Jmb Hung On To The Wrong Coattails

For a company that wasn't supposed to stumble, Chicago's JMB Realty Corp. sure has found the footing awkward lately. In March, the demise of Randsworth Trust PLC cost JMB its entire $50 million investment in the London real estate firm. The 13 pension funds that JMB had recruited to invest along with it lost $381 million more. Now, JMB finds itself entangled in the spreading financial disaster that is Canadian real estate giant Olympia & York Developments Ltd.

More than $1.1 billion that JMB raised from investors during the mid-1980s is now at risk. The reason: Five JMB public partnerships and two private placements invested all or substantial portions of their money in joint ventures with O&Y that purchased five Manhattan office buildings. Except for one disputed $7.5 million payment, O&Y has kept up its obligations so far, but there's no guarantee it can continue to do so. "We have no way of knowing what they'll do," says JMB Chairman Judd D. Malkin. "But they've gone through a lot of agony already, and they've still made their payments."

DOUBLE TROUBLE. While Malkin sounds confident, recent regulatory filings show cause for deeper concern. O&Y's travails jeopardize the future of two JMB joint ventures and the ownership of at least two buildings bought in partnership with JMB, filings show. Mortgage foreclosures would spell double trouble for investors: loss of ownership and hefty tax bills, because of JMB's speedy depreciation of its investment in the buildings. "You're going to have taxable income, but you're not going to get any cash from the foreclosure. Call it phantom income," says Glenn Aquino, a tax partner at accountant Coopers & Lybrand Inc. "If somebody bought it for tax benefits, it was a bad investment."

Those with the most to worry about are the investors who, through JMB, poured $174 million into a joint venture with M&Y to buy 237 Park Ave., 1290 Avenue of the Americas, and 2 Broadway for $1.4 billion in 1984. The venture's auditor, KPMG Peat Marwick, questions its "ability to continue as a going concern." The firm also says that JMB and O&Y may have to give up ownership of 125 Broad St.

For some of the JMB-O&Y buildings, the ride from No Vacancy to no good has been a short one. Take 2 Broadway, which was 97% leased until 1990, when now-defunct Drexel Burnham Lambert Inc. vacated 20% of the building's office space. Other tenant departures emptied an additional 8%. Last year, Kidder, Peabody & Co. decamped from 11% more. None of the space has been filled, and the partners have written down its value by $39 million, to $370 million.

WASTED BREATH. Not surprisingly, shares in O&Y-tainted partnerships are going begging in the secondary market. Today, investors can snap up each of the five funds with O&Y exposure for less than one-tenth of their original offering price. When Richard Hill, a 61-year-old Conrail engineer, tried to sell 10 JMB partnership units last week, one bidder offered $20 each for investments that cost Hill $1,000 apiece. "He shouldn't have wasted his breath," says Hill. "I don't want nothing to do with limited partnerships now. The general partner is the only one that makes out in the end."

JMB's final bill for the O&Y debacle isn't in yet. But the numbers are starting to add up. The firm has foregone $16.7 million in management fees from O&Y-linked partnerships. And it has guaranteed a $25 million bank loan to 245 Park. CEO Neil H. Bluhm says the building's leases will soon generate enough cash to cover JMB's exposure. Plus, he says: "We never counted on those fees."

After O&Y, the Randsworth collapse, and a host of mortgage foreclosures in other limited partnerships, is bigger trouble ahead? Privately held JMB is so vast and diversified that it's impossible to know for sure. But this much is clear: The troubles are touching off alarms among JMB's most important customers--the pension funds that have pmured more than $10 billion into JMB's deals. "These have definitely been learning and humbling experiences for JMB," says Gary Hiatt, portfolio manager for San Francisco City & County Employees Pension Fund. Some JMB investors might say they've learned their lesson, too.

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