Guess What Trammell Crow Is Eating

In real estate's boom years, Trammell Crow Co. was one of the most ferocious competitors around. The legendary builder staffed itself with hungry young MBAs from the top schools, paying them meager salaries but giving them equity in the projects they built. Crow's "partners" transformed skylines and landscapes across the country with thousands of shiny office towers, shopping centers, and warehouses. It was by far the largest U.S. commercial builder, and proud of it. Yet the mood at Trammell Crow is vastly different these days. Ask CEO J. McDonald (Don) Williams which U.S. company was No. 1 in commercial development last year, and he shrugs: "I don't even care."

The answer is still Trammell Crow. But that's not much to brag about now that the industry is a shadow of its former self. Crow started about $100 million worth of new construction last year, down from $2.2 billion in 1985 (chart). This year won't be much better, predicts Williams, who joined the company in 1973. Adds founder Trammell Crow: "This downturn is all-pervading, and it promises to be a long time in curing."

These days, the CEO is trying to cement Crow's claim to the fiercely competitive market for real estate services. More out of necessity than choice, the Dallas-based company now wants to establish itself as a one-stop shop for property management, leasing, construction management, information services, and yes, even a little development.

But the transformation of the once-freewheeling Crow has been wrenching, with fierce internal debates and nasty lawsuits among top-ranking partners who once considered themselves brethren. More than half of the 170 partners involved in Crow's commercial properties four years ago have left the company. Many simply couldn't or wouldn't make the transition from go-go development to slow and steady management. "You're taking a bunch of fighter pilots and telling them that now they have to maintain the aircraft carrier," explains real estate consultant Christopher B. Leinberger, who worked with Crow on last year's far-reaching reorganization.

Crow had little choice but to try something new. When the overheated real estate market collapsed, Crow's growth formula became a recipe for disaster. Since partners could hit it rich only by developing, they had little incentive to slow down. Crow soon found itself with a slew of troubled properties whose rental income failed to cover the debt service. Rocked by unfounded bankruptcy rumors in 1990 and pressed by edgy lenders, Crow slammed on the brakes.

The old Crow was not a typical company but a complex web of 1,500 partnerships, joint ventures, and corporations. Individual partnerships were formed for virtually every one of the parent company's projects. But after workouts with more than 150 lenders and a consolidation of equity ownership among Crow partners, the players have changed. The partnerships are no longer active builders, but they still hold stakes in some 6,500 projects, valued at about $9 billion. That's down from $11.2 billion in 1989 because of property sales, falling values, and foreclosures.

INTERNAL AFFAIRS. The makeover created a separate entity to focus on service businesses, including management of Crow properties. This "new" Crow, owned mostly by 77-year-old Trammell Crow, his family, and CEO Williams, now offers employees market-rate salaries, bonuses, and profit-sharing. The company also has eliminated 9 of its 15 regional offices and wiped out a layer of middle management. Total employment is down almost 24% since 1989, to 2,650. The Crow family hasn't gone unscathed in the restructuring. Harlan R. Crow, a son of the founder and manager of the family interests, figures the Crows' net worth has plunged some 50% from its peak of more than $1 billion.

The remaking of Crow has been rancorous. The company is tight-lipped about its feuds, but one major dispute is starkly displayed in recent lawsuits filed in federal and state courts in Dallas. The fight stems partly from a system in which partners borrowed from or lent to one another to cover cash requirements of their projects and operations. When real estate slumped, it was clear that many partners would never be able to repay their internal loans. So Crow created a "roll-up" program to dig them out of their deep holes: In exchange for a partner's equity in his projects, Crow forgave the internal debt. When the equity was worth less than the debt, the few solvent partners, including the Crows and Williams, absorbed the difference as a loss.

BOGUS LOSSES? More than 100 partners agreed to roll-ups, with many of them leaving Crow. But the program wasn't a hit with everyone. Last September, the company sued former Managing Partner Joel C. Peterson for refusing to absorb his share of the debts from insolvent partners. The 18-year Crow veteran shot back with his own lawsuits.

Peterson accuses the Crows and Williams of using the roll-ups to grab control of the assets and the operating company for only pennies on the dollar. In the process, he says, they allocated to him more than $34 million in bogus losses. The losses were inflated, he claims, because the equity the partners were trading in was vastly undervalued. One reason few partners resisted was that the company promised the debt forgiveness would not be taxable, he adds. If it is taxable, as Peterson contends, many former partners could be hit with huge tax bills. Williams declines to comment on the charges, except to deny them.

The courts won't be Crow's only battleground. As it pushes into real estate services, the company faces a slew of competition, not only from regional property managers and brokerage companies but from financial institutions and other developers as well. "There's a lot more volatility than there used to be," with management contracts often canceled on 60 to 90 days' notice, says real estate economist Richard Kateley. Crow will also need to be careful when its properties are vying for tenants against buildings owned by its clients. "That's an intolerable conflict of interest," says John L. Dowling, executive vice-president at rival Cushman & Wakefield Inc.

The competition will almost certainly make profits harder to come by. Crow's services business had operating income of $14.4 million last year on revenues of $158 million. Now, many outsiders question whether Crow can achieve the 10% to 15% operating margins it's aiming for. With increasing competition, "margins are low and getting lower" in real estate services, says Kateley.

`SEAMLESS QUALITY.' But Crow has some potentially formidable advantages, including a well-known name, a major presence in 45 markets, and long experience managing its own properties. Crow hopes to gain another edge by dealing with fewer suppliers to get bigger discounts. That could lower a building owner's total operating costs by 6% to 9%, estimates Mark Gottfredson of Bain & Co., a consultant working with Crow on improving its services business.

The Peterson suit, of course, has been a major distraction. People on both sides agree that some sort of settlement is likely. But in the meantime, Crow is trying to focus on the nitty-gritty of the services business. A top priority for Williams is ensuring what he calls "seamless quality" across all Crow offices. A committee of top Crow executives is trying to establish standards in every facet of the company's operations--from handling maintenance requests to dealing with tenants who are late paying the rent. That's hardly the stuff that a developer's dreams are made of. But it may be Crow's best chance for building a company with any enduring value.

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