SANTA ANA — Back in 1986, when Japanese investors started spending heavily on U.S. real estate, Tobishima Corp. went a step further: It bought into an American development company.
Hutton Development Co., then a medium-size Santa Ana developer that built mostly nondescript office buildings, now had a partner with deep pockets and connections to Japanese banks from which it could borrow even more money to put up office towers and shopping centers.
But it hasn't worked out quite as planned. In fact, Hutton is just the latest example of the Japanese retreat from the U.S. real estate market in the wake of big financial trouble back home in Japan. After becoming big players in just a few short years, Japanese companies are now buying fewer buildings here, striking fewer deals and lending less money.
Tobishima--a big, old-line Japanese engineering and construction firm that has been in the United States about nine years--is now in hot water back home. In May it demoted its president and began selling off land and stocks to pay down an enormous debt. Profits plunged. The company's biggest lender installed one of its own officers as chairman. And for the first time in its 44-year history as a public company, Tobishima skipped paying an annual dividend to stockholders.
Tobishima was stung when a resort developer called Nanatomi Co. went belly up, owing Tobishima and others more than $700 million. Tobishima had guaranteed the loans as part of several real estate projects the two companies were doing.
As a result, Tobishima has curtailed most of its development projects, including a big resort in Japan that it was jointly developing with Nanatomi. In March, the company also bagged plans for a big office complex in Washington that was to be its beachhead in the capital.
Now, says an executive at Tobishima's U.S. subsidiary in Los Angeles: "Including factors such as the soft market and tight financing, we cannot say that Hutton's borrowing ability will remain the same."
Japanese banks, in fact, have been warned by the government against making too many real estate loans at home or abroad.
"It's very bearish over there right now," says Stephen J. Duffy, a Kenneth Leventhal & Co. consultant who visits Japan regularly.
On the other hand, Hutton says it can make up some of the financing shortfall from its own lenders.
Still, the bleak financing picture--which almost every developer faces--has pushed Hutton to switch gears. It is rounding up tenants for entire buildings before the buildings go up.
There aren't many companies out there that need that much office space. So Hutton's tenants are increasingly government agencies, usually county government.
While hardly anybody is building, Hutton is putting up two eight-story office buildings in Santa Ana. One tower is for the Sheriff's crime lab, and the other for the county Environmental Management Agency. Hutton will own the buildings and collect the rents.
Hutton says it really didn't expect the government business to become such a large part of its operations.
Hutton wasn't in the development business when it was founded as Hutton Associates in 1977 by Betty Hutton Williams. Williams, who has been an active supporter of charitable and philanthropic causes in Orange County, was looking for a place to invest money she had made investing in real estate in Asia.
Williams sold petroleum products such as asphalt and jet fuel to Japan beginning in the 1950s. She also sponsored Japanese students in the United States, one of whom had a husband who worked for Tobishima.
When Tobishima came looking for American investments in the early 1980s, it was natural for the Japanese--with their predilection for personal relationships--to look up Williams. Her new company was merely a real estate investor that didn't build its own buildings. It wasn't until later that Hutton decided to dump its partners and do its own developing.
"The rationale was as simple as that we wanted to have control over our own destiny," says Hutton President Christopher J. Felix.
As Hutton got into her 70s, though, she elected to sell the company and many of its buildings in 1984 for $75 million. The buyer was Schneider Inc., a Pittsburgh construction firm that soon developed financial problems.
The marriage was not happy, and Schneider wound up selling the Hutton Centre office complex in Santa Ana--Hutton's biggest project--to Tobishima. Tobishima also bought a half interest in the development company--sans any property--for what Tobishima says was $300,000. Hutton executives own the other half of the company and have an option to buy an additional 10%, stock that the executives already vote as part of the deal and which gives them control of the company.
The company is known as a cautious and conservative outfit, especially compared to its overextended Japanese stockholder. Hutton says it owns a portfolio of buildings--including the two towers now under construction--worth $150 million.