Tarragon Realty Investors, Inc.

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Tarragon Realty Investors, Inc.

1775 Broadway, 23rd Floor
New York, New York 10019
Telephone: (212) 949-5000
Fax: (212) 949-8001
Web site: http://www.tarragonrealty.com

Public Company
1973 as Consolidated Capital Realty Investors
Employees: 385
Sales: $110.34 million (2000)
Stock Exchanges: NASDAQ
Ticker Symbol: TARR
NAIC: 531311 Residential Property Managers; 531312 Nonresidential Property Managers

Tarragon Realty Investors, Inc. is a New York City-based company engaged in real estate investment, development, and management in specific target areas in the states of Florida, Connecticut, California, Texas, Georgia, and Colorado. Tarragon controls 20,000 apartment units and 2.5 million square feet of commercial real estate. It revoked its status as a real estate investment trust (REIT) in 2000, electing to operate as a publicly traded corporation. Tarragon and affiliated companies are primarily controlled by Chairman, President, and CEO William S. Friedman.

Origins Reaching Back to 1973

The history of Tarragon is very much tied to the story of Friedman and his former business partner, Gene E. Phillips. The men gained notoriety in the 1980s for their questionable business dealings, their association with junk bond king Michael Milken, and their involvement with such major figures in the Savings & Loan scandal as Charles Keating and Herman K. Beebe. The legal entity that would become Tarragon was originally established in Oakland, California, in 1973 as a real estate investment trust named Consolidated Capital Realty Investors, one of several REITs under an umbrella organization, Consolidated Capital Equities Corp. Headed by DonaldC. Wilson, who owned a 25 percent stake, it commenced operations in 1974. REITs were created by Congress in 1960 as a way for small investors to become involved in real estate in much the same way a mutual fund allowed them to pool resources in order to buy stock. REITs could be taken public and their shares traded like stocks. Unlike corporations, however, REITs were required by law to pay out at least 95 percent of their taxable income to shareholders each year, thus severely limiting the ability of REITs to raise funds internally. Moreover, they lacked adequate oversight and were open to abuse, thereby scaring off many investors. Consolidated Capital Realty invested in apartments, as well as a shopping mall and some office space. It was fairly successful for a number of years before faltering and becoming acquired by Phillips and Friedman in the late 1980s.

Friedman was a graduate of Brandeis University and Columbia University School of Law, and began practicing as a tax lawyer in 1971. Two years later he was hired to do some legal work for Phillips, who was involved in his first real estate venture, leading to their eventual partnership. Phillips came to real estate from an unusual angle. Born in South Carolina, he earned an undergraduate degree from Clemson University, then went on to Virginia Polytechnic Institute to study for a Ph.D. in chemical engineering. He never completed the program, opting instead to become involved in real estate in the late 1960s. His company, Phillips Development, became the largest developer in Gaffney, South Carolina, close to where he grew up. By late 1973, however, he was in debt by some $30 million and forced to declare bankruptcy. It was for the purpose of liquidating part of Phillips Development that Friedman was retained. According to a 1993 Barrons profile of the two men written by Benjamin J. Stein, Apparently, Friedman was the man who encouraged Phillips to stop actually building things and instead to sell buildings to limited partnerships (which was like encouraging Alfred Nobel to study chemistry).

Phillips then took a job in Greensboro, North Carolina, with McCoy Development, identifying distressed properties that could be sold to syndicated ventures. In 1977 he bought McCoy, changing its name to Syntek Investment Properties, and Friedman became a vice-president. The two men in 1980 gained control of a troubled Atlanta REIT, Southmark Properties, that boasted few assets but $125 million in tax benefits. The company had been originally created in 1970 as a Maryland REIT under the name Citizens and Southern Realty Investors, established by The Citizens and Southern National Bank, which managed it under an advisory contract until 1979, at which point the REIT relocated and changed its name to Southmark Properties. With Phillips serving as chairman and Friedman as secretary, it would again move its base of operations to Dallas and change its name to Southmark Corporation in 1982. Using Southmark the partners began acquiring other real estate trusts in similar difficult straits, employing Syntek as an investment vehicle, then selling undervalued real estate assets or bundling them together in limited partnerships.

Influential Meeting with Michael Milken in 1982

According to a 1989 Wall Street Journal article written by Michael Totty, Messrs. Phillips and Friedman might have remained small-time operators if it werent for Drexel and its junk-bond impresario, Michael Milken. Before 1982, when Mr. Phillips made his first pilgrimage to Mr. Milkens Beverly Hills office, Southmark had barely $450 million in assets; six years and $1.2 billion in junk bonds later, its assets had ballooned to more than $3.5 billionor $9 billion if its thrift and insurance units are included.

Aside from accumulating a large number of REITs, Phillips and Friedman borrowed more money than was required for expansion, investing in other Milken junk bonds to gain interests in oil and gas ventures, campgrounds, nursing home facilities, retirement centers, a direct-mail selling company, and Atlantic City and Puerto Rican casinos. According to Totty, Like other real-estate companies in the then-hot Texas market, Southmark rushed to acquire a thrift after the industry was deregulated. San Jacinto Savings, acquired in 1983, provided a convenient in-house piggy bank to finance real-estate purchases and to buy operating companies. Southmark also acquired insurer Pacific Standard.

According to Stein, The method of operation of Pacific Standard and San Jacinto was classic financial Ponzi stuff. Both used policyholders and depositors money to buy investments that primarily benefited Southmark or its friendsespecially Charles Keating. When the investments soured, the company tried various schemes to prop up the operations. Bank examiner Neal Batson amplified on what he called Outside Cronyism in a report he would produce in the eventual bankruptcy proceedings of Southmark: Phillips and Friedman, and thus Southmark, had many business dealings with high-powered figures, many of whom have been convicted, indicted, or are under investigation for savings and loan fraud, and who were in a position to assist Phillips and Friedman with their numerous real-estate and other ventures. The number of transactions between these individuals was so extensive that they could perhaps be viewed as coordinated efforts by members of this elite club to assist each other for their own personal gain rather than for the benefit of the organizations they ostensibly served.

In a short period of time, Southmark evolved into a Byzantine network of 300 interlocking subsidiaries and 350 partnerships. Although its assets grew to nearly $10 billion, making Southmark the nations largest publicly traded real-estate investment firm, the company also accumulated significant debt through its junk bond borrowings. It was essentially a house of cards destined for collapse. One of its last acquisitions was the California REITs operating under Consolidated Capital Equities Corp., among which was Tarragons predecessor, Consolidated Capital Realty.

In 1985 Consolidated Capital Equities Corp. was acquired by a Massachusetts business trust called Johnstown American Companies, which was in turn acquired by Southmarks subsidiary, San Jacinto Savings. Consolidated Capital Realty had been a profitable business that peaked in the early 1980s. In 1982, with assets in excess of $133 million, the REIT generated revenues of $36.1 million and net income of $8.8 million. In 1984 it would post its highest net income, more than $13 million, but the fortunes of the company would progressively trend downward. In 1988 its assets totaled little more than $57 million and the trust lost $7.7 million while generating just $5.85 million in income. In that same year, Phillips was elected as one of its trustees.

Early in 1989 Phillips and Friedman were forced out at Southmark, which in short order filed for bankruptcy. As part of their severance deal, which according to the Wall Street Journal was hammered out in a three-day meeting in a Dallas hotel, they were allowed to be trustees of several Southmark REITs, including Consolidated Capital Realty. A new Southmark board subsequently asserted claims against Phillips and Friedman, who in turn asserted counterclaims. According to Stein, The settlement of these claims called for Southmark to turn over to Phillips and Friedmanamong many other thingsstewardship of five good-sized REITs and one large master limited partnership, National Realty, which Southmark had managed. The settlement also called for Phillips and Friedman to pay about $12 million to Southmark. This settlement was described by the examiner as similar to a lender settling with a borrower by giving him the collateral. But it got better. In 1991 and 1992, Phillips and Friedman persuaded the stockholders of the REITs to pay $11 million of the $12 million settlement.

Company Perspectives:

Tarragon Realty Investors, Inc. is a growth-oriented, fully integrated public real estate development, acquisition, and management company. Tarragon controls approximately 20,000 apartment units and almost 2.5 million square feet of commercial space located throughout the continental United States, with concentrations in Florida, Connecticut, Texas and California. Tarragons primary business is to create value for its shareholders through developing, repositioning and operating real estate.

Phillips was elected as a trustee of Consolidated Capital Realty in early 1989 and Friedman was named its president. Tapped to advise and manage it and the other REITs was Basic Capital Management Inc., controlled by Phillips and Friedman through their children. Poison-pill, antitakeover provisions were then adopted to secure the five REITs, and in July 1989 they all changed their names, with Consolidated Capital Realty becoming Vinland Property Trust. Phillips and Friedman were the subject of much litigation, and although they were never convicted of any crimes, they agreed to pay $20 million in connection with San Jacinto Savings and were banned from the banking industry.

Friedman Splitting with Phillips: 1992

According to the Wall Street Journal, Friedman split with Phillips in 1992. SEC filings of this period indicate that Friedman resigned from a number of real estate trusts in order to concentrate on Vinland and another REIT, National Income Realty Trust (NIRT), as well as Tarragon Realty Advisors, Inc., which would replace Basic Capital as the trusts advisor, and was owned by his wife, his daughter, and a business associate named John A. Doyle. SEC filings also reveal that Phillips was no longer listed as a trustee of Vinland. While Phillips returned to dealmaking with renewed vigor, Friedman carried on in a much quieter manner, slowly building up the business of Vinland out of his New York City offices.

In November 1995, Vinlands portfolio consisted of 13 properties, comprising ten apartment complexes, a shopping center, a combination office building and shopping center, and one farm and luxury residence. In that year Vinland also posted a profit, albeit a meager $27,000, but still a significant improvement over 1993 and 1994 when the business lost $607,000 and $429,000, respectively. In 1996 net income would improve to $853,000.

Friedman then consolidated the businesses under his control. First, Tarragon Realty Investors, Inc. was incorporated in Nevada on April 2, 1997, and Vinland was merged into it. Tarragon then acquired NIRT for $76.1 million in stock, followed by the acquisition of Tarragon Realty Advisors. In a released statement, Friedman maintained that Tarragon is now a full service, real estate company with the ability to build and develop, manage and operate, renovate and reposition apartment and commercial properties in markets throughout Florida, Connecticut and Texas. The combined operation controlled more than 12,000 apartment units and 1.7 million square feet of retail and office space. Tarragon, which had emphasized the renovation of older apartment complexes, now became especially interested in the luxury apartment market. With low interest rates and a booming economy, white-collar customers were ready buyers of upscale accommodations. Tarragon teamed with Rohdhouse Investments in 1997 to develop luxury apartment communities, including The Links at Georgetown in Savannah, Georgia, a 250-unit luxury garden apartment complex flanking the fairways of the Henderson Country Club golf course and featuring such amenities as a resort-style clubhouse, fitness club, spa, and pool. Three other luxury developments were completed by the joint venture by early 1999.

Revenues grew to $58.7 million in 1998. Because of Tarragons active slate of renovation and development, the company posted a loss of $1.4 million. In 1999, however, Tarragon would show a net profit of $5.2 million on revenues of $73.7 million. By early 2000 the company would control some 17,000 apartment units and nearly 2.5 million square feet of commercial space. In March of that year Friedman opted to revoke Tarragons REIT status, electing instead to become a C corporation. Not only did the REIT structure limit Tarragons flexibility, Friedman believed that the market did not adequately value the business and that its units had been undervalued for three years. Moreover, he now planned to grow the business by developing single-family units in Texas, luxury time-shares in California, and condominium sales in Florida.

Tarragon also moved into the Connecticut market through the July 2000 acquisition of Accord Properties, LLC, one of the states largest apartment management companies. As part of this transaction, Robert Rothenberg became Tarragons chief operating officer and a member of the board. Also in 2000 Tarragon acquired the apartment development joint ventures of Robert C. Rohdie and his family for stock with a potential worth of $10 million, making Rohdie Tarragons second largest shareholder. In addition to being elected to Tarragons board, he was also named president and CEO of a new subsidiary, Tarragon Development Corporation, to manage these joint ventures, which represented 5,500 apartment units in Florida, Texas, and Connecticut. For the year, Tarragon improved revenues by 50 percent over 1999, to $110.34 million, and net income by 25 percent to $6.5 million.

In 2001 Tarragon continued to prosper and reorganized its operations into two groups: development and investment. While Friedman appeared to have rehabilitated his reputation after his days with Southmark, reflected by the willingness of Aetna Life Insurance to provide funding for Tarragon, his erstwhile partner, in the meantime, continued to make headlines. Having built a new $2 billion real estate empire, Phillips, along with an aide, was charged by a federal grand jury in New York in June 2000 with racketeering and wire fraud in connection with an alleged attempt to induce New York City union officials to invest pension funds in one of his companies in exchange for kickback payments. A broader scheme, supported by over 1,000 hours of taped conversations in an FBI sting operation, alleged wide-ranging organized crime influence on Wall Street. Phillips was scheduled for trial in the fall of 2001.

Principal Operating Units

Investment; Development.

Key Dates:

Company is incorporated as Consolidated Capital Realty Investors, a real estate investment trust.
Name is changed to Vinland Property Trust; Williams S. Friedman becomes president.
Company is reorganized and renamed Tarragon Realty Investors, Inc.
Company revokes its REIT status.

Principal Competitors

Berkshire Realty; Camden Property; Walden.

Further Reading

Blumenthal, Karen, Theyre Back: Southmark Crashed, But Its Former Chiefs Are Doing Just Fine, Wall Street Journal, January 23, 1991, p. A1.

Rudnitsky, Howard, and Matthew Schifrin, A Jerry Built Structure, Forbes, March 7, 1988, p. 38.

Starkman, Dean, Edifice Complex: Real Estate Magnate Draws Shareholder Ire for Odd Deal Making, Wall Street Journal, February 16, 2001, p. A1.

Stein, Benjamin J., The Latest Hurrah, Barrons National Business and Financial Weekly, December 29, 1993, p. 12.

Totty, Michael, Tortured Finances: Questionable Deals, Junk Bonds Hasten Decline of Southmark, Wall Street Journal, January 17, 1989, p. 1.

Wethe, David, and Michael Whiteley, Survivor, Dallas Business Journal, June 29, 2001.

Ed Dinger