3300 Lincoln Plaza
Lincoln Property Company is one of the top five developers in the country of both office buildings and residential apartment complexes, with projects in every major U.S. city and some in Europe. It specializes in high-rise office towers and market rate and luxury apartments, although it also has built warehouse, retail, and hotel space. In addition, it has become increasingly involved in rental management.
Lincoln Property was founded in Dallas on Lincoln's birthday in 1965 as a partnership between Trammell Crow and Mack Pogue. Crow, at age 50, was already the successful owner and president of a Dallas-based warehouse building company, Trammell Crow Co., which had pioneered the concept of building before tenants are obtained. Pogue, who was named president of the new company at age 30, had recently become a commercial real estate broker following a career as a high school football coach. The original aim of Lincoln Property was to build garden apartment houses in Dallas.
The company soon became known for its suburban landscaped apartment communities with luxuries such as private clubs, swimming pools, and equipped gymnasiums. Such amenities added, for example, $1000 to the cost of each unit, as was the case at the community Willow Creek in Dallas. Projects at that time were typically worth around $5 million, from which Lincoln could make a profit of about $400,000. Very quickly the company was building apartment projects through partnerships in other cities throughout the country, such as St. Louis, San Francisco, and Denver. Eventually it even expanded overseas with projects in Madrid, Brussels, London, and Paris.
Then, in the mid-1970s, the sudden rise in interest rates and the halt in construction loans from banks nearly put Lincoln out of business. Lincoln had acquired several hundred million dollars in land for future development, and was locked into paying 14 percent interest for the property on which it was unable to build. Pogue quickly restructured loans and sold off $600 million in land, some of it at a loss, and managed to stay solvent. When real estate later picked up, Lincoln began expanding once again, although from time to time it sold off some of its property in order to have cash on hand, even when it was no longer necessary.
Having successfully learned from his mentor Crow how to master the real estate business by making deals, Pogue decided to move out on his own. In 1977 he bought out Crow's share in the company for $150 million, and Lincoln proceeded to grow independently, eventually to become Trammell Crow's closest competitor. Pogue began to diversify Lincoln's activities into developing office parks and towers, research-and-development warehouses, hotels, and shopping centers.
To carry out these plans, in 1979 Pogue took on a new, permanent partner, William Duvall, to manage development projects in other regions of the country. Duvall's responsibility was to form operating partnerships in various cities typically with real estate brokers, compensating them primarily according to the equity of the building project while paying them relatively small salaries. The local operating partner was the best-positioned person to market the new building to tenants, and sometimes also proved helpful in winning Lincoln the permit or bid to build. For example, with the connections to municipal government through a local partner in Boston, Lincoln succeeded in 1985 in gaining the city planning board's approval to erect an office building on the site of an historic store.
Having learned his lessons from the real estate crash of the 1970s, Pogue thereafter pursued a more conservative strategy of financing. Since the late 1960s financiers had been demanding larger shares of the profit, and now Lincoln was quite willing to oblige, giving up equity for less debt and thus passing most of the risk on to the equity investor. "Our policy is real simple," Pogue told the Wall Street Journal in 1986. "We put no cash into our deals. None. The only way you can lose money is if you spend it." Since funding Lincoln's first high-rise office building in north Dallas in the late 1970s, the Metropolitan Life Insurance Co. was Lincoln's chief financial partner until 1985. Lincoln also developed other sources of its own for capital: a real-estate investment trust, a junk-bond fund, and a European capital-raising unit in Geneva, Switzerland.
Typically Lincoln paid only for the architects, land options, and miscellaneous fees up front, at around $2 million, while its investing partners, such as Metropolitan Life, paid for the land purchase, short-term bank loans, and construction costs. It also paid a 2 to 3 percent development fee to Lincoln that would cover the latter's operation costs, and could amount to $30 million on the largest, billion-dollar projects. The deal gave Metropolitan Life half ownership of the building, whereby Lincoln repaid Metropolitan Life for half the construction costs in monthly installments over 15 years. Income from the rents would be split between the two partners. Lincoln had the advantage, though, that if rents were not sufficient to cover its monthly payments to the investor, it did not have to make up the difference. Also, if at any time Lincoln wanted to abandon a project, it lost only its own share.
Thus, Lincoln's high-rise office building projects rapidly spread across the country, encouraged by the building boom of the early 1980s. Some of its larger office building projects included the Lincoln Plaza in Dallas, the Lincoln Centre high-rise in Minneapolis, the Allegheny International Tower in Pittsburgh, the Sun Bank Center in Orlando, the Lincoln Tower in Miami, and major office buildings in Austin, San Francisco, Los Angeles, Washington, D.C., and Boston. Between 1979 and 1986 Lincoln built 20 million square feet of office space, equivalent to five Pentagons, according to Fortune magazine. During this period Metropolitan Life put in a total of about $2 billion and 10 percent of all of its real estate investments into Lincoln's projects. By 1985 Lincoln was starting projects worth $1.6 billion, 22 times that of its projects a decade earlier, and had $4 billion in assets and $1.4 billion in annual construction put in place, with major projects in 14 cities. It had become the third-largest diversified developer in the country, after Trammell Crow and Toronto-based Olympia & York, and was regarded as the most aggressive developer of them all. In 1986 it was ranked the 25th-largest private company in all industries in the United States. The following year it had revenues of $2.1 billion and staffed 5000 employees.
For its office buildings Lincoln emphasized top quality, such as numerous quick elevators, and employed renowned architects. Although its rents tended to be 10 percent higher than average for the area, its newer buildings also rented faster than the average for a given locality. To provide the office buildings with centralized telecommunications services, Lincoln took advantage of AT&T's breakup and created its own telephone company subsidiary, LinCom Corp.
Meanwhile, Lincoln did not abandon development in apartment projects. By 1980 it was already ranked among the top 10 housing builders. For example, it was the top-ranked builder in fast-growing Denver in 1984, with 14,000 units completed there that year. In 1986 income from apartment rentals was $43 million per year, with $8 million generated from one apartment project alone, the 7,100-unit Villages community in Dallas. As office construction slowed down in the mid-1980s, apartment construction expanded. Zoning restrictions in the Midwest, California, and Northeast restricted housing supply on one hand, but led to increased rental rates on the other. Thus, once it overcame the obstacle of obtaining a building permit, Lincoln could build more profitable apartments than before.
Lincoln's building practices, in which it assumed minimum financial risk, have been blamed for leading to overbuilding, particularly of office buildings and hotels. Lincoln, though, was not the only developer to build ahead of demand during the 1980s' real estate boom. Office towers were built because the capital existed, not because of any demand for office space. Deregulation of savings and loan institutions had allowed these firms to make excessive investments in real estate, and other developers also took advantage of this. Tax breaks offered to investors beginning in 1982 further encouraged development. Thus, investors were eager to put their funds to work, and developers such as Lincoln were just as eager to take development fees from the investors. The inevitable consequence of overbuilding was an inability to find tenants. For example, when the Lincoln Centre in downtown Minneapolis opened in 1987, it had a single tenant occupying just one of its 31 floors. This compared with Lincoln's average occupancy rate of 91 percent for office space that had been built in the early 1980s.
Although Metropolitan Life stopped investing in Lincoln's high-rise building projects in 1985, other eager investors stepped in to fill the gap. Most prominent was the securities firm Drexel Burnham Lambert with mortgage-backed bonds. Also, beginning in December of 1985, a group of insurance companies took advantage of a new type of "asset-backed" security, a type of 15-year bond, and invested $146 million of these in Lincoln's development projects.
Then, in the late 1980s, the real estate industry's boom turned into a bust, and so did Lincoln's fortunes. The collapse of the market was due mostly to oversupply, especially of office buildings, and the consequent fall in rents, but other factors contributed. A 1986 federal tax law eliminated previous tax loopholes for real estate losses and thus discouraged investment. New federal regulations restricted the amount that lending institutions could invest in real estate. At the same time, banks on their own stopped financing real estate once the collapse in the market had become evident. They began requiring the developers to put up more equity than the latter were able or willing to do. Furthermore, the credit crunch came just at the time when many of the developers' five- and seven-year mortgages of the early 1980's development boom were coming due. To make matters worse, the economy entered a recession by 1990, and demand for new commercial space further waned.
Lincoln suffered, although its policy of low risk investment saved it from total financial ruin. While the national occupancy rate for office buildings fell to 86 percent in 1986, Lincoln's joint-venture practices allowed it to break even with occupancy rates as low as 65 percent. One 39-story, $100-million building in New Orleans, however, had an occupancy rate as low as 40 percent one year and a half after its completion in 1984. This extremely low occupancy rate was due to the downturn in the local oil and gas industry. Although Lincoln had to cut back on building, the amount of office space it had built ensured that it would have continuing income from rents. By 1987 it had developed 61 million square feet nationwide and had approximately $5 billion in assets. But rents dropped on average 41 percent from 1981 to 1986 as a result of the glut in high-class office space, and Lincoln as the landlord lost out.
Lincoln kept itself afloat by selling off property, often back to the insurance companies that were its investment partners in the projects. In 1987 Lincoln sold its 50 percent share in the $300-million Lincoln Centre in Dallas to its partner, Metropolitan Life (although the company kept the Lincoln Plaza, where its offices are headquartered). This was followed by the sale of its half-interest in the $100-million Lincoln Centre in Minneapolis, for which it received a mere $6.5 million, and the $100-million Energy Center in New Orleans, both sold back to Metropolitan Life. It sold its share in the $22-million Lincoln Pointe in Tampa back to Aetna and sold other buildings in Austin and Miami considerably below their potential value. Lincoln still had more serious financial problems with its smaller projects of shopping malls and warehouses, in which it had a greater stake.
As the real estate crisis worsened, Lincoln was forced to default on some loans. It had a negative annual cash flow of as much as $75 million in 1989. Since Lincoln was essentially a series of partnerships, financial problems could be handled one by one in isolation. Five of Lincoln's partnerships however, ended up having to file for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code. In 1990 Lincoln sold $200 million in Texas properties including industrial buildings, shopping centers, and land to the NCNB Texas National Bank in order to settle its defaulted loans with that bank. It still had $1.4 billion in property in Dallas, although this was down from $4.5 billion in 1985. That year Lincoln also sold off its stake in the telecommunications business. Its LinCom subsidiary, which in the meantime had been renamed Amerisystems and later merged with a Westinghouse subsidiary, was sold to Fairchild Communications Service. Lincoln also scaled back by reducing its staff by about 40 percent between 1988 and 1990.
Although Lincoln recovered, emerging from financial restructuring in 1990, the big building days were not to return soon, since many real estate markets then had a three to five year oversupply of buildings. Instead Lincoln sought contracts as building managers, often for the very buildings it was selling back. Its managed properties increased by 10 percent between 1988 and 1990.
Lincoln also refocused on the rental apartment business. Although the apartment market was also hit by the credit crunch and recession, a steady increase in demand in certain parts of the country, such as California, enabled the value of rental property to rise. Lincoln even purchased apartment projects of other developers to increase its property management portfolio. It acquired 1,100 units in Phoenix and 800 in Denver in 1990 in the belief that the market had bottomed out. By 1991 Lincoln had become the nation's largest management company, overseeing 84,008 apartments, with Trammell Crow as the second largest. Although its construction was down 30 percent from the previous year to 2,580 constructed units, Lincoln was ranked the 12th-largest home builder in the country. In 1992 it ranked as the third-largest rental apartment builder, based on its 1,866 units started.
As Lincoln entered the 1990s it continued to be active in commercial development as well. It was still ranked the seventh most active developer in 1989. The following year it had several new development projects in progress totaling over half a billion, although this was down from its previous annual peak of activity of $1.5 billion in projects. Its lenders included some of the same institutions as before: Metropolitan Life, Prudential Life, and the Teachers Insurance & Annuity Association. Projects that Lincoln completed in 1992 included the largest tower in the southeastern United States, the 60-story NCNB National Bank building in Charlotte, North Carolina; the Orlando City Hall, in Orlando, Florida; the GSA Warehouse in Chicago; and apartment communities in New Jersey, Virginia, and California. In 1992 Lincoln, which was still under Pogue's management, ranked as the fifth-largest developer based on total number of square feet under development, finally putting the company ahead of its erstwhile competitor, Trammell Crow.