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Japanese Dynasty in L.A. Properties Falls on Hard Times

Real estate: As it tries to sell off portfolio, Shuwa Investments is grappling with huge losses and suicide of a top executive.

April 06, 1999|JESUS SANCHEZ and MELINDA FULMER | TIMES STAFF WRITERS

More than a decade ago a little-known Japanese builder and investor, Shigeru Kobayashi, was well on his way to creating a new dynasty in American real estate.

During a headline-making shopping spree in 1986, Kobayashi's real estate company, Shuwa Investments Corp., purchased about $1 billion in U.S. property, including office towers in Los Angeles, New York and Orange County. In just a few short years, Shuwa's American holdings totaled nearly $3 billion.

But Shuwa's bold plunge into U.S. real estate has turned into a humiliating retreat, with the company trying to sell off a portfolio that has by some accounts lost about half of its value. In addition to mounting financial pressures, the firm is grappling with the recent suicide of one of its top Los Angeles executives, Kiichero "Kichi" Kobayashi, whose body was found alongside a country road in Central California.

Kiichero Kobayashi, a nephew of the company president and the second-in-command of the Los Angeles office, hanged himself only a few days before a widely read Japanese tabloid published an account of his relationship with a missing Los Angeles bar hostess. The young woman lived in a Beverly Hills condominium reportedly owned by Kiichero and drove a new Mercedes purchased with his assistance.

The suicide and massive liquidation are part of a long, downward spiral for Shuwa, which has suffered from plunging real estate values, lawsuits and strained relations with its American employees. It didn't help matters that even minor operational and leasing decisions often had to be reviewed by Kobayashi family members in Los Angeles and Tokyo, leaving the company slow to respond to changing markets and tenant needs.

Shuwa's financial pain is shared with the many other Japanese investors that plunged into U.S. real estate markets in the latter half of the 1980s, buying landmark office buildings, hotels and golf courses only to watch their value plunge. After avoiding the inevitable write-downs for years, many of those Japanese investors, like Shuwa, are finally auctioning those properties at a discount.

But the Shuwa story may be the most graphic example of the wreckage from Japan's ill-fated investments in U.S. real estate.

Shuwa's sluggishness--and its lenders' reluctance to write off loans--may have led it to miss the peak of a real estate trading frenzy for large commercial properties last summer. But even before the market cooled off, bids for Shuwa's entire U.S. portfolio--which totals about 8.5 million square feet--remained below $1.5 billion--or nearly half of what the company paid for the assets, according to people familiar with the negotiations.

The campaign to sell all or part of Shuwa's U.S. portfolio has made the company even more difficult to negotiate leasing deals with, say real estate brokers.

"They are not out there chasing and aggressively pursuing deals," said Whitley Collins, a commercial real estate broker with CB Richard Ellis.

Shuwa officials in Los Angeles failed to respond to several requests for interviews.

The company began its initial foray into American real estate in the late 1970s when Shigeru Kobayashi, president of Tokyo-based Shuwa Corp., sent his son, Takaji, to the U.S. to develop and build condominium and apartment complexes. With its U.S. headquarters in Irwindale, Shuwa's U.S. subsidiary remained a low-key player that failed to generate much profit or attention.

But in the mid-1980s, Shuwa, enriched by the skyrocketing value of its Tokyo real estate holdings, joined a parade of other Japanese investors who paid top dollar for relatively inexpensive U.S. properties. In August 1986, Shuwa stunned the real estate world by buying Arco Plaza--twin, 52-story towers in the heart of downtown Los Angeles--for a whopping $650 million. Shuwa later moved its U.S. headquarters to the landmark complex.

Some brokers credit Shuwa for driving the 1980s boom in property values and surge in downtown development. Before Shuwa arrived, there were few large investors or Wall Street funds interested in purchasing office buildings in downtown Los Angeles, and the handful of Japanese investors in the market were purchasing much smaller buildings, says Dick Schnell, an executive vice president with Cushman Realty Corp.

"They were buying buildings at aggressive prices before anyone else was there," Schnell said.

It didn't take long, however, for Shuwa to run into trouble. Differences in culture and business practices strained relations between the company and its American employees, many of whom complained about their lack of control and authority. At one point, no employee could issue a check for more than $500 without first getting the signature of the elder Kobayashi, who remained in Tokyo.

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