At Silverstein's NYU workshop: RTC 101 - bidding on Resolution Trust Corporation portfolios discussed at workshop conducted by Larry Silverstein at New York University

Real Estate Weekly, Nov 4, 1992 by Lois Weiss

A detailed lesson in the due diligence work needed for bidding on a Resolution Trust Corporation portfolio was delivered to Larry Silverstein's class at New York University by a successful bidder.

The students, a mixture of real estate professionals, listened intently as two vice presidents of the Lennar Corporation of Florida enthusiastically gave an overview of the work involved in not only putting together a proposal for the RTC but explained what happened after they won.

Stuart A. Miller, an attorney and Jeffrey P. Krasnoff a CPA, spoke of first having to convince everyone - including their bid partner Morgan Stanley - that there was room to make money in bidding for the Amerifirst Portfolio of 1,109 Florida properties. Under their agreement, Lennar will contribute up to $25 million of its own money while Morgan Stanley will contribute up to $75 million. The 50/50 partnership has a kicker at a certain level, Miller explained, adding that the ability to come in with cash was the assurance Morgan Stanley needed and wanted in a local partner.

Later, within a month of winning the bid, Miller and Krasnoff found themselves coping with the natural disaster of Hurricane Andrew, which they said actually helped by providing insurance money for upgrading some of the properties.

Their bidding effort included due diligence work with a team of 10 people working 18 hour days. Miller said meetings were held in the beginning and end of each day for updates and brain storming sessions. He explained the Lennar work style as, "Work, work and more work; review do review."

The Amerifirst properties were tri-aged and tiered based on their local knowledge. Miller said the top 250 to 260 assets represented 85 percent of the book value of the portfolio and these received more scrutiny. The properties were also layered into performing and non performing assets, those owned by the lender (REO) and the property type.

Part of the RTC bidding process entailed not talking to tenants or borrowers and making only visual inspection of the property, a handicap they overcame by figuring out the value of the underlying collateral, and backing into the numbers. With special permission, they were able to speak with some of the property managers.

While RTC files and documents were lacking in information, the group plugged themselves into the process, and found the former asset managers for the lender - who had in some cases worked with an asset for over a decade - the most helpful.

They also worked with Kidder Peabody, which acted as the RTC sales agents and Kenneth Leventhal, which appraised the portfolio for the RTC.

They had to not only evaluate the properties, but be able to communicate to their partners and therefore, developed a very simplified report. Each property had a two-page summary and those were simplified amazingly, to a one-page evaluation of the entire deal.

The team allowed for various capital structures as they did not know whether to put in a cash bid or go for RTC financing. They decided to keep it as simple as possible and in the end, their winning bid was based on RTC financing for the entire package. One bidder, they said, came in with 100 different bidding models as each of the eight pools could have gone individually.

The RTC financed 85 percent of the purchase price with a step-rate five-year mortgage rising from 7 percent to 11

The most complicated of the RTC documents, they said, was the preparation of the release process so that as each asset is resolved, a mechanism is in place to release it from RTC custody. Miller said they are not worried about the five-year horizon as they evaluated the properties in such a manner that cash flow is already being returned to the partnership.

The partnership with Morgan Stanley was set up as a separate entity called Lennar Florida Partners and was up and running on the day after the contract closed, Krasnoff said.

Now they are in the midst of working out deals with borrowers as typically, payments on loans stopped as soon as the RTC took over. There are practical financial considerations, they said, as the Florida foreclosure process can tie up an asset.

The Silverstein Workshop meets on Tuesdays at 6:15 p.m. in room 421 of 11 West 42nd Street. Four sessions are left in the course, which is designed to provide insight into investment, development and workout strategies in a down market. Sessions remaining include Christian Alpers and Anthony Mannarino discussing the workout of 1540 Broadway; the development of Riverside South by Donald J. Trump and David Childs; Philip Aarons on the proposed Lincoln Square; and David Lawrence and Richard Wilpon on 450 Lexington Avenue. Walk-in registration is $265 which includes all sessions.