News

Sweet Deal

By Laurel Brubaker Calkins 

It helps to have friends in high places -- especially when you need to borrow a lot of money. Charles Hurwitz, according to court papers filed by the Office of Thrift Supervision, was a best sort of friend to his cash-strapped buddy Stanley Rosenberg.

The OTSclaims Hurwitz helped ease the way for Rosenberg -- a wealthy San Antonio lawyer and Maxxam director -- to get not one but two extraordinarily sweet deals from United Savings on some raw land he was trying to develop back in 1985 and 1986. The property -- known as Park 410 -- was a 427-acre tract at the intersection of two major highways in San Antonio, not far from where Sea World stands today.

Initially, United Savings wanted to buy and develop the land itself and hired real estate specialist Rosenberg to help. But a rival group of bidders (which, oddly enough, later turned out to include Rosenberg as a 50 percent partner) bought the property, agreeing to pay $39 million for it.

While waiting for the sale to close, the Rosenberg-and-rivals group sketched elaborate plans for a mixed-use complex that would eventually push Park 410's total land and development cost to $69 million.

Rosenberg didn't have enough cash for his half of the deal. So the day before the sale closed in March 1985, he flipped half of his Park 410 stake to United Savings.

In a meeting of the thrift's real estate investment committee -- led by United Savings' president Jenard Gross -- United agreed to pick up the bill for Rosenberg's entire share of the Park 410 deal in exchange for half his ownership share. In other words, the thrift forked over nearly half of the money -- roughly $30 million -- to get a quarter share of the venture.

But it got better, at least for Rosenberg and company. About a year later, according to court papers, the Park 410 partners circled back to United for refinancing. In what must have been a dazzling display of chutzpah, Rosenberg and his partners talked the senior loan committee -- this time with Hurwitz sitting in -- into loaning them $80 million more to roll the dice on Park 410 for another seven years. For primary collateral on the new loan -- the biggest in the thrift's history -- the borrowers offered United the deed to Park 410, which was still nothing but a vacant lot.

Regulators say the partners justified their grand price tag with a wildly optimistic appraisal of the land's future built-out value, but neglected to mention that the valuation was based in large part on their own in-house projections conducted by an appraiser largely unfamiliar with the San Antonio market.

United's senior loan committee signed off on this second deal, in spite of the fact that San Antonio's overheated commercial real estate market was clearly tumbling into free fall."Six months before United Savings approved and closed the $80 million Park 410 loan, it was a matter of public knowledge that San Antonio had more than a two-year supply of office space," the OTS points out. "In December 1985, San Antonio's major newspaper carried the headline 'Real Estate Boom City Turns to Bust,' and reported 'overbuilding of offices, retail, apartments and E plenty of foreclosures.' "

According to documents federal investigators have uncovered, United's senior loan committee -- with Hurwitz in attendance, in spite of his not technically being a member of the committee -- flagrantly disregarded the thrift's review procedure in its eagerness to make the second loan. Court records show the panel approved and funded more than half the loan before even giving United's board the chance to vote on it. This in spite of the fact that it was a bigger loan than the committee had authority to approve.

United's directors eventually rubber-stamped the loan, with Hurwitz present at that directors' meeting, even though he had no formal position on the board.

In their defense, Hurwitz and the other defendants argue that the Park 410 loan soured because the Texas real estate market crashed, not because it was shaky from the beginning. "United Savings sought quality real estate loans and investments in a market made difficult by economic forces beyond its control," they say in their response to the OTS. "E It was the decline in the Texas economy and the failure of the real estate markets, not the terms of the loan, that led to the failure of the loan."

However, that argument ignores regulators' basic beef with the Park 410 adventure: "It is against the rules to make real estate investments that are not properly underwritten and not properly approved," says Rick Stearns, deputy chief counsel for enforcement for the OTS. "It is also a violation to make unsafe and unsound investments. And it should've been clear to anyone familiar with Texas real estate that making an $80 million loan on 400 acres of unimproved land in San Antonio in 1986 was terribly speculative and inherently unsafe and unsound."

Common sense also dictates that you don't reward someone who brings you a deal that loses you more than $84 million. Nevertheless, the OTS contends that United Savings paid Rosenberg more than $500,000 in "loan and management fees" for bringing Park 410 to the table. Such a deal -- especially when taxpayers have to pick up the tab. -- Laurel B. Calkins