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Dumping That Real Estate Investment From Hell


Finance: REAL ESTATE

DUMPING THAT REAL ESTATE INVESTMENT FROM HELL

Last year, Kenneth Fried inherited a lousy investment: his father's $500,000 stake in a real estate limited partnership. The annual payout was measly, and the value of the two Houston apartment buildings owned by the partnership had dropped sharply. With no public market for real estate partnerships, Fried could be stuck with the investment for many years unless he was willing to accept pennies on the dollar. "It ticks me off," says Fried.

Help may be on the way. A maverick Boston financier is offering a possible escape hatch to Fried and other investors in Winrock-Houston LP, a $30 million fund launched in 1988. Putting a new spin on the vulture investing game, developer Bruce A. Beal is attempting a hostile takeover of Winrock-Houston, which could let investors get a lot more of their cash out of the low-yielding investment. Beal is a well-known figure in Boston real estate circles, where his family is one of the largest property owners. He is on a crusade to liberate investors who rushed into partnerships at the real estate market's peak and who have seen their dividends dwindle or disappear. "Millions of investors need a way out of partnerships controlled by entrenched general partners whose only interest is keeping things going so they can collect their fees," says Beal.

BLIND TRUST. What has normally locked in limited partners is the fact that they have virtually no say in how their investment is managed. Even when their dividends are being cut, the general partner controlling the assets typically keeps getting fees--and can keep the partnership intact for as long as 40 years. Beal's strategy is simple: get rid of the general partner. He wants to convince 51% of Winrock-Houston's 250 limited partners to vote out the general partner, Boston-based Winthrop Financial Associates LP. If Beal wins, he will replace Winthrop as general partner and sell the assets within two and a half years. He'll then distribute the proceeds, minus his 4% fee, and move on to larger targets.

The Beal takeover attempt is one of the first of its kind in the real estate world. Industry experts say other real estate pros are mulling similar moves. "A lot of people are expecting 1980s-style hostile takeovers" of real estate limited partnerships, says Lawrence G. Preble, a real estate lawyer with O'Melveny & Myers in Los Angeles. "It needs to be done," says Beal family friend Robert A.G. Monks, who leads campaigns to shake up corporate boards. "It's an example of how passive investors can protect themselves."

Until recently, Winthrop seemed a likely candidate for Beal. It was one of the nation's largest real estate syndicators in the 1980s, selling some 280 limited partnerships. But it began losing money after the syndication market dried up in the early 1990s. However, Winthrop's prospects got brighter on July 18, when Apollo Real Estate Advisers, one of the savviest and most aggressive vulture real estate investors around, upped their investment in Winthrop to a majority stake.

TOO EXPENSIVE? Winthrop, under Apollo's control, is putting up a feisty defense. After a five-week proxy battle, Beal and Winthrop are now bickering over the vote count. Each claims victory, but with no rules or legal precedents for vote-counting procedures in proxy fights involving limited partnerships, the matter may well end up in court. "There's a lot for lawyers to argue over," says Philip Johnston, an Ohio real estate lawyer. Beal says he is resolved to fight on. But W. Edward Scheetz, a partner at Apollo, says Beal's strategy will fail regardless of who wins. "It won't catch on," he says. "It's too expensive," and the payoff is too low.

Beal agrees that his battle is costly. The legal and administrative costs he is absorbing are so high that Beal says he won't make a profit even if he wins and collects a 4% fee from a sale of the properties, which he values at about $25 million. "This strategy will only work if I can do more and bigger deals," he says. He's already fighting Winthrop over a second limited partnership. And he plans to launch proxy fights soon against bigger outfits, such as PaineWebber's Retail Properties Investors Inc., which owns $200 million worth of shopping centers in the South and has thousands of investors. Also on his list: partnerships sold by Merrill Lynch & Co. and California real estate magnate John W. English.

No matter what the outcome of the contest, Fried says the limited partners will come out ahead. In attempting to fight off Beal, Winthrop has promised to buy out investors for at least 67 cents on the dollar. Given the murkiness of the legal issues, though, it may be quite a long time before large numbers of limited partnership investors finally achieve liberation.

BEAL'S PLAN TO FREE LIMITED PARTNERS

TARGET real estate limited partnerships with poor returns and unhappy investors

LAUNCH proxy contest to allow limited partners to replace general partner with Beal

SELL partnership's properties for best available price and distribute proceeds to limited partners

COLLECT flat fee of 4% of sale price

DATA: BUSINESS WEEKBy Geoffrey Smith in Boston


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