When you trade like I do, you see some crazy things. Today I thought it would be fun to share one of these transactions with you.
First, a little background.
There were once lending institutions known as savings and loan banks or usually loans. These savings were an excellent source of home loans until 1990. However, in the early 1980s, interest rates rose sharply to double digits, and problems arose because they were ill-prepared to deal with this rise.
A number of loan holders became insolvent. As a solution, deregulation has allowed these institutions to invest in riskier properties to increase profits. Good in theory, bad in practice.
Groups such as Far West Savings, American Savings & Loan, and Cal-Fed have become sources of capital for investors and commercial real estate developers. Of course, there were many amazing projects, but there were also several train accidents. Our task was to sell one such sunken car.
The Tennessee group acquired a portfolio of non-performing assets in California from American Savings & Loan. Most of them were closed houses, but one was a tenement industrial complex. Understand: Most bulk purchases included dozens of buildings in many cities. It’s like the phrase from Forrest Gump – “like a box of chocolates – you never know what you get.”
A limited due diligence was performed prior to closure. How could this be? Sellers (S&L) needed cash, they had a ton of loans on their balance sheets, and transaction speed was paramount. Therefore, people who bought at reduced prices to compensate for their risk, pinched their noses and jumped into the abyss.
At the same time, in mid-1986, we noticed a problem. New to my career, I have done many house-to-house visits looking for someone to move.
On one particular project in North Orange County, we saw rampant emptiness, more weeds than fescue, and several abandoned cars in front of one of the divisions. Dangerous, Will Rogers! Our instinct was right — there was a deal. We just needed to find out who owned the project.
Today we have access to information about copyright holders on our mobile devices. In 1986, you either called First American, Ticor, or Chicago, or searched the bank for microfiche – similar to looking at building plans in cities. Yes, the cities have not advanced much beyond the mid-80s, but I digress.
As mentioned, we contacted a buyer from Tennessee. Good news! A gentleman was sent to SoCal to manage the sale of all the houses and the like. Great guy and we hit it off.
With a recently signed agency agreement, we have started marketing the buildings for sale. Selling the listing in the 80s consisted of creating a brochure (no desktop publishing), installing a sign on the façade (not allowed so we didn’t scare away the few remaining residents), contacting neighbors (easy enough), figuring out which investors bought a similar offer (reviewing paper reference sheets) and chatting with our fellow brokers.
Keep in mind that there was no multiple listing service back then, so the available objects were paginated and mailed to brokerages. Snail, horror!
The buyer was quickly identified through a broker, the terms of the purchase were agreed, and an escrow boom began.
By the way, it was October 1986. On January 1, 1987, there were huge changes in tax legislation. That is, many write-offs of commercial real estate had to end at the end of 1986, so our buyer made it infinitely clear that the closing date could not overshadow December 31.
Simple enough. We had three months. Everything went as usual until …
A buyer called me in mid-December. We were supposed to close in a week, and I thought he wanted to discuss the details. Wrong! I will never forget his words. “Allen, I’m on a project. There is a giant gap in front of the rear structure, and it gets bigger every minute! “
At first I thought he was joking. There is no such luck. Twenty minutes later, I watch a scene from the movie Earthquake. You could have buried a Volkswagen in a hole!
It took us two days to discover that a water leak was the cause and the city was to blame and had to clear up the flood. Uf. But wait, it was December 22nd. There is also what is called the festive season. Trying to get someone to react quickly at this time of year is like moving an elephant with a pallet jack.
The remainder of 1986 is fading, and our close dependence on urban workers. we have resorted to unconventional tactics. Several crew lunches, Miller Light packaging (shh, it was after hours) and many prayers concluded successfully on December 30th.
Our client was so excited about our performance that 11 days later he came to my 30th birthday party. Yes, this is a story for another time.
Allen S. Buchanan, SIOR, is a director of Lee & Associates Commercial Real Estate Services in Orange. You can reach him at [email protected] or 714.564.7104.