BEHIND THE FALL OF ROCKEFELLER CENTER THE INSIDE STORY OF WHY BAD BLOOD SEPARATES THE ROCKEFELLERS AND MITSUBISHI -- AND TAINTS THE NEXT ROUND OF BITTER FIGHTING.
(FORTUNE Magazine) – Late in February, David Rockefeller left New York for Tokyo confident that he had found a way to stave off disaster -- the bankruptcy of Rockefeller Center, a soaring symbol of his family's wealth and civic vision. Rockefeller, 80, had arranged a meeting with Takeshi Fukuzawa, president of Mitsubishi Estate, the Tokyo company that had every reason to regret paying $1.4 billion for 80% of the Center only six years earlier. Rockefeller intended to persuade Fukuzawa to avoid bankruptcy by way of a huge rescue plan into which David and other private investors were prepared to pour $60 million of their own money.
The mission was beset by misfortune from the start. First, the car took Rockefeller and Richard Voell, president of the company that runs Rockefeller Center, to the wrong building. Then Rockefeller, hurrying down the wide boulevard to the right one, fell on the sidewalk in front of Mitsubishi headquarters, not far from the Imperial Palace. He lay on the ground for 20 minutes -- it later turned out he had broken his right leg in four places -- while Voell rushed inside for help.
Rockefeller insisted on going ahead with the meeting. But Fukuzawa and his top aides found it difficult to give their full attention to his presentation. Instead, they grew increasingly uncomfortable as this patriarch whom they all respected sat in a wheelchair in obvious agony. Only after some 45 minutes did Rockefeller, having made just a sketch of his complete pitch, agree to go to a hospital.
Within three months, what Rockefeller had dreaded came to pass. On May 11, Mitsubishi pushed the Center into filing for Chapter 11 bankruptcy protection -- one more milestone in a saga of how a proud Japanese company grossly overpaid for a landmark piece of America and in so doing further enriched one of the world's wealthiest families. It is also a story of inept management, risky market speculation, angry small investors who had faith in the Rockefeller name, and -- or so the Japanese privately claim -- the greed of that same billionaire family. In supporting roles: shrewd investment bankers, vulture investors like Carl Icahn, and a doomed foray into derivatives.
At its simplest, this tale is perhaps the greatest example of how Japanese investors, flush with billions of yen, lost their shirts in U.S. real estate. However the bankruptcy plays out, Mitsubishi, which has had to swallow some $500 million in additional losses since buying into the Center, is far from done paying for this disastrous investment. People close to the situation say the company, part of an intertwined complex of businesses that also makes cars and electronics, will have to invest at least another $200 million if it opts to cut a deal with creditors and retain majority ownership. It also faces huge tax liabilities as a result of the bankruptcy.
But what really sticks in Mitsubishi's craw is that the bankruptcy could further enrich the Rockefeller family trusts, perhaps by more than $100 million. The trustees, led by William Bowen, president of the Mellon Foundation and a former president of Princeton University, have told the Japanese that they intend to invoke the original contract and force Mitsubishi to buy out the trusts' 20% of the Center. Worse, says an investment banker involved in the case, "the Japanese are terrified that Bowen will turn and use the money to buy back into the Center at a discount. They already feel like they were taken by the Rockefellers, and that would really humiliate them." Of course, the trustees' efforts to wring money out of Rockefeller Center for at least 100 direct descendants of the original John D. is where this tale begins. Truth be known, Rockefeller Center never has made much more than occasional blips of profit since its opening in 1932. The challenge was to get cash out of this white elephant without giving up control of what still is, for all the red ink, one of the world's real estate gems. In 1985 the trustees decided to mortgage the Center. In an intricate deal, they formed a real estate trust, took it public, and loaned the proceeds back as a mortgage to the family company that owned the Center. Raising that $1.3 billion, of which $350 million went to the family, had been easy. The public, many of them persuaded by brokers that they had a once-in-a-lifetime opportunity to invest alongside the Rockefellers, grabbed the shares at $20 apiece. As they were to find out, this was no great relationship.
If the Rockefellers looked smart for squeezing out all that cash while retaining control of the Center, look at how brilliant they seemed four years later. In 1989 the family managed, in effect, to sell the place again -- or at least 80% of it -- this time getting $1.4 billion.
Even in those giddy days of real estate prices, this tag was high. But the Rockefellers were lucky enough to have something desired by two bitter Japanese rivals: upstart Mitsui Fudosan and white-shoe Mitsubishi Estate. Mitsubishi convinced itself that Rockefeller Center was a perfect fit to go along with prestigious chunks of Tokyo and London it already owned. Mitsubishi's $1.4 billion bid was double the price Mitsui was preparing to offer. The family trusts pocketed the lot.
Within a year, Mitsubishi got the first signals of trouble ahead. The 1991 budget for Rockefeller Center showed that the projected deficit had grown and that rents in New York were collapsing. The original numbers that had helped sell the REIT to the public -- and partly hooked Mitsubishi on the deal -- had predicted rents in the complex would reach $75 a square foot by 1994, when a third of its 623 leases would expire. Instead, rents in other prime-space parts of midtown Manhattan were dropping to less than $30 a square foot. Profits seemed more elusive than ever.
By 1992 things had gotten worse. Some of Rockefeller Center's most famous tenants -- including the Associated Press, which has a whole building named after it, Lazard Freres, and Simon & Schuster -- would soon be negotiating renewal prices. They were sure to be pushing for huge concessions, thereby adding even more red ink. In 1992 the annual shortfall totaled $50 million, in 1993 it was $61 million, and by 1994 it had grown to $139 million. Mitsubishi and the Rockefeller Family Trusts covered these deficits.
Bowen, head of the trusts, began pushing Mitsubishi for help in getting out of this snare as early as 1993. But Mitsubishi had bigger worries. Real estate prices were nose-diving in Tokyo, home to almost all of Mitsubishi's $26 billion in assets. Rockefeller Center seemed relatively minor.
The REIT holding the mortgage on the Center also called in vain for help from Mitsubishi. Its problem: how to pay back some of its huge debt. In addition, a wrong bet on which way interest rates were headed left the REIT with a derivatives loss of at least $59 million. The REIT asked Mitsubishi to guarantee a $200 million line of credit, the only way to head off a cash-flow crisis in June 1995. The Japanese never replied.
Bowen attributes part of all that followed to the fact that "the Japanese took such a long time to respond. It was very frustrating." Indeed, Mitsubishi's undoing can be largely blamed on the company's decision to play the role of a minor investor all along, leaving the Rockefellers and their legions to run the empire the Japanese had paid for. Now that things were going seriously bad, everyone turned to the real owners -- and the deepest pockets -- to solve the problems. For its part, Mitsubishi was wary of another face-losing deal with the Rockefellers. Says John Spuches, a lawyer representing Mitsubishi, of his clients: "They were very sensitive because in 1989 they had been accused of overpaying, and they didn't want to do it again. They were reluctant to run after any deal where they would have to put up a lot more money. This time they wanted to be sure that every zero in any check they wrote was completely justified." So Mitsubishi called in J.P. Morgan & Co. for counsel. One recommendation: Buy the REIT. Mitsubishi took a stab at following this advice early last year, somewhat belligerently offering only $4.35 a share when the stock was $5.75.
This low-ball offer enraged the REIT's management, who asked Bear Stearns and Donaldson Lufkin & Jenrette to help find alternative financing. Then something unusual happened. The REIT's chairman at the time was Claude Ballard, a limited partner of Goldman Sachs. The REIT began to look at financing offered by another Goldman Sachs partner, Daniel Neidich, who runs Whitehall, Goldman's real estate vulture fund. Last November, Whitehall and Goldman Sachs Mortgage Co. signed a letter of intent to lend the REIT $225 million in exchange for large fees, a handsome 14% return on part of the loan, and various rights and warrants. If the REIT defaults on the loan, Goldman could get control of the company's only asset, the mortgage on Rockefeller Center. Not a bad deal for $225 million, even at today's distressed prices.
The Japanese immediately made another bid to buy the whole REIT. This time they offered more than $6 a share, a big premium over the then price of $4.50. All to no avail. By the end of December, the deal with Goldman had been completed and Neidich became a director of the REIT.
The Goldman affair has raised a lot of eyebrows because it was put together while a partner of the firm was chairman of the REIT. Both the REIT and Goldman say that Ballard recused himself from talks about the deal and did not steer the company to Goldman's vulture fund. In any event, a buyout never happened. Mitsubishi has now stopped mortgage payments, leaving the REIT once again desperate for new financing. Mitsubishi's first unpleasant experience with the Rockefellers had come in May, when the Japanese saw what they perceived to be a darker side of David Rockefeller. Only nine weeks after his aborted rescue mission to Tokyo, Rockefeller met with a group of Mitsubishi executives, including Takugi Yamashita, senior managing director in New York, this time at Rockefeller Center itself. It was all a formality. The Japanese laid out the reasons why Mitsubishi planned to push the Center into bankruptcy.
After the die was cast, David stood up and delivered what one person at the meeting describes as a "poignant, sad reflection" on the decision. "He called the Center his family's greatest achievement and a symbol of his father's faith in New York," the source says. "He urged Mitsubishi to do nothing to endanger the quality and prestige of the property." The Mitsubishi team listened with admiration as he spoke. This was the Rockefeller they had always revered, the patrician statesman who stood above the fray.
That veneration died hard with the next day's newspapers. No sooner had the meeting adjourned, it seems, than Rockefeller went public with criticism of his Japanese partners. Through the New York Times and the Wall Street Journal, he lambasted Mitsubishi for the bankruptcy decision. He also noted the Japanese reaction to the Rockefellers' reluctance to put their hands in their own wallets. "They became very upset and said the family should make a sacrifice," he told the Journal.
Bowen recalls that during the weeks leading up to the bankruptcy filing, Mitsubishi had persuaded the trusts to contribute their 20% of a $270 million package to buy out the REIT. But when the package grew by $38 million, Mitsubishi wanted the trusts to pay all of the extra amount.
The two sides fell out over this relatively tiny sum. Says Bowen: "We made three accommodations for them. One, we were to participate pro rata with them to buy out the REIT. Two, we were willing to defer the exit dates for our investment. And three, we would make a disproportionate contribution at their request, but it had to make business sense." Bowen had at first proposed terms that would have effectively made the excess contribution a preferred five-year equity investment with a 12% dividend rate. That would also have given the trusts control of Rockefeller Center if four dividend payments were missed. The Japanese were infuriated. Says lawyer Spuches: "Our client was stunned. They paid the Rockefellers to get out of the investment in 1989, and now the Rockefellers wanted us to pay them again to get back in."
What Mitsubishi really wanted was a self-sacrificing gesture to compensate for its embarrassingly bad investment. Bowen, as a fiduciary and trustee, says he was not in a position to make one, nor did he care to throw more good money after bad. After all, the trustees had managed to pull out a fortune for the family. They were not interested in pouring money back into an illiquid, poorly performing investment.
Mitsubishi, of course, saw it differently. Says one adviser: "The $38 million was supposed to be a recognition that Mitsubishi had lost a lot, and the Rockefellers had made a lot. In fact, we eventually said to them, it doesn't have to be $38 million; it can be $30 million or $25 million. The amount isn't all that important." But when it became clear that Bowen would demand preferential returns, Fukuzawa and his executives decided to do what Bowen may well have felt all along was nothing but a bluff: They forced the Chapter 11 and immediately began to work on putting together a restructuring.
Above all else, it seems, Mitsubishi's executives are determined to prevent the Rockefellers from regaining control of the property. To that end they are likely to put up large sums to cut deals with creditors. Bowen is on his own crusade. He is courting wealthy investors around the world to put together enough to buy back into the Center if Mitsubishi loses control.
Meanwhile, those mom and pop investors whose REIT shares have fallen almost 75%, to a recent $5, over the past decade are surely ruing the day they ever got mixed up with the Rockefellers.