $100 million in real estate loans and properties to a private investment group. And Stephen A. Roth, president of Los Angeles-based Secured Capital Corp., says his firm has assignments to sell $200 million worth of single- and multiple-asset real estate portfolios.

DEEP STUDY. A wholesale sell-off is unlikely. Unlike their American peers, who have largely dumped their problem loans, many Japanese bankers still see long-term potential in the U.S. market. Some are exploring partnerships with U.S. investors that would allow them to get bad loans off the books while maintaining an interest in the assets. Los Angeles-based Solus Properties, for example, is negotiating to buy about $200 million of loans and foreclosed real estate from a Japanese bank, according to real estate sources. The bank would get a portion of future returns on the properties above a negotiated floor.

Banks may be backing out of the U.S. cautiously. Back in Tokyo, though, regulators are pushing for a U.S.-style market for real estate debt. The demand for expertise gives Japanese banks extra incentive to attempt more U.S. deals. Indeed, First Boston's Mitani says he has talked with several Japanese clients about securitizing thinly profitable American loans. "Eventually," he says, "they can use these techniques in Japan to give liquidity to the Japanese market."

Japan may get more than Yankee ingenuity out of such activity: It may import Yankee buyers. Hitoshi Kayama, a senior economist at Industrial Bank of Japan Ltd., says he has been getting visits from investment bankers looking to hook up U.S. investors with bank assets backed by Japanese real estate. Tokyo buildings owned by Americans: An inevitable turn, perhaps, to Japan's 1980s buying binge.

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