Surviving a real estate crisis

Abstract

The corporate acquisition thrust into real estate development of the 1960s boomeranged badly during the early 1970s. Examples abound of large write-offs forced by the failure of real estate subsidiaries, and every senior executive has his favorite horror story. In the past eighteen months, eleven large companies have writ ten off or reserved losses totaling more than $500 million. Other firms have just quietly cut back or liquidated their operations. For many companies, the consequences have been acutely traumatic. Board meetings become angry battlegrounds where draconian resolutions are proposed. Financial institutions, which only yesterday were pressing additional funds on a company, mut ter darkly about getting guarantees on everything or perhaps even calling their existing loans. On Wall Street, the price of the company's stock plummets. Options are often driven underwa te r -un fa i r ly penalizing other executives who may have made superb contributions in unaffected areas of the company. Everywhere morale sags while the company gropes for a way out of the crisis. The process of self-extrication is inevitably painful, but it seldom needs to be as agonizing as many companies make it. Admittedly, calm in the midst of crisis is easier to preach than to practice. Yet a company's financial, strategic, and psychological losses can be substantially reduced if management takes a systematic and rational approach to the problem. One must realize that, regardless of the origin of the problem, it cannot be dealt with like a manufacturing loss for example, by closing a plant at a definable cost. Because of the many variables involved and the long-term nature of real estate problems, particularly in the case of a large-scale communi ty development, potential losses are unusually hard to quantify. An operation with $10 million in sales could often expose a parent to losses of five times that amount. The problem is frequently compounded by top management 's ignorance of the operations of its real estate subsidiary. At the first sign of trouble management concludes that the whole operation is a house of cards managed by a crew of incompetents. Such a reaction practically guarantees that the effects of the crisis will be more painful and more prolonged than they would otherwise be. 31