LOS ANGELES - Real estate managers CB Commercial Realty Advisors and Westmark Realty Advisors completed their well-publicized mating dance with the announcement late last month that they will merge.
The agreement is expected to be final by the end of June, a CB Commercial official said.
The new firm will operate as Westmark Realty Advisors and will start life anew with $4 billion of tax-exempt assets under management. TCW Realty Advisors - a joint venture between Westmark and Trust Co. of the West - brings $3 billion. CB Commercial contributes $1 billion. All the firms are based in Los Angeles.
Terms of the deal were not disclosed.
James Didion, chief executive officer of CB Commercial Group Inc., said the Westmark principals will be paid a combination of cash and back-end money that is tied to their continued involvement in the firm.
Vince Martin, managing partner of Westmark, will continue in the lead role. Scott Tracy, managing director of CB Commercial Realty Advisors, will become executive managing director of Westmark.
"Our intent was to acquire their (Westmark principals') economic interest, and in doing that involve them in the building of the merged company by having a portion of the purchase price tied to the success of the merged company," said Mr. Didion.
The desire of the Westmark principals goes beyond economic benefit, Mr. Didion said. "Their goals are broader than financial goals, so complacency won't be an issue," he said.
The joint venture with Trust Co. of the West will remain in effect with TCW Realty continuing as fiduciary and marketer of TCW products.
Constraints on profitability have driven most of the recent merger activity in the real estate investment management business. Two recent buyers of real estate managers, Victor MacFarlane, chairman of San Francisco-based MacFarlane Realty Partners L.P., and Gary Schwandt, managing director of Acacia Realty Advisors, Dallas, said their companies and the ones they acquired had been unprofitable, primarily because of small asset bases.
Industry professionals believe both TCW and CB Commercial were profitable. TCW has many corporate pension client, and servicing them is less expensive than public finds; CB Commercial Group Inc. has multiple lines of business.
Mr. Didion acknowledged TCW Realty Advisors' and CB Commercial's revenue streams were "strained" with the writedowns the firms took in the early 1990s. But he said both companies have been consistently profitable and would continue to grow.
"The writedowns impacted all of us, and some attach it to the assumption of a loss," said Mr. Didion. "And that isn't true.
"You have to look at when the writedowns were taken," he said. "We're comfortable that they (the properties) will increase in a recovering market."
Pensions & Investments Performance Evaluation Report partially validates Mr. Didion's thesis. For the 10 years ended Dec. 31, 1994, TCW Realty Fund I returned -0.63%; for five years, it returned a compound annualized -9.77%.
But for the one-year period, the fund returned more than 16%. The fund's performance was even stronger in the last quarter of 1994, according to the PIPER rankings.
But TCW's Fund II and Fund IV are still among the weaker performers for the one-year period in the PIPER universe.
Mr. Didion said discussions about the merger began when it became known in the real estate investment management industry that Westmark was searching for a strategic partner. In April, Mr. Martin told Pensions & Investments Westmark was talking with CB Commercial and other firms about forming an alliance.
The close relationships of the two firms helped the negotiations. According to Mr. Didion, CB Commercial Group provides property management to one-third of TCW's portfolio; CB Commercial Group's brokerage units has sold properties to and for TCW; Mr. Martin used to run CB Commercial until he left in 1981 to form Westmark.
According to Mr. Didion, the most apparent synergy resulting from the merger is the economies of scale a larger company enjoys.
"CB Commercial Group Inc. will benefit by having a larger realty adviser as a preferred client," said Mr. Didion, explaining other benefits of the merger. "They (Westmark) get access to our deal flow and real time information."
Also, TCW clients now have access to CB Commercial's private commercial mortgage expertise. The combined assets of the new firm makes it more efficient to add a publicly traded real estate investment trust unit, Mr. Didion said.
The new firm also becomes a research powerhouse, another must-have element of the 1990s real estate adviser. TCW has Sol Rabin; CB Commercial brings its CB Commercial/Torto Wheaton affiliate.
"Research is vital to our organization," he said. "Building our research operation is one of the opportunities that comes from this merger."
Mr. Didion also said there will be no layoffs of professionals because the strategy is to grow the new company.