Sale of The Century

FOR SALE: 6,000-acre spread in the rolling hills north of Dallas. Includes two country clubs, a lake and beach, several small parks. Semioccupied. All this for less than $100 million.

FOR SALE: Continental Regency Hotel in Peoria, Ill. A city landmark with 333 rooms. Needs work. Anxious owner asks just $4 million.

FOR SALE: First-class polo complex in Selma, Texas. Features corrals, paddocks, barns, apartments, tennis courts. Will consider all offers over $7.5 million.

The reluctant owner of these properties, and tens of thousands more, is the U.S. Government. A federal stockpile of distressed real estate holdings is suddenly growing to an unprecedented and ominous size as Government regulators seize insolvent savings and loan associations and commercial banks. President Bush’s plan to bail out the S & L industry, which won Senate approval last week by a vote of 91 to 8 and now faces House consideration, calls for the Federal Deposit Insurance Corporation to take over some 400 hopelessly ill thrifts and sell off their real estate in the next few years. During this huge liquidation the Government will hawk everything from office towers to condominiums, sewage plants to gravel pits, shopping malls to single-family homes.

The disposal of such a huge property glut presents Government bureaucrats with a very delicate situation. If they try to unload the property too fast, they could sharply depress the real estate market and the value of the assets they still hold. The falling prices could put even more S & Ls in jeopardy by undermining their outstanding real estate loans. Already the impending sales have frightened real estate investors and kept a damper on prices, especially in the hard-hit Southwest. The federal holdings, says Dallas S & L adviser Richard Kneipper, are like a “tidal wave about to crush us all and drown everybody.”

Yet the U.S. cannot afford to go too slow in selling off the real estate, because the Government needs the proceeds to pay off S & L depositors and carry out the bailout, which is expected to cost more than $150 billion in the next ten years. Moreover, the Government has never proved to be an entrepreneurial manager of property, so the real estate it owns is likely to keep diminishing in value. Says thrift consultant William Ferguson: “Bad assets don’t usually get better, they get worse. Buildings and sites deteriorate.”

A prime reason for the nervousness is that no one is sure just how much property the Government will be taking over. Stuart McFarland, chairman of Virginia-based Skyline Financial Services, which manages 8,000 repossessed properties in 21 states for the Government, estimates that the real estate might total $200 billion or more. The load of S & L properties is compounded by a growing stock of real estate that other Government agencies have taken over in recent years because of loan defaults. The Farmers Home Administration will have to dispose of 1.3 million acres of farmland, a territory roughly the size of Delaware. The Federal Housing Administration has about 70,000 homes on the market.

Most of the property being acquired in the S & L bailout is concentrated in the Southwest, where the bulk of insolvent thrifts overextended themselves during the oil-boom days of the late 1970s and came to grief in the oil crash of the mid-1980s. The thrifts began repossessing property when borrowers could no longer meet payments, often because homeowners lost their jobs or business owners suffered from plunging sales as the energy-based economy declined. In many cases the loans should never have been made. Observes James Noteware, national director of real estate for the accounting firm of Laventhol and Horwath: “A lot of what the thrift institutions are passing on to the Government is really junk.”

The properties are hitting a real estate market that is generally far weaker than during the go-go days of the 1970s and early 1980s. The overbuilding of offices and condos has produced a huge surplus of such structures all across the Sunbelt, and some excess properties even in Northeast states like Massachusetts and Connecticut. “What you’re dealing with is the aftermath of , a massive speculative excess. It tends to drive down the value of all real estate,” says Austin-based banking analyst Alex Sheshunoff. To make matters worse, mortgage rates have risen a full percentage point in the past year, to an average 11.5%, which has stalled home sales and depressed residential- property values in many areas.

The Government’s objective in liquidating such real estate will be to get nearly full market value, not only to reduce the eventual cost of the S & L bailout to taxpayers but also to avoid undercutting the going rates in the marketplace. Yet the Federal Savings and Loan Insurance Corporation, which currently holds most of the repossessed property and will be combined with the FDIC under the Bush plan, has seldom shown a talent for getting top dollar. In Guerneville, Calif., a small town north of San Francisco, the FSLIC took over a condominium project with more than 20 units two years ago. The original owners had been trying to sell the units a few years earlier for an average of $140,000 each, though market conditions suggested that a price of $75,000 was more appropriate. When the FSLIC took over, it sold all the condos for about $27,000 apiece.

Real estate experts have accused the FSLIC of being inept at dispensing with property in a speedy but careful manner. The problem, they charge, is that the agency is riddled with bureaucrats who cannot make sharp, quick business judgments. Says Sam Pierce, a Houston-based adviser to the thrifts: “The FSLIC doesn’t know a good deal from a bad one. They don’t have the necessary brainpower or manpower.”

Realizing the momentous task ahead, FSLIC officials have made an attempt to become more savvy in their dealmaking. The agency’s central-region division has taken over three blue-carpeted floors of a sleek office building in north Dallas, and is opening a ground-floor showroom to hawk its myriad properties. The 15-member sales staff is augmented by 100 private contractors and real estate agents who work for fees and commissions.

If Congress approves the Bush S & L plan, as it probably will, all thrift real estate will be consolidated into the newly formed Resolution Trust Corporation, which will be eliminated after five years. Some experts fear that the RTC, which will be supervised by the FDIC, will speed up the selling process too much. The FDIC has a history of moving quickly to dispose of banks’ repossessed assets, generally holding on to Texas and Oklahoma property for less than a year before selling it.

Government regulators insist they will be cautious. Says Steven Seelig, acting director of liquidations for the FDIC: “We will make sure the property hits the market slowly.” Richard Breeden, the presidential assistant who helped put together the bailout scheme, maintains that “it’s not in the Government’s interest just to dump property” and suggests that the five-year time frame for liquidating the real estate might be extended. In fact, many investors think the Government may need a decade or more to dispose of the surplus.

The worst scenario would be a steep rise in interest rates and an economic downturn, which would sink property values still more and saddle the Government with the world’s largest collection of white elephants. Even if the economy remains stable, banking regulators face the biggest cleanup job of the decade, or maybe the century. The cost of the Bush bailout plan very much depends on what kinds of deals the regulators can strike. If they fall down on the job, it will be the U.S. taxpayer who picks up the pieces.