Friday, October 22, 2021

Crazy Deal!

Image Attribution: www.canstockphoto.com 

When you’ve plied your trade as long as I, you see some nutty stuff. Today, I thought it would be fun to share one of those transactions with you.
 
First, a bit of background.
 
Once there were lending institutions known as Savings and Loans. These thrifts were an awesome source of home loans prior to 1990. However, in the early eighties interest rates spiked to double digits and trouble ensued because they were ill-prepared to handle the surge. A number became insolvent. As a solution, deregulation allowed the S & Ls to invest in riskier real estate assets to bolster returns. Good in theory, bad in practice. Groups such as Far West Savings, American Savings and Loan, and Cal-Fed became capital sources for commercial real estate investors and developers. Sure. Many amazing projects resulted but there were also a number of train wrecks. We had the task of marketing one such train wreck.
 
A group from Tennessee acquired a portfolio of non-performing assets in California from American Savings & Loan. Most were foreclosed houses but one was a multi tenant industrial complex. Understand. Most bulk buys included dozens of buildings across numerous cities. It’s akin to the line from Forrest Gump - “like a box of chocolates - you never know what you’re gonna get”. Limited due diligence occurred prior to close. How could it? Sellers (the S & L) needed cash, had a ton of loans on their books, and transaction speed was paramount. So folks who bought - discounted price to offset their risk, held their noses and jumped into the abyss.
 
Concurrently in mid 1986, we noticed a problem. New in my career, I did a lot of door to door canvassing - looking for someone who needed to move. On one particular project in North Orange County, we witnessed rampant vacancy, more weeds than fescue, and a couple of abandoned cars in front of one of the units. Danger, Will Rogers! Our instinct was correct - there was a deal. We just had to figure out who owned the project. Today, we have access to title holder information on our mobile devices. In 1986, you either called First American, Ticor, or Chicago or searched a bank of microfiche - similar to reviewing building plans in cities. Yeah. Cities haven’t progressed much past the mid eighties - but I digress. As mentioned, we connected with the buyer from Tennessee. Good news! To manage the sale of all the houses and such - a gentleman was deployed to SoCal. Great guy and we hit it off.
 
With a freshly inked agency agreement - we set about marketing the buildings for sale. Selling a listing in the eighties consisted of creating a brochure (no desk top publishing), planting a sign out front (not allowed lest we spook the few occupants who remained), contacting the neighbors (easy enough), figuring out which investors had bought a similar offering (reviewing hard copy comp sheets), and talking to our fellow brokers. Mind you, no multiple listing service existed - so available properties were paginated and MAILED to brokerage houses - snail mail - the horror!
 
A buyer was quickly identified through a CB broker, purchase terms negotiated and boom. Escrow underway. As an aside this was October of 1986. Massive changes in tax laws occurred on January 1, 1987. To wit, many commercial real estate write-offs were to vanish at the end of 1986 so our buyer made it infinitely clear that a close date could not eclipse December 31. Easy enough. We had three months. Hmmm. Things progressed as normal until…
 
The buyer called me in mid-December. We were scheduled to close in a week and I figured he wanted to discuss the details. Wrong! I’ll never forget his words. “Allen, I’m at the project. There’s a giant sink hole in front of the rear structure and it’s getting larger buy the minute!” At first, I thought he was joking. No such luck. Twenty minutes later, I’m witnessing a scene from the movie Earthquake. You could have buried a Volkswagen in the hole!
 
We spent two days discovering a water leak was the culprit and the city was responsible to fix the deluge. Cool. Oops. It was December 22. There’s this thing called the holiday season. Attempting to get anyone to respond quickly during this time of year is tantamount to moving an elephant with a pallet jack. Slow sledding. With the remainder of 1986 trickling away and our close dependent upon city workers - we resorted to unconventional tactics. A few In-N-Out lunches for the crew, a case of Miller Light - shhh it was after hours, and lots of praying yielded a successful close on December 30, 1986.
 
Our client was so thrilled with our performance - he attended my 30th birthday 11 days later. Yeah. That’s a story for another time.
 
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com.

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