PRINCIPAL REASONS FOR DEFAULT AND IMPACT OF FINANCIAL
STRUCTURE OF DISTRESSED REAL ESTATE.
by
Edward Norbert McPherson
Bachelor of Science in Management
Southeastern Massachusetts University
1980
DEPARTMENT OF URBAN STUDIES AND
PLANNING
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS OF THE DEGREE
MASTER OF SCIENCE IN REAL ESTATE DEVELOPMENT AT THE
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
TO THE
SUBMITTED
SEPTEMBER, 1990
QEdward Norbert McPherson 1990
The Author hereby grants to M.I.T.
permission to reproduce and distribute publicly copies
of this thesis document in whole or in part.
Signature of the author____
u
oEdward Norbert McPherson
Department of Urban Studies and Planning
September 1990
Certified by
C t
i
bMarc Louargand
Lecturer in Urban Studies and Planning
Thesis Supervisor
Accepted by
A loria Schuck
Chairperson
Interdepartmental Degree Program
in Real Estate Development
Rotch
MASSACHUSTTS INSTITUTE
OF TECHNo!G Y
SEP 19 1990
LIBRARIES
PRINCIPAL REASONS FOR DEFAULT AND IMPACT OF FINANCIAL
STRUCTURE ON DISTRESSED REAL ESTATE.
by
Edward Norbert McPherson
Submitted to the Center for Real Estate Development
on September 1, 1990 in partial fulfillment of the
requirements for the degree of
Master of Science
in
Real Estate Development
ABSTRACT
This
thesis
analyzes
the
factors
affecting
distressed property and identifies the principal reasons
for default.
The thesis further analyzes the impact of financial
structure, principal
factors of default,
and the
probability of an
individual property successfully
emerging from foreclosure.
The central question being explored is: From the
vast pool of distressed properties, can opportunities
for long term appreciation be identified by analyzing
the primary reasons for default and the associated
financial
structure?
The
real estate
market is
currently absorbing the large inventory of product built
throughout the 1980's. Distressed property will be the
focal point of the real estate industry throughout the
1990's. To a large extent, the business of real estate
development
will
be
real
estate
redevelopment.
Understanding the variables that drove the national and
regional economies, the local real estate market and the
causes of default will allow investors and financial
institutions alike to identify the properties with the
greatest potential for appreciation.
Thesis Supervisor: Marc Louargand
Title: Lecturer in Urban Studies and Planning
DEDICATION
I would
like to
dedicate this
wife Doreen, to whom I
month
after
Development.
entering
my beautiful
was married October 21, 1989 one
MIT's
I appreciate
understanding, and patience
you for believing in me.
thesis to
Center
all of
for
Real
Estate
your encouragement,
throughout the year.
Thank
ACKNOWLEDGEMENTS
To Dr. Marc
an
Louargand, who acted as
And for
immense workload.
my advisor despite
all that
he taught
me
throughout the process, I will always be grateful.
reader and
acting as a
collegue Laurie Webster,
To my
editor gave generously of her time, I thank you.
To
my dear
reader
insight,
not
and
friend
Kimball Wong,
editor.
Thank
patience and
soon forget
who
you for
was my
the
primary
long
hours,
constructive criticism.
all the
fun we
had, which
I will
made this
thesis such an enjoyable and educational experience.
My
friend, I owe you one.
To my parents, William and Regina McPherson without whom
my year at the MIT's
would not have
and
support
grateful for
Center for Real Estate Development
been possible.
throughout
my
your gift of
courage to pursue my dreams.
Thank you
entire life.
for your love
I
a positive attitude
am
very
and the
TABLE OF CONTENTS
1. ABSTRACT............................................
.
2. CHAPTER ONE, FOUNDATIONS OF REAL ESTATE DISTRESS.. .p.
3. CHAPTER TWO, THE WORKOUT PROCESS. .....
...
....
...
6
..p. 46
4. CHAPTER THREE, THE ACADEMIC VIEW...................p. 59
5.
CHAPTER FOUR, THE
6.
CHAPTER FIVE, SUMMARY & CONCLUSIONS................p.
86
7.
BIBLIOGRAPHY. -
.............. p.
89
8.
INTERVIEWS ........................................
.
91
--
INDUSTRY VIEW. ...
-
-
-
-
--
-
--
.
.
..
p.
CHAPTER ONE
THE FOUNDATIONS OF REAL ESTATE DISTRESS
This thesis
estate assets.
the
of
of
led
to
the
of
current
and
commercial
new
and
United States
the
in
This condotion
England.
which
forces
oversupply
space
residential
begins with an overview of
The analysis
macroeconomic
situation
distressed real
examines the nature of
in
giving
supply is
excess
New
foreclosures and is threatening the
rise to large scale
very integrity of the banking
system in the New England
region and elsewhere.
Chapter
process;
two contains
the
players
together to resolve a
loan, much
an
and
of the
relationships
workout
which
come
troubled or defaulted real estate
of the material
interviews with
overview
in chapter two is
industry professionals who
based on
are engaged
in the work-out process.
Chapter
three presents
the
academic
view of
the
causes of real estate loan failure, based primarily on a
1985 survey
results
conducted by
were
interviews
used
as
with work-out
James Boykin [21
a
template
for
specialists.
.
a
The
Boykin's
series
of
results of
these
interviews
industry view.
are
resented in
chapter
The
four,
Finally, chapter five contains a summary
and conclusions of the research.
In order to understand the current state of the real
estate
industry it
is important
may give us
surfaced
and converged
decade
to set
variables that
insight into the
the beginning
at
for a
the stage
market in 1990's.
place
sort of historical perspective.
todays market into some
That view
able to
to be
Eight
of the
depressed real
last
estate
variables have been identified
which stimulated the great building boom and bust of the
1980's.
and
These
include:
Controls,
1981,
variables are
Inflation,
discussed chronologically
Disintermediation,
Deregulation, The
Shifts
in
Economic
Employment
Monetary
Recovery Act
Growth,
Loss
of
of
Bank
Examiners, and the Tax Reform Act of 1986.
(1)
INFLATION.
Historically,
occurred
periods
immediately after
of
wars.
revved up
with the
all types
of consumer and durable
high
inflation
Post war
increased demand and
have
economies
purchases for
goods, thus, causing
prices to rise in response to this demand.
Prices started to increase during the Vietnam War in
1966, but, unlike other inflationary surges, they failed
to stabilize after a
continued
few years.
upward for
The inflationary surge
more than
a decade.
Vietnam War,
the United States
high defense
expenditures and pursued
programs
home.
at
concurrently maintained
This "Guns
during the Vietnam years
During the
and
expensive social
Butter"
approach
set the stage for historically
high rates of additional inflation.
The
inflationary
effect
was
also
due
to
the
inflation related to the cold war with the Soviet Union.
After WWII, the
economy never returned to
condition of lower military
30
years
the
U.S.
constantly ready
emphasis
on
expenditures.
maintained
for a full scale
military
a peace time
spending
a
For the next
military
war.
that
was
This continued
resulted
in
constant
inflationary pressure.
Inflation was then raised
twin oil
1973-74
shocks of
more than
to greater heights by the
the 1970's.
quadrupled
The first
the price
embargo of
of oil.
The
second embargo of 1978-79 had the further effect of more
than doubling the price of oil again.
Inflation
had become
everyone learned
this inflation,
habits as
a part
how to deal
of everyday
with it.
In
Americans began to change
William Greider
life and
response to
their buying
describes in Secrets
of the
Temple:
"By the late 1970's, most citizens had drawn
their own practical lessons from the experience.
It not only made sense to buy now rather than
later; it also made sense to borrow money in
order to buy things now.
Even with higher
interest rates, a loan made today to purchase an
automobile or a television set or a house would
be paid back tomorrow in inflated dollars that
were worth less. So long as wages continued to
spiral upward in tandem with prices, one stayed
ahead by borrowing.
If inflation persisted, as
everyone had assumed, debtors would be rewarded
and savers would be penalized.
(Greider at p.
17)
The changing
surface
consumer attitudes also
in surveys.
Americans
were
began to
less willing
to
avoid debt and thus stop spending as Greider continues:
Jay Schmiedeskamp, research director of the
Gallup Economic Service,
saw the new behavior
reflected in surveys of consumer attitudes. "The
brake is off,"
he said " inflation doesn't slow
people down the way it always has. That's a rather
historic change.
There used to be a brake inflation came along and people stopped buying.
That isn't happening now."
The prudential wisdom inherited from the past, a
Grandfather's old-fashioned warning to save for the
future and avoid debt, was turned upside down.
Smart young consumers now did the opposite.
The
overall
effect
was
neither
irrational
nor
antisocial. What Grandfather did not understand was
that borrowing
and buying drove
the American
economy. (Greider at p. 17)
For years the Federal
to control inflation, with
Reserve Board (FRB) had tried
little success.
By the late
1970's things had gotten so out of hand and the FRB felt
that something
drastic had to
be done to
moderate the
economy:
"After years of inflation" Paul Volker told
an audience in the Autumn of 1979, "The long run
has caught up with us." The message was clear to
every member of the Federal Reserve Board, even
to those three reluctant governors who had
recently voted against even a modest increase in
half of
rate.
In the last
the discount
September,
their
worries
about
imminent
recession were contradicted by the new data on
economic output coming in from the commerce
department.
Despite all the forecasts, the
economy wasn't tipping into a contraction; it
was accelerating again.
(Greider at p. 104)
In spite
of the efforts to
the FRB, accelerated lending on
system
circumvented
continued
to
the
finance
lower inflation by
the part of the banking
positive
investment
efforts.
for
Lenders
price-driven
opportunities, thus, augmenting an inflationary spiral:
And, despite the Fed's gradual efforts to slow
things down with measured increases in interest
rates,
the
banking
system
was
actually
accelerating it's lending.
Bank credit was
expanding at an annual rate of more than 20
percent, and, as the Fed officials heard from
worried bankers, a lot of new credit was going
into speculative ventures
- businesses and
individuals borrowing in order to buy things on
the rising prices, speculative investments from
gold and silver to real estate.
They were
betting that inflation would drive prices much
higher.
The smart speculator would then sell
the commodities or other tangibles, repay the
loans and reap a smart quick profit. (Greider
at p. 104)
Despite the
over
where
concerns that lending
the
money
customers had to
they were
be kept happy.
making profits on
institutions had
lending
As
to go out.
going,
tales of customers
their real estate came
new projects continued
was
A
in, money for
cycle of constant
increases in prices due to the demand for real estate as
a inflation hedging investment
vehicle resulted.
bankers have
were in the
lending
they
always said they
money, it
may
be
never really
feeding
the
business of
occurred to
population's
While
them that
desire
to
speculate:
Speculation did not look like a risky bet:
the overall inflation rate was near 13 percent
and the price of oil was increasing at an
alarming rate of more than 6 percent a month- an
annual inflation rate of nearly 80 percent.
Gold had jumped 28 percent in value in a single
month, reaching a new record of $411 an ounce.
The price of silver, in the same period, had
increased by a staggering 53 percent, up to
$16.89 an ounce.
(Greider at p. 104)
The
fear
on the
constant atmosphere
of inflation
part
that
of regulators
created
a collapse
imminent:
"The specter of 1929 was raised by me and
others," Governor Coldwell said.
"Look, we're
was
on the verge of going into hyperinflation in the
United States." While that sounded much too
apocalyptic, the frenzy of borrowing and buying
did resemble
the potential for
a classic
speculative bubble, one of those fevers that had
occurred periodically in economic history. The
marketplace loses touch with real value and
plunges forward in an orgy of acquisition.
Whether it is stocks or bonds, corner lots in
big cities or undeveloped swampland in Florida,
speculative
bubbles
all derive
from
one
conviction: the buyers are convinced that in a
few days or weeks or months they will become
sellers and unload their purchase at a profit.
Bubbles always collapsed eventually; the fever
broke
and prices
fell drastically.
Then
speculators were forced to sell at a loss. They
failed and so would banks that lent them money
to take their gambles. That is approximately
what happened to wall street in 1929, when the
bubble of financial speculation burst and the
stock market collapsed. (Greider at p. 105)
Guarantees on all deposits by the Federal Government
meant that government agencies,
most of the risk.
would
promote
collateralized
only have
not the investors, bore
In the course of their lending, banks
the
virtues
loan.
3% of their
act as a safety valve.
Yet,
of
a
20%
the banks
equity,
themselves would
assets set aside in
Even
amount in reserves, they would
fully
reserves to
if they had ten times that
not be able to survive a
large, sudden drop in the value of their assets.
The combined
result of many variables
of inflation unprecedented in
States.
percent:
was a period
the history of the United
From 1967 to 1979, prices increased by over 100
Inflation in the late 70's caused prices to
rise the fastest they had in 20 years, inflation
in
1979
averaged
more
than
13%.
The
inflationary surge was reflected in the consumer
price index which was calculated as 100 with
1967 prices.
By 1970 it was 1.16.
By 1975 it
was 161. Four years later in 1979 it was 217.
(Greider at p. 101)
Thus, a decade of
real estate investment was driven
by highly leveraged deals which required price inflation
in order to make them successful.
(2) DISINTERMEDIATION.
Disintermediation
banking
or
flow
is the
Banks
the
as
flow of
conduit
borrowers.
Disintermediation
flows
from
away
of funds
financial intermediary
Intermediation
act
is a
these
out of
system.
funds into
between
occurs
Financial
the system.
savers
when
intermediaries
the
and
the
to
the
money
alternate
investments.
The FRB saw the control of credit as the most
important
function
of
the
Disintermediation, familiarly known
was
a
result of
expansion
the
of credit.
FRB
Central
as credit crunches,
attempting to
As the
Bank.
control
FRB tightened
the
the money
supply and pushed up interest rates, thousands of people
withdrew their
funds in favor of new
options like the
money market account offered by Wall Street firms, which
offered returns superior to bank and thrift deposits.
Disintermediation was prevalent throughout in the
1970's.
Unregulated
offer small
could
which paid
offer.
These
unregulated depository
higher
than
limited the
were able to
investors money market accounts
writing privileges
banks
firms on Wall Street
those
a higher yield
accounts
were
accounts which could
allowed
amount of
with check
by
Regulation
interest that
than the
the
first
pay yields
"Q"
could be
which
paid by
banks and thrift institutions.
Money rushed out of financial intermediaries such as
the savings
thrifts were
mortgage
and loan
associations.
unable to
lending
contractors were
the
Even
willing to
for the access to the
result these
make new mortgage
stopped,
essentially shut down.
As a
housing
loans.
When
industry
was
though the home buyers and
pay higher
capital.
interest rates
The shut down came from
the investors who refused to provide money since returns
were
artificially depressed
ceilings on the amount of
Investors who had held
resulting from
government
interest which could be paid.
their funds in regulated savings
accounts drawing 5 percent interest withdrew their money
and placed it in
higher returns.
unregulated investments providing much
Financial institutions were suffering from both
same
the
at
threats
internal
and
external
time.
Externally, Wall Street firms had found an ingenious way
around
Regulation "Q"
with their
money market
funds,
these new accounts enticed away the money that S&L's had
Thrifts
funds.
of long-term stable
considered sources
immediately found themselves unable to depend upon their
thrifts were forced to pay
which
deposits.
themselves
The
in
occurred whenever
the
mortgage
not
from
condition
resulting
was
funds to
known as
"negative
the current cost of
portfolio
lend, the
a higher price for new money
borrowing,
from
came
of new
In search
liability base.
yield.
describes the situation of the
The
traditional
thrifts
yield".
found
This
funds rose above
Boston
Globe
banks in a July 30, 1990
article:
By the late 1970's, virtually all of the
money the thrifts made came from long-term,
fixed-rate mortgage loans that earned about 6
percent interest. Virtually all the money they
lent came from deposits on which they paid about
5 percent interest. As long as there was a
spread between the two rates, they were assured
of profits. The moment there was not, they were
in (negative
yield) trouble.
The trouble
started in
the early 1980's
when overall
interest rates rocketed.
The spread on which
the institutions depended disappeared, and the
industry effectively went broke. (Boston Globe
at p. 16)
Each
time a
denounced
by
credit crunch
home
effected parties.
access
to
builders,
the
S&L's,
FRB was
and
other
The actions by the FRB choked off the
credit.
episodes was
developed, the
The
result
of
these tight
creation of a pent-up
money
demand for housing.
This demand was heightened by the maturation of the baby
boom generation into the housing market.
So much
bank's and
in 1978,
from
money left
the banking industry
thrift's survival was
with an attempt
the competition
of
threatened.
to save the
Wall
that both
Starting
banking industry
Street firms,
Congress
started formulating ways to allow banks to compete.
result
was
the
Monetary
Act of
deregulated the banking industry.
1980,
a
law
The
which
The major part of the
deregulation influenced the thrift industry.
Thus,
the
overnight.
go
Thrifts
after high
estate
addition,
real
loans,
yield
land
they had
estate
(and high
and
new powers
changed
power to
risk) commercial
construction
to operate
loans.
real
In
real estate
Banks had new competition for
estate borrowers at
spectrum.[16]
industry
were given the additional
development subsidiaries.
the real
lending
the high risk end
of the
(3)
MONETARY CONTROLS.
The FRB had also failed to achieve a desired rate of
economic
growth
which
they
had
previously
done
by
controlling interest rates.
The Federal Reserve System operated like the
modern equivalent of the
king's keep a
separate
storehouse
alongside the
private
economy and independent of its forces. But the
Fed could influence the financial flows inside
the plumbing through two tiny valves - mere
pinpricks in size compared to all the wealth in
circulation. One valve was the discount window
at each of the twelve Federal Reserve Banks,
where
commercial
banks routinely
borrowed
hundreds of millions, even billions, every day
to make up for temporary shortages in their
required reserves.
The other, more important
valve was the Open Market Desk at the New York
Federal Reserve Bank in the middle of Wall
Street, where the Fed bought and sold government
securities
in the
open market,
in daily
transactions usually running from $500 million
up to several billion.
In both cases the Fed
created money with a keystroke of the computer
terminal
(computer accounting having replaced
"the stroke of a pen").
(Greider at P. 32)
In
times of
crisis, the
Discount window as a means
system.
A change in
Federal Reserve
to inject liquidity into the
operating method was installed and
a monetarist approach
was adopted.
This change
response
people
were
to
those
"inflationary psychology".
seemed to
used the
The
permeate everything.
to tighten the money supply.
who
feeding
was in
the
borrow and buy behavior
The Board's
answer was
Historically, the FRB had controlled the economy and
access
to credit
by manipulating
1979, the general feeling was
control.
Paul
interest rates.
that inflation was out of
Volker, the Chairman
time departed
from traditional
of the FRB
wisdom and
at the
adopted the
monetarist method of controlling the money supply.
approach
controlled the
economy
at
any
controlling
thus, the
total amount
one
spending
time.
by
interest rate
In
The
of money
result
not making
in the
would
money
would be allowed
This
be
available,
to fluctuate
according to market.
This change in operating
Saturday,
change
in
October 6,
the
attempting to
World
into
1979.
availability
shock the
the notion
method was put into effect
By
of
making this
money
the
historic
FRB
economy, Wall Street,
that
they
were serious
was
and the
about
controlling inflation.
The monetary supply changes made
would come to be known
as the "Saturday Night Special".
(Greider at p.
140)
When
money
became scarce,
resourceful
bankers had ways to obtain more of it, despite
the rising price, and to amply finance their new
loans.
Typically,
they
would
sell
off
government securities to raise funds for lending
and raise the market rate offered on their own
certificates of deposit- in effect, luring away
the deposit money that was fleeing from credit
unions and S&L's.
The bankers also borrowed more from the
Federal Reserve itself, simply by phoning the
discount window officer at one of the twelve
Federal
Reserve Banks.
Discount borrowing
soared shortly after the October 6 announcement
to more than $3 billion a day, subsided for
several months and then reached another peak
later of $3.5 billion a day. The Fed's decision
to raise the discount rate to 12 percent hardly
discouraged bankers from "going to the window,"
as they called it. When the alternative was
borrowing in the money market where short term
rates were bouncing as high as 18 percent, The
Fed's discount rate was still a bargain.
In theory and myth, The Federal Reserve's
Discount lending was the power of life or death
over private banks. If a bank relied too much
on the Discount privilege, the Fed could simply
refuse its request for a loan - threatening the
bank with crisis and possibly insolvency. In
practice, the central bank rarely, if ever, said
no at the discount window. A bank might be
scolded,
perhaps subjected
to a
rigorous
examination or told to "stay away from the
window" until its affairs were in order. But
the Federal Reserve would not refuse to make a
discount loan unless it had concluded that the
bank was already doomed.
The Fed's original
purpose was to prevent bank failures, not cause
them,
a
reality that
aggressive
bankers
regularly exploited. (Greider at p. 141, 142)
During the late 1970's
banks were under siege.
The
banks were reeling from competition from Wall Street and
the negative yields which were being experienced.
then started looking
stabilize their
made
by the
economy,
uncertainty
capital
access to
lines.
balance sheets.
FRB
the
for a safe haven
in their
bank's
regarding
requirements.
capital and
customers
their
where they could
But, with
method
Banks
the change
of controlling
were
ability
The customers
to
filled
with
meet
their
demanded
the banks responded
the
future
with credit
Unfortunately,
tighten
while
the money
explosion
supply
in the
Individual
the
FRB
through
availability
bankers
was
made
of
credit
attempting
to
monetary policy
an
credit took
lines
place.
available
to
borrowers who felt threatened by a credit cut-off due to
the
new monetary
always
controls.
be financed
Window.
The
through the
final
available which
These
result
credit lines
FRB's Discount
was
a
level
was actually higher than
of
could
Credit
credit
existed prior
to the imposition of monetary controls.
In the months following
to fine
money
tune the new
supply,
the opposite
had
the
operating method and
the
financial markets
October 6, while attempting
FRB
inadvertently
with available cash.
of what the
makings
of
a
lines
and
"mistaken cash"
the
result was
FRB had intended.
The banks
potential
they
crisis;
had
for their customers with
simultaneously
into the
flooded
The
committed to reserving capital
credit
tighten the
placed
hands of their
the
FRB's
credit hungry
customers.
(4) DEREGULATION.
Deregulation
disintermediation.
was
It
a
direct
was generally felt
response
to
that without
some adjustment, banks would
in
a
competitive
Deregulation was
to compete
for
interest
savings
deregulation
rate
an attempt to allow
on an equal
the
be hard pressed to survive
banks and thrifts
footing with Wall
of
started
environment.
American
with
Street firms
families.
good
Although
intentions,
the
end
result forced the S&L's to compete in an arena they were
not
prepared
or
understanding of
qualified
to
work
within.
the effect of deregulation
An
requires a
look at banking before and after Regulation "Q".
Regulation "Q"
regulations
"Q",
initially established the
governing
banks and
the thrifts.
thrifts had
banking industry:
advantage over banks (they were
attract
capital)
broader home
mortgages,
to
given an
interest rate
allowed to pay a higher
mortgage
Thrift services
personal loans,
regulated interest rates.
in the
savings accounts in order to
encourage
ownership.
Regulation
different purposes
Thrifts were
interest rate on pass book
Under
rules and
and
lending
and
included home
savings accounts
with
The intent and the purpose of
thrifts was to be long term lenders.
Regulation "Q" was also
conflicts
between
a way of settling potential
banks
and
services each was to provide.
for
the
enjoying.
interest
rate
thrifts
the
It also compensated banks
advantage
Under regulation
regarding
the
"Q" thrifts
thrifts
would not
were
be
allowed
to
operating
use
their
the
in
interest
banks
core
rate
advantage
by
such
as
businesses,
commercial and construction lending.
Regulation
term
"Q" advanced
structure
referred to
of
assets and
as "balancing
thrifts attracted
higher interest
the idea
of matching
liabilities
the books" by
which
was
bankers.
The
stable, long term savings
rate, from
term home
mortgages.
deposits.
The
Long
the
with their
which they could
lend long
term loans, from
long term
bank's asset base was
unpredictable and
would flee to higher interest opportunities, as a result
they offered
short term loans.
Short
term loans, from
short term deposits.
Banks
they
offered the
also
certificates
development,
allowed
to
corporations
same services
offered:
of
commercial
deposit
and construction
operate
which
service
is
a
as thrifts,
lending,
(CD's),
loans
brokered
acquisition,
(AD+C), and
organizations
real
plus
estate
or
were
151
B
development
subsidiary of the bank . Banks provided these additional
services due to the belief
the expertise to control
by regulators that banks had
the additional risk associated
with the broader services.
Under the
discontinued
Monetary Act of 1980,
which
resulted
in
Regulation "Q" was
the
thrifts
being
stripped
of
their
commercial banks.
a percentage of
interest
rate
In addition,
advantage
over
thrifts now had to keep
their assets
on reserve with
the FRB.
The imposition of universal reserve requirements put all
banks
and
thrifts
in
the
same
position
regarding
reserves.
Under Regulation "Q"
thrifts were limited in
offering
savings
personal
mortgages.
loans,
and
With deregulation thrifts were able to offer
all their
and
accounts,
traditional services of a
now were
able
to offer
all
full service bank,
forms of
commercial
lending, brokered CD's and AD+C loans.
Under deregulation the role
of the neighborhood S&L
went from making personal loans to sophisticated lending
such as factoring receivables
part
of
their
credit
lines
commercial
real
allowed to
offer checking
estate
interest
on
and
projects.
lending
Thrifts
accounts or
order of withdrawal) accounts,
earning
for large corporations as
their
on
risky
were
also
NOW (negotiated
which had the benefit of
balances,
a
feature
not
offered by commercial banks.
Approaching the early
finding
it nearly
impossible to
cover the negative yield
portfolios.
savings and
Despite
make enough
money to
spread on their large mortgage
recent
loan fraud,
negative yield,
1980's, troubled thrifts were
congressional
recent evidence
focus
on
supports that
incompetence and inexperience
with the
new business
debacle.
lines were the
primary causes of
the S&L
The July 30, 1990 Boston Globe article dealing
with the congressional attempts
to prosecute the "S&L's
Kingpins",
industry observers
restates what
most
now
agree:
Virtually the entire industry was bankrupt by
the early 1980's, long before most of those now
accused of wrong doing had even entered the
business.
The
reason was not
crime, but
spiralling
interest
rates that
drove
up
institutions borrowing costs and drove down the
value of their principal assets: long-term, low
interest mortgages.
(Boston Globe at p. 16)
The
deregulation of
S&L's competing
with commercial
firms.
The search
funding
of
for higher
projects
speculation.
financial institutions
This
banks and
Wall Street
yields resulted
involving higher
risk
situation was further
the conversion of mutual
led to
in the
and
more
compounded by
thrifts to stock thrifts whose
shareholders demanded better performance.
Mutual
depositors.
thrifts are
Depositors
thrifts that
could not
ownership in the form of
savings, because
interest a
resulted in
with
take the
limited the
pay to it's
the thrifts having excess
no means
of passing
by the
benefit of
higher interest rates on their
Regulation "Q"
thrift could
are owned
it
on to
Boston Globe describes the results:
amount of
depositors.
This
capital on hand,
the owners.
The
over huge
public anger,
led to
"...this
salaries, exorbitant perks and cozy deals at
individual thrifts" (Boston Globe at p. 16)
similar to the
the other hand are
Stock thrifts on
structure of many companies listed on the New York Stock
Stock thrifts are owned by share holders with
Exchange.
concern focused on the price of the stock, earnings, and
thrifts
management
The
results.
quarterly
within a
generally operated
mutual thrifts
the
their earnings,
to
respect
disciplined with
lean environment.
thrifts of being hard nosed
Given the approach of stock
and
stock
these
of
preferred to remain under
their present
structure.
The management of the S&L's was simply not qualified
to offer
to.
the additional services they
regulation
After
qualified
to
involved
Congress
was
that
disintermediation.
projects
in.
the
The
opinion at
S&L's
were
were
they
the
time
in
due
to
failing
Under deregulation
not
also
were
the S&L's
the riskier
manage
becoming
"Q"
were now allowed
competition now
took place on an equal footing, Congress had adopted the
approach of survival of the fittest.
Vincent F. Martin Jr. CEO
Los
Angeles based
deregulation of
real
of TCW Realty Advisors, a
estate
investment firm
the banking industry had
impact on the real
estate market.
feels
a significant
Mr. Martin described
the scenario developers faced in obtaining financing for
their projects: previously, the
developer had to obtain
permanent financing, in order to secure the construction
financing to start the
project.
the construction
lender (the
financing would
exist for them
This situation assured
short term
lender), that
to be "taken
out" when
the developer fulfilled the contractual responsibilities
of the construction.
Prior
to 1980,
provided
permanent
[11]
fifteen
or
"take-out"
fifteen companies acted as a
market not only
projects, but,
major insurance
financing.
professionals who
These
control to the real estate
by controlling the supply
by also
companies
of money for
employing seasoned
would filter
real estate
out projects
that were
not economically sound.
Through 1979, these real estate
professionals
as
enthusiasm
operated
and
optimism
underwriters provided a very
market
by
limiting
regulating
the amount
the
of
a check
of
on
the
unbridled
developers.
These
important restraint on the
supply of
finished
money,
in
product which
turn
would
eventually enter the market.
Mr. Martin contends that
the impact of deregulation
removed the controls these real estate professionals had
on the
were
there
real estate market.
15 accepted
sources of
were thousands.
Before
deregulation, there
permanent financing,
Deregulation resulted
now
in banks
and thrifts starting to provide "mini-perms" which had a
the construction and
would act as both
6 year term and
the permanent financing for a project.
(5) THE ECONOMIC RECOVERY TAX ACT OF 1981, (ERTA).
The changes
Economic Recovery
Reform Act
Tax Act
of 1986
of 1981
(ERTA) and
(TRA) both encouraged
investment in real estate.
from the
Federal Tax Code
made in the
the Tax
and hindered
These Acts mirrored the boom
and bust of the 1980's.
Prior to ERTA, the marginal tax
rate
estate received
was 70%
and real
gains exclusion.
maximum capital
passage of
to
resulted in
gains tax on
real
tax rate
estate.
Under
was lowered
the effective
a effective
35%.
The
tremendous incentives
ERTA, the
to 50%
gains exclusion was raised to 60%.
rates lowered
capital
real estate of
ERTA in 1981 included
invest in
federal
These rates
a 50%
marginal
and the
capital
When combined, these
maximum capital
gains tax
rate to 20%.
Expansion of the investment
feature of
types of
ERTA.
They offered incentives
real estate.
Credits were
rehabilitation and subsidized
Treasury Regulations
for
a
wider
tax credits was another
range
of
real
given for historic
housing.
allowed tax
for specific
Vaguely written
credits to
estate
be issued
projects
than
real estate market
to take advantage of
rapid
in
loss
accounting
who could
partners
Which
rules.
depreciation
the tax saving
In addition, ERTA introduced
components of real estate.
very
creation of a
The effect was the
originally intended.
off losses
the
Passive
deals.
tax-sheltered
write
increased
from those
real
estate shelters against ordinary income with few limits.
the expected
the depreciation period from
ERTA changed
useful life of the property to an arbitrarily determined
period
of
15
years.
system's (ACRS)
175% declining
producing an
The
accelerated
method of
cost
depreciation used
balance method.
recovery
the rapid
This resulted
astounding first year deduction
in ACRS
of 12% of
depreciable cost.
(6) SHIFTS IN EMPLOYMENT GROWTH.
Changes
in
employment
growth
came
from
three
different but related sources.
First, the maturation of
the
to swelling
baby boom
generation led
market to accept the largest
in
the history
of
of the
job
addition to the work force
the United
States.
As jobs
were
created, the corresponding demand for housing challenged
the building industry to keep up.
In
New
high-tech
England, we
and
financial
also
saw
services
the growth
of
the
industry
and
the
evolution of the working population from a traditionally
population into white
blue collar
collar professionals
and technical workers.
This change was common in the northeast as shifts in
employment
growth
professionals were
and
took
place.
typically made
administrative population.
White
up of
The
collar
the technical
new white
collar
professionals did not absorb the existing housing stock,
instead choosing to purchase new and upscale housing.
The
Northeast region
particular
has
in general
been
losing
and Massachusetts
population
manufacturing base for a number of years.
has moved
mostly to southern
and
in
it's
Manufacturing
states due to
the warmer
climate, lower wages, and a lower cost of living.
During the years that Massachusetts was experiencing
a boom in
construction from
1980-1989, the
state also
experienced a slow growth in population which was offset
by out-migration.
The overall
result was
more people
moved
state
moved into
the
out
of the
Despite these
state
than
shifts, many people wishing
were unable
to find
state.
to enter the
housing comparable
to what
they were accustomed to.
This churning of the population in Massachusetts was
driven by the growth of
fringe, the
industries loacted on the urban
semi-circle defined
by routes 128
and 495
in the
Boston area.
so they were not particularly
housing in this corridor,
between
change
route 128.
Boston and
in
inner suburbs lying
the older blue collar
attracted to
sought suburban
The new arrivals
total population
led
result, a
As a
to
a major
minor
boom
in
housing in the outer suburbs of metropolitan Boston.
1984
Between
existing home
result was,
and 1986,
went from
the
median
price for
$82,600 to $177,000.
a single family
home in Boston
an
The end
was priced
nearly twice the national median.
(7)LOSS OF BANK EXAMINERS IN MID 1980's.
Many examiners left government service with the lure
of private sector salaries.
The loss of bank examiners
during the 1980's had a dramatic impact upon the ability
of the banking system to enforce the governing rules and
regulations.
The exodus
it took the
was so large that
government agency over a decade to replenish the staffs.
Dennis Aronowitz,
University
a professor of banking
describes
the
situation
law at Boston
faced
by
regulators:
Bank examiners are a cadre of professional
is extensive and
employees, whose training
costly to the agencies. In recent years, many
for higher
left government
examiners have
In fact
salaries within the banking industry.
bank
during the mid 1980's the Comptroller and the
FDIC suffered reductions of as much as one third
of their examination forces and only recently
rebuilt to the staff levels of ten years ago.
6)
(Arnowitz at p.
The loss of bank examiners could not have happened a
The early
worse time.
and seemed out of control.
banking had lost equilibrium
was a
There
time when
1980's represented a
banks would
that the
likelihood
utilize
their safety net of federal deposit insurance, and there
was
a
shortage of
examiners
alert regulators
to
total number of bank
agencies, the
by the
According to data supplied
potential problems.
to
examiners currently
employed by the three banking regulators is between 5543
and 5788.
1983
The breakdown is:
at
and 2229
the
2600 at the
960
FDIC; and
OCC; between
in the
federal
reserve system.
(8) TAX REFORM ACT OF 1986.
The intent of the Tax Reform Act of 1986 (TRA) was
to
close loopholes
classified
which
real estate
created
into two
residential and nonresidential.
tax shelters.
TRA
different categories:
The two new categories
were given new cost recovery periods with 27.5 years for
residential
and
31.5
years for
nonresidential.
The
depreciation method for both classes became the straight
line method.
The
effect was to take almost
all of the
tax sheltered benefits away from real estate.
changes related to tax benefits
A contrast of the
ERTA to TRA
cost recovery periods from
associated with
is illustrated by the fact that under ERTA's accelerated
recovery system
cost
100% of
money was
the investors
Under TRA, after 15 years less
returned after 15 years.
than half of the depreciable cost would be returned with
the
balance being
recaptured over
16.5
the remaining
years.
all capital gains exclusions,
TRA also eliminated
and
a
single tax
over $15,000.
income
allowed to
losses were
However,
gains.
if
28%
of
rate
As
in the
all
gains
past, capital
be written off
the losses
for
was created
against capital
gains,
exceeded
the
amount deductible against personal income was limited to
The resulting
$3,000.
significantly reduced
effect was
that these
the appeal of real
changes
estate to the
average investor.
Another
to
offset
passive losses
the material
TRA
of
The intention of
limitations.
losses
aspect
passive
loss
TRA was to allow passive
passive gains.
can be used
was
In
certain
to offset other
cases,
income, if
and active participation criteria
is met.
Taxpayers with adjusted gross incomes (AGI) of less than
$100,000 can
deduct $25,000
in passive
losses against
non-passive income.
If AGI is more than $100,000, fifty
cents on the dollar in passive loss benefits is lost for
Thus if AGI
every dollar which income exceeds $100,000.
is $150,000 all passive loss benefits are lost.
VARIABLES ON THE DEVELOPMENT OF
THE EFFECT OF THE EIGHT
THE NATIONAL OFFICE MARKET.
from the
to understand the implications
In order
eight variables just described,
it is useful to examine
the growth of national office market through the 1980's.
An economic
study by
Massachusetts
Raymond
Professor William Wheaton
Institute
Torto
of
the
of
Technology
University
of
of the
Professor
and
Massachusetts
documents this tremendous growth.
The impact
of the variables as
they surfaced and
converged during the 1980's was significant.
of illustration, a review of
office market from World
As a means
the growth of the national
War II proves useful.
and Torto explain the basic
Wheaton
changes taking place in the
character of the national office market:
During the post World War II period, the
two
has exhibited
office market
American
distinct trends: long run growth and a shorter,
The long run growth of the
8-10 year cycle.
market has come largely in response to the
sustained growth of those types of employment
that require office space. In general, there
have been two sources of such employment growth.
First, even though manufacturing employment
has continued to decline as a share of the total
economy, the proportion of the manufacturing
work force classified as "white collar" has
risen from 20% at the end of the war to close to
period, the
During this same
40% today.
involved
employees
manufacturing
of
percentage
in "central administrative functions" has also
Thus, even if manufacturing
more than doubled.
is declining, changes in product, planning, and
technique have generated a growing demand for
offices.
The second, and much more important, source
of office demand has been the enormous growth in
non-manufacturing
--
employment
particularly
finance, insurance, business and professional
services. Employment in these sectors occupies
office space almost by definition, and since the
mid 1950's it has grown from 3 to almost 12
million workers. (Wheaton and Torto at p. 3)
Historically,
during
Even
place.
was
employment
to changes
periods of
constant,
growth were
net absorption
in the
different
rates
experienced.
rate of the office
in employment
where
time
patterns.
In
of
growth
have taken
office market supply
the national
rates of
growth
dramatic fluctuations
economic
long-term
addition, the
space fluctuated due
Torto
and Wheaton
continue:
from an
long run changes
While these
service economy, and from
industrial to a
"blue-collar" to "white-collar" employment are
not likely to abate, the pace of growth has
fluctuated considerably.
During recessions,
such as those of 1960, 1971, 1975, as well as
1982, the growth in office employment slackens
to the point of little or no increase. Equally
between
periods
the
during
important,
significant
also
were
there
recessions,
differences in the rates of longer-run growth.
Office employment grew most rapidly during the
last half of the 1960's and 70's, and more
slowly during the early 60's and early 70's.
Growth during the recent recovery has matched
and in some cases exceeded that of the late
1970's.
In response to this pattern of employment
growth the net absorption of office space also
rose gradually
Net absorption
fluctuated.
throughout the 1960's from annual levels of
fifty million square feet in the first half of
the decade to 100 million square feet in 1969.
Absorption fell sharply in 1970-71, rebounded a
little in 1973-74 and fell again in 1975-76.
From there it rose again sharply, at several
points reaching 140 million per year during the
Once again, a
1981.
late 1970's, and in
recession sent it plunging in 1982-83, from
which it has rebounded in 1984-85. (Wheaton and
Torto at p. 4)
of these fluctuations, the
In spite
an
increased
for
demand
office
perception of
space
existed.
Nevertheless, the result
of these dramatic fluctuations
was that the demand for
office market space became very
difficult to predict.
Thus,
developers would overbuild due
be
greater
demand.
a possibility existed that
to what they perceive to
Wheaton and
Torto
describe
various periods of growth which have taken place:
On the supply side, the stock of office
space has grown from roughly 1 billion square
feet in 1955 to 3.8 billion square feet today.
construction has
new office
pace of
The
and since the
fluctuated greatly, however,
mid-50's there has been three distinct building
booms. The first was during the late 1950's,
lasting roughly three years and producing a
total of 228 million square feet over that
period. From there, construction slowed during
the 1960's, grew at a stable rate during the mid
60's and then entered the second boom period,
1968-74. This second boom was more pronounced,
and lasted almost seven years, producing a
35
the
record 810 million square feet of new space. It
ended with a recession, and record 15% vacancy
rates.
For two years after the second boom, the
with building
quite depressed,
market was
activities at levels typical of the 1950's.
This slackening set the stage for the third and
current boom, Which so far has also lasted seven
years, and produced 1300 million square feet of
almost as much as was produced in
new space -(Wheaton and
the entire preceding 20 years.
5)
p.
Torto at
The following chart documents the cycles of growth
the national office market has experienced:
Office Construction Cycles
Period
Ann.Const.
Phase
76.0
Boom
1957-59
59.0
Trough
1960-65
74.0
Stable
1965-70
108.0
Boom
1970-75
69.0
Trough
1975-80
172.0
Boom
1980-84
(Wheaton and Torto at p. 5)
In
explaining the
Torto conclude that
driven
by the
cycles of
228.0
179.0
369.0
810.0
144.0
1293.0
growth, Wheaton
the office market reacts
changes in
results assure that
Tot.Const.
to and is
employment population.
an eight to ten
The
year spread exists
between vacancy peaks as the study continues:
The three peaks in office construction have
been matched by three peaks in the national rate
of office vacancy. From a low of below 5% in
the 1950's, the national vacancy rate rose to a
peak in the mid-1960's of 8.5%, fell to 4% in
the late 60's, rose to 14% in the mid-70's, fell
to 5% by 1979 and is currently up to an all-time
36
and
Again,
16%.
high of
characterize the spread
peaks - which tend to
construction by several
Torto at p. 5)
complicated
The
nature
market makes it impossible to
related to the
the
supply of
the
office
the actual
national
office
assume that all growth is
equation.
had a dramatic impact
related to time lags from
project to
of
supply side of the
demand have also
in
seem to
8-10 years
between these vacancy
follow the peaks in
(Wheaton and
years.
space.
Surges in
upon the growth
Much of
demand
is
the preliminary phases of the
completion as Wheaton
and Torto
explain:
It would be tempting to conclude from this
brief historical analysis that the office market
has an inherent and predictable cycle of 8-10
years duration, upon which the industry could
rely for it's plans. Unfortunately, the market
is more complicated than this, because there are
alternatives explanations for the cycle, each
with a different implication for the future.
which might be
The first explanation,
called a "supply-side" theory, argues that the
the cycle, largely
industry itself creates
through it's inability to forecast correctly.
Without reliable forecasts, developers start new
projects only when current market conditions are
favorable
these
Extrapolating
favorable.
conditions into the future, the industry as a
the space
When
building.
whole continues
actually becomes available several years down
the road, the market naturally softens as the
supply is slowly absorbed. The downturn causes
the industry to postpone construction plans for
a while, which only creates a tight market, and
starts the whole cycle over again. According to
this "supply-side" theory, then, the cycle is
caused by the use of current market conditions
as a barometer for the future, rather than by an
also
that
demand
of
forecast
accurate
anticipates the likely construction response of
the whole industry.
While the supply-induced theory has some
supporters, and also some undoubted truth, it
ignores the unanticipated variations in demand
that have occurred over the last few decades.
Consider, for instance, the fact that the sudden
surge in office demand during 1966-1970 was
totally unanticipated, and found little supply
Even though construction soon
to match it.
raced to keep up with demand, the enormous
supply of space authorized during the 1969-73
period did not become available until 1972-76, a
ending a
demand was slowing,
period when
In each of these cases, even the
recession.
best planning by developers would likely have
been spoiled by the macro-movements of the
Perhaps more interesting is
national economy.
the prospect that the building activity of the
last 18 months will be coming on line in
1986-87, as the economy slows. Thus variations
in demand, or long-run office employment growth,
and a series of unanticipated recessions, have
also clearly been important in explaining the
(Wheaton and
past cycles of the office market.
Torto at p. 5,6,7)
In addition to the surges in the general demand for
national
space,
office
there
is
further
growth
associated to demand related to specific types of space.
Nevertheless, there
the
demand for
are dominant factors
national office
space, as
which dictate
Wheaton and
Torto describe:
Beyond these major market phenomena, it is
also true that there have been changes in the
of space.
particular kinds
preference for
Shifts in the demand towards non-contiguous
and a desire for
space or "back offices",
high-rise views are
historic structures or
examples of trends that have helped to shape the
The fact
market in any particular period.
remains, however, that the state of the economy,
the growth of office employment, the price of
the
remain
it's availability
and
space,
overwhelmingly dominant factors that explain the
should
absorption, and
movements in
past
national office
Torto's study of the
Wheaton and
construction
(Wheaton and
future.
do so in the
12)
continue to
Torto at p.
the previous
cycles of
used to illustrate that the
thirty years
last ten years were unique.
was built in
ten years, the amount which
Over the last
was
four years would have required twenty years in the past.
Wheaton and Torto provided
real estate
from a
market behavior
estate
local perspective.
An
markets should provide an
examination of both types of
have affected
how the eight variables
understanding of
observe real
step is to
The next
market.
a look at the national
real estate.
THE EFFECT OF THE EIGHT
VARIABLES ON THE DEVELOPMENT OF
THE MASSACHUSETTS RESIDENTIAL MARKET.
A
of
review
residential market
eight
variables.
professor
the
growth
the
in
also illustrates
In
a study
of economics
at
Massachusetts
the impact
conducted by
Wellesley
of the
Karl Case,
College, it
was
found that the growth rates in the residential market in
Massachusetts
significant.
over the
The
later part
following
tremendous rate of growth:
of the
table
1980's were
documents
the
Total Existing Home Sales in Massachusetts:
1983-89
(Single-Family Homes, Condos and Co-ops)
Year
# of Units
1983
1984
1985
1986
1987
1988
1989
(Case at p.
65,000
66,500
80,500
84,600
100,500
93,300
86,500
the general growth in
confused with
number of
the high
be regarded
as
1980's what took
area.In the
dwellings can
new
the
individuals to
"churning of
place was a
internally driven market activity
the market," which is
"Churning" accurately
being sold and resold.
of homes
the population and
sales of residential
sales to
be
cannot
growth
economic
Massachusetts,
In
not
20)
describes what occurred in the Massachusetts residential
market.[16]
As
market
Massachusetts
started to
area to support the
The
growth of
newly
labor
and the
leading industries
transfer
employees into
of
the
growth that they were experiencing.
tech, financial
the high
administrative support
high level
the
of
tightened, many
dropped
rate
the unemployment
industries required many
executives to
imported managers
services, and
transfer into the
did
not
occupy the
mid to
area.
The
existing
residential
collar"
"blue
they
instead,
inventory;
located in new and upscale suburban homes.
Later when the "demand generators" cooled for these
leading
people into
transferring
demand
first reaction
industries, their
for
curtailed.
homes quickly
new
stop
was
The result
area.
this
was to
prior
The
planning for the construction of these new homes and the
investment in time and
money into the approvals process
encouraged the builders to continue the building process
until it was complete.
The
dramatic
rate
of
economic
growth
in
the
in a large inventory
Massachusetts economy has resulted
of residential stock being built. Thus, it is necessary
that a period of time pass before economic forces regain
equilibrium in
Richard Pollard,
order for
the stock
Chairman of the
to be
absorbed as
Massachusetts Bankers
Association explains:
"The New England economy in general, and the
Massachusetts economy in particular, enjoyed an
unprecedented boom during the mid-1980's. The
boom has come to an end as certain advantages
dating from the 1970's and before, such as
lower-than-average home prices and an ample
into
turned
labor, have
of
availability
disadvantageously high housing costs and short
labor supply.
A rebalancing of macroeconomic forces must
work itself out; there is no way simply to will
continued hypergrowth when a regional economy
has moved out of balance with competing regional
economies when the national economy itself must
deal with a huge national deficit and
(Pollard at p. 1)
imbalance.
the
Despite
current
slowdown
in
trade
the
general
economy, there are many reasons why Massachusetts should
consider
itself
prosperity.
fortunate for
the
past
15 years
of
Professor Case describes the history of the
current cycle of economic growth recently experienced by
Massachusetts:
Massachusetts is fortunate to have a well
capitalized banking network traditionally known
for prudence and integrity. At the same time,
it must be said, and will be widely acknowledged
within the industry, that the years of the
"Massachusetts Miracle" led to excesses. Like
many builders and buyers, bankers were not
immune to the illusion that real estate values
would soar unremittingly. Banks have failed and
more will fail because enthusiasm in some cases
resulted in reach exceeding grasp.
What seems to be lost in the current gloom is
where the region and the Commonwealth have been
over the last decade and a half. In 1975 the
The
Massachusetts economy hit rock bottom.
unemployment rate went over 12% that year,
second highest in the nation behind Michigan.
Massachusetts faced a bigger budget crisis that
year than it does today. But 1975 was followed
by 15 years of sustained economic growth, with a
pause for the recession of 1981-82., Since 1980,
personal income had risen at a rate of nearly
Since 1975
50% above the national average.
jobs have been created in
nearly 840,000
Massachusetts, an increase of 37%. The housing
market boomed from 1983 to 1987, increasing the
value of the existing stock by over a hundred
billion dollars in the Boston metropolitan area
alone. By mid 1987, the unemployment rate stood
The lowest among the 50 states. It
at 2.5%.
very prosperous decade and a half".
a
has been
(Case at p. 14)
The fifteen
Massachusetts
estate
year period
had a
market.
experienced by
of prosperity
significant
Professor
effect
Case
real
on the
out,
points
the
escalation in prices of housing due to pent-up demand:
The current real estate cycle began back in
In that year the median price of an
1983.
home in Boston was
existing single family
$82,600, 17% above the national average of
Pent-up demand coming out of the
$70,300.
1982-82 recession (during which the prime rate
combined with rapid income
went over 21%),
surge of housing demand
growth, led to a
Existing home sales in
beginning in 1983.
Massachusetts jumped from an annual rate of
34,500 in mid 1982 to 73,900 in early 1983.
Supply in the form of new construction did not
respond at first because zoning regulations and
permitting
were
controlled
by
351
very
independent cities and towns.
The increased demand coupled with a slow
supply response pushed prices sharply higher in
1984. At that point an inflationary psychology
took over and prices boomed from 1984 through
1986. During those years prices were rising at
(40% per year),
a rate as high as 3% per month
pushing the median price of an existing home
from $83,600 to
$177,000 nearly twice the
national median. (Case at p. 14)
The demand for housing was created more as a result
of
from
the changing
actual
makeup of
growth.
In
the population
addition,
rather than
changes
in
the
Internal Revenue Code encouraged additional purchases in
the residential market.
The
result was an overbuilding
of the residential market as Case illustrates:
missing
important
was an
there
But
growth was extremely
ingredient: population
Prices were not rising because more
slow.
people wanted to live here but, because those of
us who did live here wanted bigger and better
That missing element meant that when
houses.
the building boom finally caught up with the
price boom, the region overbuilt and overbuilt
Between 1985 and 1988, construction
quickly.
100,000 to 147,000.
employment jumped from
Housing starts in the five eastern counties of
the state rose from a rate under 10,000 per year
during the early part of the decade, to just
under 15,000 in early 1985 to a peak of over
22,000 in 1986 and 1987.
Another factor that contributed to the
overbuilding was the internal revenue code.
Much of the building that actually took place in
1986 and 1987 was planned between 1984 and 1986.
During those years , the tax laws were very
The
investment.
real estate
favorable to
Economic Recovery Act of 1981 introduced very
rapid depreciation rules, and passive partners
could write off losses from real estate shelters
with virtually no limit. Condominium investors
enjoyed tax sheltered income and expected to
enjoy sustained appreciation. (Case at p. 15)
By the
had
misread
time that the builders
demand,
a
tremendous
residential inventory had been
the
Tax
Reform Act
of
1986
lower
demand
overstock
created.
the
in
The passage of
the
further discouraged
absorption of the existing stock.
the
realized that they
for residential
The consequences from
housing
have
been
devastating as Case explains:
The overbuilding on the supply side of the
market ran headlong into a slowing economy on
the demand side and a new tax law. The result
was a large inventory of unsold homes and a
larger inventory of unsold condominiums, As a
result, very few new units are now being built.
44
The construction sector has lost 31,000 jobs,
the
filling
builders are
and
developers
bankruptcy courts, banks have found themselves
with large portfolios of foreclosed property,
and the housing starts are back down to under
(Case at p.
7,000 per year, a drop of over 70%.
16)
Although overbuilding and the misreading of demand
may
represent
general
causes
of
failed, no two properties are alike.
offer some insight and
why
projects
have
While generalities
partially explain why a specific
properties fail, they don't offer complete answers.
45
CHAPTER TWO- THE WORKOUT PROCESS
Before looking at the reasons why specific
properties fail, we will look at the workout process. The
bulk
this
of
chapter
with workout
interviews
As we start the 1990's,
is
based
on
specialists in
a
series
of
the Northeast.
we are experiencing a depressed
real estate market and a severe credit crunch.
The main
focus of all parties involved in a workout situation is:
survival first, a mutually acceptable agreement second.
Understanding the workout process begins by looking
at
how the
bank views
estate owned (OREO).
their portfolio
of other
real
When a solution for nonpayment can
not be "worked out", the
bank forecloses and unless the
property can be sold at auction, the property becomes an
asset of
the bank,
thus, becoming
part of
the bank's
OREO portfolio:
Other real estate owned is frequently an
unsound bank asset, even when carried at or
below the appraised value. The bank's purchase
usually
foreclosure
through
property
of
indicates lack of demand. As time lapses, the
more firm and the
lack of demand becomes
soundness of real estate for which there is no
demand becomes more questionable. Banks usually
lose money in liquidating other real estate
owned despite the apparent adequacy of appraised
(Comptroller's Handbook, p. 3)
value.
46
In
financial institutions
recent years
have been
faced with a rising number of non-performing real estate
loans.
In increasing
their
lenders to
some
reach
obligations.
seek some
form
Out
sort of
relief hoping
compromise
of
of necessity,
by
borrowers
with their
work
numbers borrowers are approaching
on
debt
to
service
lenders are
forced to
assisting them
through
these difficult times.
The "workout
the borrower is debt restructuring.
amortization
period, accrual
in lieu of foreclosure and
Regardless of
other variations.
the
lenders aim
the loan
is always
forgiveness
of interest,
principal and interest, deed
many
This may be in the
rates, extension of
reduced interest
form of
granted to
concession" most commonly
the same,
the concession,
to improve
it's
position in a difficult lending situation.
The borrower
tries
come
to
obtain
agreement with
he
usually has
these
concessions
his lending officer, a
a
business
and
to
an
person with whom
and personal
relationship
with.
Reduced interest
rates, simply means to
contract rate
of interest.
interest rate
from 16%
costs
of
debt service
to 10
and
For example,
1/4% lowers
attempts
lower the
lowering the
the monthly
to increase
the
probability of the bank being repaid.
amortization period is where
Extension of the loan
the
which
years,
building .
is
the case
normally
a
on
commercial
lower the
40 years, it will
by spreading the repayment
monthly payment
15
period or the
By extending the amortization
maturity to 30 or
term to
7 to
where from
be any
maturity may
term to
of the loan
over a longer period of time.
Accrual of interest is when
not afford to pay
the property can
is that
an "accrual rate". the idea
A "pay rate" and
interest.
the case where
as in
longer period
of time to reach
than anticipated.
owner to
In this case
for a period of time the
requires a
stabilization/lease up
the bank will allow the
pay the difference at a
example the contract rate of
10 1/4%.
the project
of interest for a
pay a lower rate
time and will
the agreed
for a determinable amount
upon interest rate, hopefully
of time,
there are two rates of
period of
later date.
For
interest will be 16%, but,
owner of the property will pay
The difference of 5 3/4% will be deferred, and
usually added on
to the total amount owed or
it can be
paid in a lump sum payment.
Forgiveness
where
the
property
bank
to pay
of principal
does
and interest
not require
back a
the
certain amount
48
is a
owner
case
of
the
of money,
the
bank
the
for
circumstances
exceptional
requires
is very rarely done and
This
amount would be forgiven.
to
consider this as an option.
foreclosure
lieu of
in
Deed
the title of
willfully gives
bank as full consideration
he is liable.
for which
for
property
swap,
even
owner
when the
is
the property back
to the
of the outstanding mortgage,
Both parties considers
it an
bank
would
The
the debt.
resell the property to recoup
basically turn around and
the principal.
Being
with
involved
a
scenario
workout
is
Many
emotionally draining experience for all concerned.
real estate projects are a
for the
borrower to place
result of a lifetime of work
him in a position
building or acquiring a piece of property.
of
project
edge
the
on
towards
long
working so
of
an
only
a goal
is
default
an
of either
The prospect
to see
the
emotionally
stressful situation for any developer.
A workout
properties in
both the
northeast and southwest
seventeen year period explained
tries
to do
is assess
properties are the
outside
the
over a
that the first thing he
whether the
problems with
direct result of the
owner or the result of
completely
with troubled
specialist who has worked
the
actions by the
factors in the market which were
owners
control.
Next,
the
tries to determine if
workout specialist
will make a positive contribution
presence of the owner
the work that needs
will hinder
decided
owner will
be removed
property.
The
he
possible
opinion it is always better
project
success.
become a
of the
it
if
In
in place.
owner
is
his
to work with the property's
have a vested interest
owners since they
progress, the
feels
specialist
the
it is
If
day control
from day to
workout
will keep
to be done.
hinder the
owner will
that the
his presence
or if
the problems
resolution of
to the
the continued
In
in seeing the
new person
contrast, a
entering the project without knowing the details of what
will likely
has transpired
of the
slow the resolution
problem even further.
The consequences of failing to come to an agreement
with
often forces
the loan to be
in question?" once
the loan
reclassified as "repayment
this occurs the bank
the "workout
loan with
to repay
lending officer
your original
will place the
a resolution
department" where
will most always take place.
workout department
The
loan department.
loan
department
reality
will
really the
is
Individuals who enter
may
hope
now encounter
for a
a
the controlled
"workout",
bank
controlled
but,
officer who
in
will
probably not be very flexible and who will be determined
to obtain
specific guarantees so the
50
bank will receive
The controlled loan department
them.
the money owed to
in large commercial banks
more bank officers who
usually consists of twenty or
deal exclusively with people who
will not be
their loans and very likely
are not paying
able to pay them.
The workout
the
original
and
lending officer
Unless a
controlled loans.
place, the bank moves
loan leaving
with the
process begins
is
turned over
to
can take
quick resolution
quickly to protect it's interest,
they immediately issue a "demand" for payment and begins
against the
foreclosure procedures
the
is to be
banks plan
The next step will be
the Sailors
get a "judgement" under
to court to
The
in going
as efficient as possible
through the foreclosure process.
to go
borrower.
and Soldiers Act of 1941 which should take three to four
weeks.
weeks the bank will try
During those three to four
to negotiate
from
a position
of strength
position
proposal
where
unless
it
they
don't
radically
are negotiating
a favorable
knowing that
to four weeks away.
judgement is three
the
The banks
a settlement.
have
improves
The
to
bank is in
accept
it's
any
lending
position.
A controlled loan specialist at a major New England
bank indicates that banks
feels if they negotiate first
and then follow with
foreclosure proceedings, they face
of losing six months
the possibility
to liquidate the property in
and the possibly of having
a market that
worth of interest
could deteriorated further.
bank is
The
concerned about the processing time required to complete
a foreclosure if the negotiations fail.
After the judgement is rendered, the court will set
allow the borrower six weeks
a "return date" which will
to come forward with a reason
or to
seek relief under
Nevertheless,
the bank
why the loan was not paid
the Sailors and
can start
Soldiers Act.
for an
to advertise
auction as soon as the judgement has been given.
While Massachusetts is the
Sailors and Soldiers Act, the
that has not repealed the
Act
will
only
only state in the union
limited
provide
to
protection
the
thousands of businessmen and women who are unable to pay
their debt service.
The Act only provides protection to
sailors and soldiers who are currently on active duty in
a declared war.
Nonetheless, the
Act does provide some
time for the average borrower to find a solution.
The
controlled
loans
their time dealing with
officers
feel their
"projects that
lent to
department spends
problem loans.
job is
should never
to attempt
of
Controlled loan
to collect
been financed.
inexperienced, undercapitalized
most
on
Money was
individuals on
lending criteria
knowledge
the
With
imprudent,
backs on the
in authority turned their
and that people
standard
were rampant"
"sweetheart deals
feel that
departments
that
... it was
most
the herd
loans.
allowed risky
which
of
these
in
individuals
Many
projects".
ill conceived
loans
these
were
the worst
mentality of
kind".
Most real estate professional interviewed agreed in
retrospect
that even
discipline
within the
1986, they
still would
for
real
estate
if it
were possible
banking
industry
not have cooled
development.
A
to maintain
from 1982
to
the enthusiasm
specialist
from
a
controlled loan department of a major Boston bank echoed
these feelings:
... bankers should have never given out 100%
financing, and developers should have never
They
taken it, everyone knew it was wrong.
(lending officers) used examples of large profit
taking as an excuse to open the flood gates and
allowed years of experience to remain silent.
In addition, there
the mentality
are serious questions regarding
of developers during the
boom period.
A
senior workout specialist at a major bank in New England
describes the aggressive behavior of developers:
Many developers believe those late night cable
The ones
programs on real estate development.
that say you can buy all that property with no
money down, and if anyone says that you can't,
then we'll show you away to negotiate around
Workout specialists have little patience
them!.
for the naive, new, arrogant developers.
this attitude, developers who have
As a result of
are
from their projects
the excess cash flow
been draining
increase the
require they
the banks
balking when
equity in existing projects.
Times have changed, eighteen to twenty four months
ago a successful workout would likely have resulted from
the discussions held with a officer in controlled loans.
cannot pay
the borrower
because
the negotiated
themselves in a
Banks find
debt service.
the bank
coming back to
of those agreements
with many
real estate, and
the declining market in
However, with
having to liquidate
the properties in a
significantly worse
than it
lower
position of
market that is
was two years
ago.
Given
the failure rate of these renegotiated loans, banks have
come to see
giant set of
the "workout situations" as a
mistakes.
Changes which
laws
their
revised to
borrowers
seek
the
greatly assist
assets.
In
Prior
bankruptcy proceedings
of 1989,
available to
to
being
would take
same proceedings
recovering
ability in
the process in
assets more
Currently, the
banks
October
speed up
repayment.
the bankruptcy
have taken place in
the
laws
order to
where
make the
lenders trying
revised, the
six to
to
entire
nine months.
will take four
to six
months.
of the
The marriage
dissolving
1980's, is
in
the
banking and
The
relationship is hostile.
The
1990's.
the
during
industries
the banking
real estate and
real estate industries are very different than in recent
past.
Banking
offer
the
same
solutions that
to change to deal with
previously
they
made
and expectations need
Borrowers perceptions
available.
willing to
no longer
professionals are
the new realities of the current
business climate.
offered
assistance
benefit
borrowers would
While
borrowers are
lenders into
by
banks,
using threats as
greatly from
the
than
not
often
more
an attempt to
offering concessions.
coax the
Borrowers threaten
to go into bankruptcy or to file a lender liability suit
as a
obviously, these
means to forestall foreclosure.
threats
contribute
to the
greatly
current
hostility
between banks and borrowers.
As
long
as
negotiation process
unlikely
and
these
threats
are
a mutually satisfying
the odds
of
irreparable
part
of
the
agreement is
damage to
the
relationship between lender and borrower increases.
In the past, bankruptcy
as
the lever
to
was the primary tool used
force bankers
to yield
concessions.
of the troubles experienced in
This was especially true
using to persuade lenders
were interviewed
loan departments who
say that lender liability
is an issue
A Vice
on a daily basis.
have to deal with
that they
Many
to workout their loans.
officers in the controlled
of the
are
weapon borrowers
the latest
has become
liability
and lender
However, times have changed
the Southwest.
President in charge of the controlled loan department of
a major Boston bank explains:
"If one of the clients I'm dealing with does not
threaten me with lender liability, then the guy
next to me will be threatened".
legal basis
The
from
court
a
for lender
decision
which
liability originates
held
"verbal
that:
statements were implied commitments."
liability
lender
The
suit
from
surfaced
conversations which occurred when a borrower was signing
a loan approved by the lending
a long
negotiated with
agreement.
a few
borrower had no
During
loan
The
years to maturity.
bullet or
to as
are referred
case the
relationship.
business
term
officer with whom he had
These loans
balloon loans.
experience with this
the signing, the borrower
lending officer how the balloon
In this
type of
asked the
payment was going to be
short time?.
made when the
note came due in such a
response, the
lending officer assured the
to worry and that the
was
In
borrower not
situation will be worked out when
the time comes.
implied
statement implied
this
in
and
commitments"
verbal
the
case
new financing
to offer
a commitment
were
statements
"verbal
that
ruled
judge
The
when the note came due.
If you cannot pay your debt
suits, the trend is clear.
it will be increasingly
to the bank,
to
lender liability
the impact of the
Regardless of
maintain control
property.
of your
ownership
and
difficult for you
Banks are now under enormous pressure to deal with their
problems.
examiners
a
As
them to
who want
banks
the
result,
with
assets at
recognize their
value, which means
their current
faced
are
tomorrows liquidation
price.
The problem
troubled
of recognizing
forces
property,
realistically deal
A
property.
value of
the current
with the economic viability
pension
fund
advisor
to
involved
everyone
of the
the
discussed
realities of a depressed real estate market:
The property is only worth what the property can
produce in income, regardless of how much it
cost to build. This is not rocket science, and
any property can be sold or fully leased if you
lower the price far enough.
The
pension
workouts are
fund
more of a
advisor
further
political issue at
felt
that
banks.
The
question is when will a Sr. V.P. authorize his people to
advisor sympathized
The pension fund
the price?.
bite the bullet and lower
the banks
with the workout choices
have :
How are the decisions at the banks were
made? How much is quantitative and how much was
emotional?... At some point you have to come to
grips with a loss or settle for lower returns.
There
of the
market
a large
will play
role in the
One predictable result according
a major New
England bank is
reclassify
real
real estate.
future of
to a Vice President of
losses the
that the heavy
real estate will prompt banks
banks are experiencing in
to
environment
current workout
The
past.
failed
from the
effects
lasting
will be
estate
into a
much
higher
risk
This reclassification will result in the cost
category.
significantly in
for real estate increasing
of capital
the future.
The potential
high risk category is consistent
estate projects into a
with the feeling held by
that it
TCW's Vincent Martin, he feels
for that
is important
develop a control mechanism
of
the
resulting
equation.
reclassify real
action by banks to
An
from tighter
control mechanism needed.
the real
estate market
to restrain the supply side
increasing
bank controls
cost
of
may be
capital
just the
CHAPTER THREE - THE ACADEMIC VIEW
One described
Chapter
the history
of the
of some
factors influencing the real estate market over the last
variables included
The eight
decade.
and surveys of real
were accumulated through interviews
estate professionals.
To begin
they felt
asked what
real estate market
primary forces driving the
were the
for this
the research
professionals were
thesis, these
one
in chapter
of the 1980's?.
chapter
This
focuses
projects and discusses the
on specific
impact of these variables on
the micro real estate market.
Specifically their impact
on distressed real estate is examined at length.
by
James
which
to
survey
from
professionals,
an
Boykin provides
start
about
questioning
the
and
properties
excellent
these
specific causes
A 1985
point
real
estate
of
project
failure.
If
more
specific
reasons
individual properties can
for
the
default
of
be determined and understood,
this information will serve
as the foundation for sound
economic decision-making as
the properties re-enter the
market.
The following chapter continues toward the goal
of this thesis to develop a framework for thinking about
workouts in the future.
The article by Boykin entitled "Why Real Estate
Projects Fail"
provided the results of
survey of real estate
why real
a 1985 national
executives of the primary reasons
estate projects fail.
Boykin
identified nine
specific reasons why projects fail.
(1) Inaccurate
or
overly
optimistic
market
feasibility study.
(2) Poor planning.
(3) Financing problems.
(4) Location problems.
(5) Improper timing.
(6) Lack of professional experience.
(7) Construction problems.
(8) Weak project management.
(9) Inadequate cash flow projections.
In order to better understand the nine specific
reasons for
in his
real estate failures which
study, an
Boykin includes
individual discussion of
each reason
should prove useful.
(1) Inaccurate or
overly optimistic market feasibility
study.
60
The industry surveys proved to Boykin that the age old
problem of overestimating market
still
holds
attributed
true
today.
demand for real estate
The
factors ranging
to several
was
overestimation
from poor
data
bases to improper analysis:
The executives who faulted feasibility studies
all implied that the studies erred by forecasting
an overly optimistic absorption rate of space or of
market acceptance of the space. This failure was
sometimes identified as an inaccurate determination
of the magnitude of need for the proposed space.
Other studies were characterized as containing
inadequate analysis of market data or as poorly
interpreting the available data such as terrain,
executives
Some
demographics.
and
markets,
suggested that reasonable economic feasibility and
marketability reports occasionally were analyzed
improperly by the developer. (Boykin at p. 89)
(2) Poor planning.
A number of survey
of the
respondents concluded that one
key ingredients consistently missing
was in the
Often,
goals were
preliminary planning
of a
project.
set which could simply not be accomplished:
Inadequacy of planning prior to a project's
development or the acquisition of real estate
was the second most frequently mentioned cause
of failure, but it was a difficult cause to
pinpoint. Sometimes it was identified as lack
of project preplanning or improper design and
It was related to "unrealistic
conception.
goals" or to uncertainty about the final goal to
be achieved. (Boykin at p. 89)
(3) Financing problems.
one of the most
estate deal--
real
critical elements of any successful
proper capitalization
consistently cited as
interest
rates,
overleveraged
deals.
also
The effects of higher
undercaptalized
and
projects,
structuring
financial
was
failure of many
a reason for the
of the 1980's real estate
--
contributed
significantly to the growth of failed real estate:
Respondents specified two types of financing
problems that led to project failure: a rise in
interest rates after the project was conceived
Not
financing.
structure of
and improper
was always
surprising, the
second problem
associated with the first. However, even in the
absence of interest changes, projects failed
or
were
undercapitalized
because
the
overleveraged
structures
that resulted
in
unanticipated financial difficulties when there
in
economic
change
was
an
unfavorable
conditions. (Boykin at p. 89)
(4) Location Problems
Inexperience on the part of real estate developers new
to the
process led to
locations.
included
the consistent selection
of poor
Again, a wide range of problems existed which
poor selection
of
sites
and numerous
zoning
conflicts.
Location
problems
included sites
that
were
simply wrong for the given project, sites that
did not coincide with local planning objectives,
and sites that clashed with surrounding zoning
The failure to obtain
and building esthetics.
among
was included
appropriate zoning
the
89)
p.
at
(Boykin
problems.
location
(5) Improper Timing.
The lack of experience was also evident in the area of
judging the economic feasibility of real estate projects.
Poorly
evaluated projects
were extra
sensitive to
changes in market conditions:
Improper timing as a cause of project failure
seems to be almost entirely associated with
( of course, the
"inaccurate feasibility study".
same is also true, to a lesser degree, of
"financing problems" and "location problems".)
Projects fail because they encounter unfavorable
changes in the local or national economy, because
they ignore national or local trends, or because
(Boykin
they fail to specific market downturns.
at p. 89)
(6) Lack of professional experience.
(7) Construction problems.
(8) Weak project management.
If the three reasons for failure, lack of
professional experience, construction problems,
and weak project management, are considered to be
different facets of a major category, "failure of
the project developer to control the project,"
this cause becomes as important as the first
cause on the list, poor feasibility studies.
Examples of developer failure are as diverse as
the number of failures. Among the subcauses that
the
are
failure
developer
to
contribute
following:
the
*
*
*
*
*
*
*
*
*
Insufficient experience
Lack of "follow through" after the project
is completed
Inept administration
Inexperienced or incompetent project personnel
Understaffed project teams
Excessive personnel turnover on project teams
Inaccurate construction estimates
Ill-advised economies on construction materials
(for
Excessive or unanticipated cost overruns
(Boykin at p. 89)
many reasons).
the
understand
to
Failure
and
pipeline
the
unwillingness to recognize the impact of other properties
recognized
are
1980's
the
During
capital, many
unqualified
accustomed
businessmen,
overseeing
their own
business
their
for
were
to
to
do
watching
of
estate market who
so.
the
businesses assumed
transferrable
estate.
availability
general
of
to
Successful
details
the skills
real
and
of
estate
They entered the development business often
development.
times
the
people entered the real
clearly
were
with
of real
field
the
experience in
professional
lack
the
of
examples
two
as
a
single
project which
ended
with
tragic
results.
(9) Inadequate cash flow projections.
Inaccurate cash flow projections are a cause
of failure that can be subsumed in all of the
preceding sections. The problem may be caused by
of
understanding
of
the
project,
a lack
unrealistic assumptions, lack of knowledge about
the market or the suitability of the project for
that market or by underestimated expenses and
costs. (Boykin at p. 89)
The
of
lack
financing
of
apparent
with
estate projects
real
the
regarding
knowledge
specific
Cash flow projections
financial analysis.
became
very
to
poor
due
failures
of
number
also
the
were simply
wrong in a number of cases.
was conducted during a
Boykin's survey
England real
New
observers
differences
Boykin's
were
between
failure
Southwestern
During the New England boom,
real estate was crashing.
local
booming and
estate was
period when
of
fond
New
sample
England
represents
pointing
and
the
out
Texas.
the
Since
Southwestern
experience to a great degree, a local New England sample
of
interviewees
factors.
Their
was asked
responses to
to
respond
the list is
chapter four, The Industry View.
to the
Boykin
contained in
CHAPTER FOUR - THE INDUSTRY VIEW
This chapter explores variables that impacted specific
real
estate
projects
and
interviews
comparing
presented in
questions
by
the
them to
of
results
the
presenting
for
framework
The intent
chapter three.
in
these interviews was to encourage industry professionals
to go
interviewees included:
conducted,
of
members
a
board of
bank
lawyers and
real
directors,
and
estate
specialists, real
bankruptcy attorneys,
developers,
professors,
consultants,
interviews were
bank presidents
and controlled loan
brokers, workout
estate
Thirty
properties failed.
reasons why
the specific
generalities to explain
beyond the
accountants,
and
property
managers.
REASONS FOR DEFAULT
Boykin
presented nine
variables
that can
be used
to
explain why a particular property would go into default.
In general,
the interviewees agreed with
the variables
Boykin presented, although they tended to group the nine
variables
overly
into
three
optimistic
main categories:
market
feasibility
66
inaccurate
studies,
or
debt
structure
and
lack
The
experience.
of professional
industry professionals, as a group, placed the remaining
six variables
under the
regarded them
they
expanded upon
as
three main
categories because
inseparable.
The
the descriptions that Boykin
interviewees
offered and
proposed several variables that were not included in the
Boykin model.
THE INTERVIEWEES MODEL:
(1) Inaccurate or overly optimistic feasibility study:
*
*
*
*
*
Poor planning
poor market knowledge
location problems
improper timing
overbuilt markets
(2) Debt structure, capitalization: debt/equity
*
related to inexperience
(3) Lack of professional experience:
*
*
construction problems
weak project management
ADDITIONAL VARIABLES ADVANCED BY INTERVIEWEES:
(4) Slow down of regional economy:
*
overestimating demand
*
ignore
macroeconomic
factors
businesses need for real estate
(5) Relaxed lending criteria, Fraud
(6) Obsolescence:
* functional
* physical
which
impact
*
economic
OPTIMISTIC
OVERLY
OR
INACCURATE
FEASIBILITY
MARKET
STUDY.
as well as those he
planning, poor
overbuilt
and
described under poor
problems and
to the downturn
other and
To
markets.
variables were
interviewees, these
to each
category of
market knowledge, location
timing
improper
that
included
they
described under his
characteristics Boykin
the same name
reason
main
the
this category,
Within
fail.
projects
as
surveys
market
optimistic
overly
cited
interviewees
the
of
half
Over
the
intricately related
real estate
in the
market.
bank
A
specializing in
consultant
said
properties
distressed
go through
"developers would
in...
while
developers would
at
saw
the proper
cases
with
where
procedures of
market that they intended to
conducting a survey of the
build
he
dealing
the
same
use the same market
time...
two
other
survey to support
the feasibility of their project." In these cases he saw
all the variables at work.
An example of a
this was
specific project which illustrated
described by
development
firm which
a vice
president of
is adjusting
to the
an eminent
market by
counterbalancing their excess capacity with workouts for
cited an
She
banks.
to
under
and
planned
projects
similar
other
consider
failed
addition,
and in
demand
assess
correctly
did not
example where developers
construction in the area.
Three residential
in
a small
third
condominium projects
were built
The
second and
Massachusetts.
village in
developers
similar
started
attached
high-end
housing projects based on the enthusiastic response that
the first developer received from the village residents.
Developers two
enough of a demand for
there
was not
not confirm if
and three did
their projects.
out all
the
alone projects two
the first development, let
units in
As it happened,
to sell
sufficient demand
there was
and three.
The developer
responsible for
the workout
of the
first project pointed out that the units were priced too
high
to
attract
from
people
to shift
the
during
later, the banks refused to
the
prices
changed.
when
it
The
area.
inflexible when the market
original developers remained
started
local
the
construction phase,
and
allow the developer to drop
became apparent
the
market
had
The banks action was described as "holding the
developers feet to
the fire," all this
bank
foreclosing on
bank
spending
the property
hundreds
of
resulted in the
and resulted
thousands
of
in the
dollars
to
from the second and the
differentiate the first project
third.
interest
rate
offer low
it necessary to
bank also found
The
the
financing in
hope
of selling
the
units.
interviewees who stated that
She agreed with other
most often,
"
with age, and
doesn't improve
it is better to cut your
price, sell the
inability
the
realistic goals,
demand.
was characterized
would support
location that
select a
general
form
demand,
assess
correctly
acknowledge
product,
understand
to
specific
this project
In
lesson.
impact of the variables
example, the
the
a
and learn
units
by
troubled property
that a
reasoning is
loss." The
loss is your best
your first
trends
market
and
existing
the impact
of competition
on the
of these
variables were
critical factors
All
which affected the project.
A
university real
and developer
estate professor
offered his insight in regard to "poor planning." He saw
people utilizing
goals," and
"short term
long term
people unrealistically
explained that many
entered the real estate market,
long term
strategies for
which has always been a
business, with the intentions
of selling out
within a period of months instead of years.
"Improper
the failure
timing" described
of projects
by Boykin
attributes
to unfavorable changes
70
in the
economy, specific market downturns
regional or national
specific
to
projects
when
businesses,
regional
he
are
this
said,
economic slow
that, since
real estate
businesses,
a
slow
eventually hurts
A
down.
banking
the regional
generators,"
"demand
negatively
being
A
variable.
slow down of
on the
consultant commented
economy
attributed the failure of
Many interviewees
or trends.
affected
by
fundamental fact
in
real estate.
the
the
is
for other
provides facilities
down
or
regional
economy
to describe
He went on
what occurs when you combine the downturn in the economy
with the existing oversupply of real estate.
"The competition for tenants drives down the
rental rates and real estate values decline as a
result."
He
maintained
to
that
inventory
has
be
principal
reasons of
the large
considered
default,
supply
to
be
of
one
although it
excess
of
the
is more
a
result of the variables discussed in chapter one.
DEBT STRUCTURE.
Throughout the interviewing process, professionals
attributed the failure of many projects to improper debt
structures.
The
and over again.
phrase "too
much debt" was
Many times a project
used over
was started just
was available.
because the financing
to them.
projections developers presented
accepted the
In many cases, bankers
based their lending decisions on
with
relationships
personal
Lenders regularly
past
and
developers
the economics of the specific
successes, rather than on
project . During of 1982 to 1986 many projects were "tax
driven deals",
built or
many projects were
the reason
acquired was to exploit tax benefits for investors.
A vice
that developers
bullish and
times
the
very aggressive,
were "great salesman,
said many
The accountant
very optimistic.
for
ask
would
developers
firm said
a major accounting
president in
percent
100
financing, fully expecting the bank to only authorize 80
percent.
When
they would consider
would
use the
project.
just
to
it
"free money,"
and
in many cases
next development
initiate the
money to
the loan,
amount of
the full
they got
They place an enormous amount of their efforts
get
developers loan
financing
their
for
projects.
presentation was so polished
the developers received the
"The
that when
full amount they requested,
they convinced themselves the
project could support the
full amount of the loan".
The
bank
consultant
specializing
in
distressed
properties also felt that the "easy money" of the 1980's
was
primary cause
developers 100%
of
default.
He
said that
financing was unfortunate
72
"giving
because they
in a responsible manner".
just did not handle it
A real estate professional specializing in property
management
banks
simply too much
many cases there was
commented that in
He said he could not believe the "amount of money
debt.
that
assets for
manages troubled
and who
lent on
was
support 25
buildings
apartment
three
maintenance with
a 40 to
involved with
debt." He was
percent of the
only
they could
properties,
these
from
suffering
60 percent vacancy
deferred
rate that
had been refinanced well above the properties ability to
support the new levels of debt.
of a
The president
bank consulting firm
gave the
only different opinion regarding
debt, by cutting right
to the heart of the debt
I asked him if he felt
failure were "overbuilding
causes of
the main
issue.
and too
much debt"?, his response was: "If you feel debt was the
cause of failure,
pointed
out that
the
individual properties
whether
they
you just don't understand!".
then
have
overall real
are affected
all
debt or
estate market
to the
all
He
and
same degree
equity.
"Is
a
property which is owned by a large pension fund that has
zero debt affected any less than the property owned by a
first time
developer with 100% debt,
economy slows
estate?"
down and there
He continued,
creates competition
"...an
when the regional
is an oversupply
of real
oversupply of
property
for the same tenants,
73
which drives
down rental rates and as a
people to
real estate,
of the
the problems
only magnified
causing certain
out that
The bank consultant pointed
estate declines."
debt
result the value of the real
be taken
the market
out of
sooner.
have
funds
Pension
strength
financial
the
to
weather any downturn in the real estate market, but when
will respond
real estate
allocations out of
by pulling future fund
and place
funds
the pension
lower yields,
estate produces
real
of their
a higher concentration
funds in alternative investments.
of the changing tax benefits on a project.
the tax benefits
TRA of 86 took away
the
value"
estate; when
real
of
the impact
had another point about
The consultant
He said that
"that subsidized
tax
benefits
were
discontinued, the realization that the projects were not
economically viable had to be dealt with.
former
A
banker
and workout
specialist
who
is
currently working for a real estate syndicator in Texas,
about his
talked
his
works
new employer
for acquired
experiences regarding
acquired.
351 buildings
partnerships to take advantage
estate was
benefits
The
enjoying from
74
company he
and created
currently
limited
of the tax benefits real
When
the tax
discontinued with
TRA 86,
1981 to
were substantially
the properties
1986.
properties could support it's underlying
not one of the
debt.
The syndicator spends his time taking each property
through chapter 11 bankruptcy proceedings to restructure
the debt.
LACK OF PROFESSIONAL EXPERIENCE
Almost two-thirds of the interviewees cited lack of
contributed to many of the
group they felt inexperience
problems
to
related
or
inaccurate
a
As a
of specific projects.
in the failure
major role
which played
a variable
experience as
professional
the
category
involving
feasibility
studies,
first
overly optimistic
poor planning, poor market knowledge improper timing and
location problems.
To a lesser degree this variable was
also related to problems with the financing structure of
projects
that
failed.
problems rooted
from
those
There
were,
however,
within inexperience that
already
described
categories, including one that
in
the
other
were separate
first
two
Boykin described as weak
project management.
Interviewees
pointed
to
the personality
of
the
classic real estate developer as a reason causing him to
have
unrealistic
expectations.
75
Another
workout
that young
inexperienced business
people "feel immortal" when they
receive a large sum of
specialist commented
They "kid themselves into thinking they have the
money.
golden touch and ignore the voice of experience."
Some of the examples of these variables advanced by
the
projections
life
the
of
found in
were
errors
Other common
investment.
over
escalate
to
continued
that
were
included instances
interviewees
the
many
proformas, they included: requiring a 5% increase in net
operating income (NOI) per year, no planned vacancy, and
no reserves to pay for future tenant turnover expenses.
A
developers this way: "These
know what
new developers just did not
they were doing.......
contractor... got
inexperienced
described
specialist
workout
They
got land... got
financing... got building...
and got
clobbered!".
A
who
had
he saw cases where
commented that
in
broker
mortgage
development
or
in
operating
experiences
similar
people inexperienced
property
obtained
financing, got half way through the project and realized
they were out of money.
Several
accounting
senior
firm
workout
pointed
officials
out that
existed in large development
firms.
this
at
a
problem
major
also
They said managers
phase or
the development
properly manage
necessary to
in-house controls
had the
firms rarely
in development
the project management of existing properties.
accountants
These
noted that
feedback on the
to provide managers with
were critical
controls
financial
financial status of the projects and they had seen cases
where controls were extremely inadequate and by the time
recognized it
problems were
adjustments.
appropriate
late to
make the
of sufficient
staff as
was too
Lack
well as overburdened staff also led to crisis situations
within
that "lenders should look
bankers was
to
accomplish
the
realities." He
did
not
have
companies
of
realities
failures he
They
project.
development
the
the market
said
up"
catch
saw were a result
to the substance
thought
staff
for
suggestion
Their
companies.
estate
real
to
that
many
supervise
"the
Eventually
and many
a
of
the
of in-house deficiencies
instead of real estate specific problems.
RELAXED LENDING CRITERIA AND FRAUD
An interviewee who worked in a controlled loan
department brought up this variable which Boykin did not
include in
his article.
large bank said that
was the
reason many
The officer
who worked
in a
relaxed lending criteria and fraud
troubled loans were
approved.
He
under the
been "money
there had
had seen
cases where
table to
the lending officer, misrepresentation
loan
committee
He
committee."
had
to
non-presentation
and
also
loans
seen
to the
the
on
loan
troubled
a member of the board
properties that were made because
of directors had an interest in the project.
He cited
incentives
cases where
to lend.
lending officers' pay
the
quality of
involved
bank
For
example,
in some
was tied to the
loan dollars
lending
given improper
lenders were
quantity and not
placed.
goals
unrealistically high and had
instances
Another
which
had
example
been
set
forced lending officers to
stretch lending guidelines to achieve them.
Although fraud
probably played
failures, it is unlikely it
the
other
interviewees
although they
a part
in project
was a major cause.
made
any
mention
did describe cases of
of
None of
fraud,
incompetence which
bordered on fraudulent behavior by lending officers.
A Boston Globe article on
Loan
debacle
interviewees by
supported
the
fraud in the Savings and
opinion of
down-playing the
many
role of fraud
of
the
in the
thrifts:
"Despite, or
perhaps because
of, the
regulators efforts, saving and loan loses are
now so large that for fraud to account for even
one third of them, or $50 billion, would require
a level of criminal wrong doing so substantial
many authorities think it unlikely.
For example, it would mean that fraud in
this one industry was more than twice the $23.5
billion of fraud of all types that the federal
government investigated in the 1980's, and 25
times the amount that it prosecuted, according
to justice department statistics.
"If there was that much fraud, why are only
hearing about it today?" asked James R. Barth,
an Auburn University economist formerly with the
office of thrift supervision, which regulates
"Does anyone
savings and loan institutions.
loot these
could
people
really believe that
institutions of that much and the government not
know a thing until it was all over?"
huge salaries,
over the
Public anger
exorbitant perks and cozy deals at individual
institutions have been raging for more than a
year, but concern that fraud was endemic in the
industry, and a principal cause of many of the
losses taxpayers must now foot, took off this
spring when federal regulators reported that
they had discovered evidence of wrong doing at
60 percent of failed institutions....
Of the 21,174 cases of suspected savings
and loan crime referred to the department so
far, 83 percent involve less than $25,000,
Attorney General Dick Thornburgh told a senate
committee last week.
"The mere fact that you can find fraud at
these institutions is not surprising; companies
in their death throes lose control of their
employees," said Edward J. Kane, an Ohio State
University economist who has written extensively
on the crisis.
Along the way, all
attracted some crooks.
agree
the
policies
"What the government did was the equivalent
said
of giving away the keys to the bank,"
all
money's
the
when
blame
you
do
Litan. So who
gone, the people who took it, or the people who
gave away the keys?"
The
avoidable
controlled
mistakes
loan. officer
made
by
said
he
inexperienced
had
seen
lending
In one example a lending officer had accepted
officers.
land-locked, unbuildable
In another situation
It is
emerged as
a main
that
clear
can be
professionals
loan documentation
on
seen in
of
part
the
has
loan officers.
focus for controlled
inexperience
of
Evidence
sold to satisfy
jointly and could not be
debt.
used as
same lot was
and the
collateral on four other projects.
the
the lot was
only to find out that
seeing the property,
land was held
without ever
on an appraisal
collateral based
land as
several of
other
the examples
given above.
A manager at a
it
for professional
difficult
was
large accounting firm commented that
outside
the
real
estate industry to understand why developers and bankers
apparently did not perform adequate risk analysis.
OBSOLESCENCE
Two of the interviewees identified one last variable
that contributes
That variable
down
into
economic.
poor
to the
failure of
is obsolescence.
three
types:
specific projects.
Obsolescence
functional,
a
project, whether
physical
and
be the result of
Functional obsolescence can
design in
is broken
it be
residential
apartment complex or a commercial distribution facility.
If the original
use of the project can
80
not be realized
because of poor design,
the project would be considered
functionally obsolete.
Physical obsolescence can be the
result of age and can
or
apartments
including
manufacturing
facilities.
attributed
syndicator
apartment
affect many types of real estate,
the
complexes with
The
former
which he
bankruptcy to the combined effect
tax code in
of the
banker turned
of
failure
frame
wood
multi-story
many
was taking
of
the
through
of the changes in the
1986 and the obsolescence
(design and age)
buildings.
Economic obsolescence is a loss in value due to
factors external
the
to the property and
owners control.
obsolescence
is: poor
access problems.
Some
of the
location,
considered out of
causes of
economic
noxious uses
The economic obsolescence
nearby,
accrues to
the improvements on the property only.
Obsolescence
is either
curable
or incurable,
the
following three matrixes are used to illustrate the most
likely form
you will
observe under
each category.[16]
FUNCTIONAL OBSOLESCENCE
CURABLE
INCURABLE
DUE TO:
DESIGN
TECHNOLOGICAL
CHANGE
Many
variables
that
functionally obsolete
would
make
new
projects
curable, however,
are considered
most professionals interviewed considered poor design to
be incurable.
An example of obsolescence as a result of
technological
change would
multi-storied,
wooden,
and concrete,
case of
manufacturing
were replaced by large single
steel
be the
inner city
facilities
that
story plants built out of
which required
advantage of assembly line production.
the space
to take
PHYSICAL DETERIORATION
INCURABLE
CURABLE
DUE TO:
DEFERRED
MAINTENANCE
AGE
DAMAGE
Physical obsolescence
and
can
be the
result
occurs in
of
one
existing buildings
or a
combination
deferred maintenance, age or damage to the structure.
of
ECONOMIC OBSOLESCENCE
INCURABLE
CURABLE
DUE TO:
POOR LOCATION
OR A CHANGE IN
NEARBY USE
Ill-conceived
projects are
obsolete and are considered
incurable.
considered economically
by most professionals to be
Questions
exist
who
as to
is
current oversupply of real estate?
to blame
for
the
Was the overshooting
of the supply due to the overly lax credit standards and
intensely competitive expansion by
boom years
Was the oversupply
of real estate?
overly optimistic developers?
somewhere in the middle.
explains how
the banks during the
due to
The answer probably lies
Karl Case of Wellesley College
the inherent
competition within
the real
estate industry promotes overdevelopment:
one the reality is that we do not have
central planning in this economy; private risk
taking entrepreneurs who build projects in Hull
don't coordinate their activities with those who
build in old Orchard Beach or in Revere. From
the standpoint of banks, what could be safer in
the environment of 1983-87 than an 80%, fully
collateralized loan? In fact, it was a natural
downturn, and now the results must be dealt
with.
85
CHAPTER 5- SUMMARY AND CONCLUSIONS
Given this
unprecedented time
in the
history of
the real estate and banking industries, it is unecessary
to
spend the
depressed
time to
assess blame
for the
Assessing
market.
currently
blame
is
both
counterproductive and likely to offer very little value.
While this paper is an initial step in understanding why
troubled properties
them, the
affect
is
research
exist and
in
workout process
illustrates that
paper also
needed
how the
developing
a
further
solution
to
successfully dealing with large portfolios of distressed
properties.
These interview
of Boykin's
results are
results, but
respondents view
generally supportive
they differ
in the
the relationship between
In addition, the two
way that
the factors.
new categories of Obsolescence and
Fraud were added.
A
dominant
theme
that
throughout the research for
lack of an
even the most
Developers simply did
basic analysis on many
during
the
1980's.
86
surfaced
this thesis was the obvious
adherence to the fundamentals
financial analysis.
developed
consistently
In
of market and
not conduct
of the properties
response
to
the
competitive market most banks were facing, many of their
financing decisions made during this period of time were
internally rather than on
based on guidelines generated
a complete
analysis
Given the
long term
estate development
impact of real
these decisions
that
based on a
economically sound
basis.
project-by-project
a
imperative
it is
decisions,
on
comprehensive evaluation
of all market and financial information available.
type
of
is
analysis
critical
acquiring
the
of
feasibility
be
in
This
determining
the
developing
new
and
properties.
Four primary
thesis.
conclusions can
First, the importance
unyielding
institutions.
Guidelines
for sound
for
experience and
rash of failures illustrates
the
complex
judgement as
the
The current
that the ability to obtain
a building is a very
business
that are
Second, that there is no
development industry has proven once again.
financing and build
financial
must be established
both practical and realistic.
substitute
of sound, consistent and
criteria
underwriting
from this
be drawn
of
real
small part of
estate.
Third,
the
importance of fundamental
market analysis is absolutely
critical.
it must
In
addition,
be
understood
that
supply and demand are separate and distinct and very few
assumptions
can be
This thesis
includes several examples
developers
made
who mistakenly
without sufficient
believed
87
analysis.
of inexperienced
that the
constant
products entering
of new
supply
The real estate market will simply not absorb
does not.
Banks are not investment
loan money.
is an
independent of
and make
risk
of lending
with
associated
to invest
officers.
properly
In
100% of
willing to accept
must be
There
to complete
informed decisions
the influence
addition, borrowers
advisors.
part of investors
obligation on the
proper analysis
the
institutions which
are financial
that banks
recognize
must
investors
Finally,
produced.
product
every
that it
market proves
The current
additional demand.
reflected
the market
the
repaying
liability.
If
anything,
the
current
real
market
estate
reflects a hard learned lesson on the part of developers
that
being
homework
is
overly
a
aggressive
dangerous
doing
combination.
responsibility of the developers
the same mistakes which have
in the
without
precarious position it
It
proper
is
the
of the future to avoid
put the real estate market
is in today.
only then
will equilibrium return to the real estate market.
BIBLIOGRAPHY
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90
INTERVIEWS
1. Bacow, Lawrence. MIT Center for Real Estate
Development, Cambridge, Ma. Interview by author.
June 1990.
2. Baker, Harry. President at Baker Property
Management, Warwick, RI. Interview by author.
July 1990.
15
12
3. Bender, Robert. Vice President at Bank of New
England, Lowell, Ma. Interview by author. 17 June
1990.
4. Black, Tom.
Boston, Ma.
Vice President at Bank of New England,
Interview by author. 12 June 1990.
5. Cuggini, Marylynn. Vice President at Bank of Boston,
Boston, Ma. Interview by author. 22 June 1990.
6. Di Cara, Lawrence. Partner at Peabody and Brown,
Boston, Ma. Interview by author. 26 June 1990.
7. Dennison, Eric. Vice President at Kenneth Leventhal,
Boston, Ma. Interview by author. 10 June 1990.
8. Eagan, James. President at Canton Institution for
Savings, Canton, Ma. Interview by author. 10 June
1990.
9. Freiden, Bernard. MIT Department of Urban Studies
and Planning, Cambridge, Ma. Interview by author.
20 May 1990.
10. Galowitz, Stephen. President at Harvard Real Estate
and Urban Development Forum, Cambridge, Ma.
Interview by author. 9 July 1990.
11. Gilfoyle, Kathleen. Vice President at Bank of New
England, Boston, Ma. Interview by author. 3 August
1990.
12. Guscott, Kenneth. President at Long Bay Development,
Boston, Ma. Interview by author. 7 July 1990.
13. Hatfield, Stephen. Arthur Anderson & Co., Boston,
Ma. Interview by author. 1 August 1990.
14. Jaynes, Michael. Real Estate Syndicator, Houston,
Tx. Interview by author. 1 July 1990.
91
15. Kurzina, Peter. Vice President at Argus Management,
Boston, Ma. Interview by author. 19 June 1990.
16. Louargand, Marc. MIT Center for Real Estate
Development, Cambridge, Ma. Interview by author.
July 1990.
25
17. McAvey, Maureen. Director at Coopers & Lybrand,
Boston, Ma. Interview by author. 30 July 1990.
18. McGlame, Sean.
Stoughton, Ma.
President at James Construction,
Interview by author. 14 June 1990.
19. Megathalin, Donald. Boston District Council of the
Urban Land Institute, Economic Research Association,
Cambridge, Ma. Interview by author. 13 August 1990.
20. Merry, Jack. President at Standard Capital, Hingham,
Ma. Interview by author. 3 July 1990.
21. Nahigian, Robert. President at Auburndale Realty,
Auburndale, Ma. Interview by author. 24 June 1990.
22. Nixon, Lawrence. President at BEI, Boston, Ma.
Interview by author. 19 June 1990.
23. Reader, John. Vice President Asset Management at
Shawmut Bank, Boston, Ma. Interview by author. 17
June 1990.
24. Smith, David. President at Recapitalization
Advisors, Boston, Ma. Interview by author. 12 July
1990.
25. Spelios, Susan. Asst. Vice President at Bank of New
England, Pertinax Properties, Peabody, Ma. Interview
by author. 16 June 1990.
26. Sperantas, Dean, President at Phoenix Realty
Advisors, Key Biscayne, Fl. Interview by author, 27
June 1990.
27. Stucky, Nancy. Vice President at The Green Co.,
Newton, Ma. Interview by author. 14 June 1990.
28. Thomas, Stephen. Managing Director at Copley Real
Estate Advisors, Boston, Ma. Interview by author.
August 1990.
29. Valles, Alain. Vice President at Boston Advisory
Group, Inc, Boston, Ma. Interview by author. 17
July 1990.
92
1
30. Wagley, James. Vice President at Kenneth Leventhal,
Dallas, Tx. Interview by author. 14 July 1990.
31. Ward, Jared. Vice President at Bank of Boston,
Boston, Ma. Interview by author. 12 June 1990.
32. Wheaton, William. MIT Department of Economics,
Cambridge, Ma. Interview by author. 15 May 1990.
33. Wheeler, Michael. MIT Center for Real Estate
Development, Cambridge, Ma. Interview by author.
May 1990.
25