CHICAGO - The plug has been pulled on the ailing LaSalle Fund IV commingled fund, and LaSalle Advisors Ltd.'s top management has been purged, in part because of poor performance of the company's commingled funds.
Daniel Cummings, co-head of LaSalle Advisors, said the firm would reduce its asset management fee for its commingled funds and credit $500,000 to Fund IV investors for excessive fees charged in the valuation of a property in that portfolio. The firm also presented a plan for selling six of the portfolio's eight properties between 1998 and 1999. But Mr. Cummings cautioned that plan is not a liquidation strategy.
"We are not wedded to the schedule we proposed," he said. "Our investors encouraged us to be patient."
"LaSalle is adopting a well-conceived disposition strategy," said Tim Judson, a consultant for The Townsend Group, Cleveland. "The time for this clearly had arrived.
"At the same time, they will try to do what is best for the investors," he said.
The recent concessions follow the firm's decision to release the fund's 40 investors from their remaining $60 million commitment to the fund.
The concessions were announced at a recent meeting of Fund IV investors, a few of whom described the demeanor of LaSalle officials as contrite and conciliatory.
Some of the investors in the fund are pension funds for McDonnell Douglas Corp., Bell Atlantic Corp., Illinois Power Co., Delta Airlines Inc., Deere & Co. and Ford Motor Co.; Los Angeles City Employees' Retirement System; Northern Illinois Gas; the Board of Pensions for the Presbyterian Church; and the Michigan Municipal Employee Retirement System.
Mr. Cummings and Lynn Thurber will serve as co-heads of LaSalle Advisors, replacing Kenneth Campia, vice chairman of LaSalle Partners and formerly president of LaSalle Advisors. Mr. Campia has been reassigned from the tax-exempt institutional area and will be in charge of new product development with London-based Kleinwort Benson Investment Management, which owns a 20% stake in LaSalle Partners.
Ms. Thurber came over from Alex. Brown Kleinwort Benson Realty Advisors, which was merged with LaSalle Advisors when KBIM acquired its stake in LaSalle Partners. Mr. Cummings is a LaSalle Partners veteran.
LaSalle Partners Managing Director J. Marshall Peck, whose duties included marketing to tax-exempt clients, also has been reassigned from the tax-exempt area. He will handle business development and marketing for LaSalle's service and management business.
Other casualties of the shakeup are Steve Hulce, a managing director in charge of retail acquisitions, and Brad McNealy, a managing director in charge of the retail management property group.
Both men are leaving the company to pursue other opportunities, Mr. Cummings said. Their duties will be spread among remaining employees.
The personnel changes are related, in part, to the poor performance of some of LaSalle's commingled funds. "Given some issues on our commingled fund business, it was probably a good time to have new leadership," said Mr. Cummings.
The changes also are related to the merger of ABKB and LaSalle Advisors, he said.
LaSalle Advisors decided to release the investors from their commitments to Fund IV because of its limited size, the need to repay mortgages and signigicant capital expenditures required for some of the properties. The investors' net equity in the portfolio had shrunk to $218 million, from $466 million.
"What we laid out was a reasonable plan for a sell-hold analysis for each asset in the portfolio," said Mr. Cummings. Two of the eight properties in the portfolio are not likely to be sold before 1998 because they are "in markets that will take some time to turn around or have issues to be addressed," he said.
Fund IV originally was supposed to terminate by July 2002.
Raising the final $60 million from investors might have proved difficult.
The $2.1 billion San Diego County Employees' Retirement System and two other unidentified investors refused to fund a $955,700 capital call last year that was used to purchase the Saddle Creek Shopping Center in Germantown, Tenn.
LaSalle might also have encountered resistance calling for capital because it suspended indefinitely income distribution to Fund IV investors in November. Distributions were about $10 million, said Mr. Cummings.
In its third-quarter report to investors, LaSalle said additional capital was needed to:
Repay $155 million to Continental Bank for the first mortgage it held on the Wilshire Courtyard office building in Los Angeles. The interest-only balloon mortgage comes due in July 1996.
Stabilize the Sharpstown Center, a Houston mall, which has a vacancy rate of more than 20% and is in danger of losing its anchor tenant.
Sharpstown Center and Wilshire Courtyard are the two properties that are being held indefinitely, according to Mr. Cummings. It was Sharpstown's poor performance that convinced Gary Kaku, chairman of the San Diego fund, not to fund the capital call that resulted in the purchase of the Tennessee mall; the Wilshire Courtyard was the property on which the excessive fees were charged.
According to Mr. Kaku, Sharpstown has been written down 30% from its $125 million purchase price.
Mr. Cummings confirmed Sharpstown is only 77% occupied and that its anchor tenant is negotiating with another mall. The center had a market value of about $90 million prior to the news its anchor might leave.
Mr. Cummings declined to discuss how LaSalle overcharged investors on the asset management fee for the Wilshire Courtyard. A knowledgeable source said the excess fee occurred because of the way LaSalle accounted for interest payments on the building's mortgage.
As of Sept. 30, the Wilshire Courtyard had an appraised value of $188 million. Continental Bank held a $135 million first mortgage. It is due to receive $155 million because of accrued interest.
According to the source, LaSalle paid half of the mortgage interest on a current basis and half accrued. When interest accrues on a loan, the principal increases, and the net asset value of the property decreases.
But LaSalle reported the interest as paid in full each quarter, which keeps the principal stable and net asset value higher than it would if the principal increased.
A higher net asset value results in higher fees.
Mr. Cummings said the method LaSalle used to calculate fees was appropriate.
During its review of the portfolio, the firm's management concluded $500,000 in excess had been paid by investors, and they should be credited for their pro-rata amounts.
Mr. Cummings conceded the LaSalle Advisors proposals are an effort to atone for poor performance.
Investors and their representatives have described the pre-shakeup LaSalle as uncommunicative, arrogant and insincere. One investor noted LaSalle grudgingly lowered its asset management last year but that it had no effect.
According to the investor, the company reduced its asset management fee to 1% of net asset value from 1.25%, but only for a net asset value in excess of $300 million.