Like many once-high-flying developers, Eric Yale Lutz found himself almost unable to cope with financial disaster. His crisis came in 1991, when his flagship property, the 10-story 777 Eisenhower Parkway office building in Ann Arbor, Mich., slid toward bankruptcy.
Lutz’s net worth, amassed during a 30-year career, melted away. Headlines trumpeted his distress. He describes himself as being “emotionally paralyzed by circumstances.”
Reality puts developers “in a belittling position and they don’t know how to handle it,” Lutz says now.
But, for Southfield, Mich.-based Lutz and the commercial real estate market in general, the first green shoots of recovery are showing. Lutz, who is 48, successfully took 777 Eisenhower out of bankruptcy in February. That’s happening to other distressed properties too. New investors with fresh capital are re-entering the market. It’s a long, long way from a healthy market, but things are improving.
“Everybody’s got a short memory,” says Paul Dietz, a Bloomfield Hills, Mich. building broker. “I’ve been through it three times now, where everybody said it’s the end of the world and it’s never coming back. But there is no word `never.’ I don’t know about developers, but the real estate market is coming alive.”
Not long ago, Lutz made an offer on a small strip mall on behalf of investors. He was surprised to find himself up against nine bidders.
“On a small group of stores! I don’t think a year ago that lender would have seen nine offers,” he says. “In 1991, the banker would enter the room with a long, sad face and as tired eyes as we had. You don’t see that any more.”
Lutz’s story typifies both the excruciating pain that the recession inflicted on the real estate world and the fragile hopes now stirring for a recovery. People who know him agree that Lutz benefited from experience.
He started young, going to work for a Southfield real estate firm when he was just 18. By his mid-20s, he was managing one of the largest diversified groups of properties in Michigan-apartments, office buildings, hotels, warehouses. And he was mentoring newcomers just a couple of years younger than himself.
David Horton, who now runs his own property management firm in Birmingham, was one early Lutz protege.
“In order to take on a person in a training capacity, you have to be able to commit a lot of your personal time,” Horton explains. “So he would literally meet me at 7 or 7:30 a.m. every morning, and at 6:30 or 7 p.m. meet and review progress. That went on for a year and a half. That year and a half training had more value to me in my career than my bachelor’s degree. There was no comparison.”
Lutz’s talent, numerous people say, was seeing value in properties where others didn’t. Once, he took an office building in Birmingham, Mich. that faced an ugly parking garage, the rents correspondingly low. Lutz paved the alley, planted trees, marketed it as The Courtyard-and was able to attract renters.
“Eric has a unique ability to see diamonds in the rough in real estate,” says Mark Canvasser, another former protege who now owns his own firm.
From the late 1970s on, Lutz ran his own firm, sometimes in partnership with developer Tony Brown, buying existing properties and developing new ones. The late ’70s through the late ’80s were heady years. Lutz added dozens of properties. By the time his troubles hit, he was juggling more than 50 properties with a total value around $250 million.
Along the way, he won a reputation for wearing stylish double-breasted suits and designer ties. Even the paper on which he printed reports to clients was the highest grade bond. He liked to ski in Aspen (he hurt his knee badly a few years ago in a skiing accident) and entertain lavishly.
In the mid-’80s, Lutz went after the undervalued 777 Eisenhower building in Ann Arbor. Built in 1972 as a regional headquarters for the contracting firm Bechtel, the 10-story, 328,000-square-foot building was almost totally unsuitable except as a single-tenant building. Each floor was too large for multiple tenants, who would find their desks too far from windows, and the guards in the lobby were surly.
Lutz saw promise. He bought the building for $18.5 million in 1984, borrowing the bulk of the money from Metropolitan Life Insurance Co. By 1989, he had pumped in another $5 million from investors to convert it to multitenant use. By then the building had won a reputation as one of Ann Arbor’s most prestigious office locations. Lutz had dozens of tenants, including corporate giants like General Motors.
A partnership he formed to own 777 had no trouble drawing investors. Among those who signed on, according to court documents: Publisher Keith Crain; former Chrysler executives Gerald Greenwald and Robert (Steve) Miller; Florine Mark, president and chief executive officer of Weight Watchers Group; and Roger Fridholm, former president of Stroh Brewery Co.
But even as the 777 building prospered, trouble loomed. Developers throughout the nation had failed to heed warnings that they were building too much. Yields on investments were falling sharply and vacancy rates soared.
Soon, tenants learned to play landlords off against each other. They demanded a year or more of free rent and lucrative decorating allowances as the price for signing a lease. Between 1989 and 1992, Lutz had to pump in another $3 million in decorating allowances just to keep tenants happy.
Then the recession hit, and tenants began to shrink their office commitments. In 1989, General Motors abandoned 25,000 square feet of space in the building; Bechtel gave up another 75,000 feet. Lutz found two replacement tenants to take 50,000 square feet, but they demanded a crushing $750,000 in improvements before moving in.
The partnership “had exhausted its cash resources,” Lutz says. “So the only way to attract those tenants was to not make payment of the real estate taxes.” The partnership, like many in real estate in recent years, wound up owing the City of Ann Arbor almost $2 million in back taxes. Operating bills for utilities and janitorial service and other expenses totaled another half-million dollars.
Adding exponentially to his woes, Lutz faced similar problems at virtually all his other properties. The final blow came when lenders, spooked by the savings and loan disaster, cut off all credit to dozens of owners like Lutz.
“We lost one partnership, gave a couple others back to the lenders, and we ran like hell and sold between June 1989 and August of 1991,” he says. “After that, you couldn’t sell anything. There was just too much fear in the marketplace, too much panic.”
Life became a nightmare. Lutz slashed overhead, eliminated his acquisitions department, his mortgage office, his development staff-75 percent of his payroll in all. But still cash hemorrhaged. The crisis wiped out much of the 30 years of profits he had built up. His wife went back to work and the family sharply curtailed their style of living.
“It’s like being a family farmer,” Lutz says. “You farm your fields for 20 years and along comes a tornado and takes your stock away. There’s a great human reluctance to look objectively at the circumstances.”
“It’s got to be tough on those guys,” says Robert Pliska, a veteran Birmingham-based property manager. “They were sitting on top of the world from ’84 to ’88. The turnaround started in ’89. And in ’91, ’92 they got smashed.”
By late 1991, Lutz knew that to save the 777 building he’d have to put it into Chapter 11 bankruptcy reorganization. He did so in January 1992. The filing touched off more than a year of negotiations and phone calls between Metropolitan Life, the dozens of limited partners, and dozens more creditors.
“I think it deeply hurt Eric from an emotional standpoint,” says his one-time protege Canvasser. “He believes in what he was doing and he never intended to hurt investors or the vendors. Eric would do anything and everything in his power to make each and every one of them whole.”
In the end, all parties agreed to a settlement that shared the grief. Metropolitan Life accepted a delayed payment on its mortgage, while creditors like Detroit Edison (owed $219,000) would get 75 cents on the dollar.
Lutz and his partners got to retain ownership of the property but must forego any financial returns until they pay back others. Many developers were not so fortunate.
Cynics often saw the downfall of developers as punishment for the decade-long binge of the ’80s. More sympathetic viewers noted that the wreckage brought down many ordinary people, too. Thousands of people employed by developers in the ’80s were laid off, and many of them had to leave the real estate field entirely. Related industries like construction and architecture were devastated.
Many investors in 777 were happy to have someone as skillful as Lutz handling the bankruptcy. Investors in many other buildings were simply wiped out. Lutz managed to hold onto not only 777 but also about half his other properties. “Eric handled things as well as anyone could have,” says investor Roger Fridholm.
