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Targeting the Real Estate & Leasing

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Kidder, Peabody did not limit itself to expanding and updating the firm's traditional investment banking services in post-war times. It also moved into new areas, among them real estate financing and investments. The huge demand for capital by the real estate industry, which in the 1960s exceeded $100 billion yearly, attracted corporations seeking to diversify, investors looking for above average rates of return, and investment houses searching for new clients and profits. Some firms like Kidder, Peabody, considered real estate financing a natural extension of their investment banking activities and decided to add real estate to the list of industries they served. Though Kidder, Peabody was not totally inexperienced in real estate financing, it did not set up a special department for the purpose until November 1960 when Richard Hurd joined the firm. The son of a prominent real estate financier, Hurd, who was then in his mid-thirties, developed the firm's business in this area, and in September 1962 the partners, determined to limit the firm's liabilities in these operations, organized the Kidder, Peabody Realty Corporation, a wholly-owned subsidiary of the partnership. The Realty Corporation assisted builder-developers and property owners seeking capital by helping them plan and place their financings with wealthy individuals, partnerships, and institutions. Through the use of sale and leasebacks, limited partnership interests, first mortgage loans, and secured and collateral trust notes, the Realty Corporation arranged the acquisition and construction of apartment complexes, shopping centers, and similar projects.

In addition to its financings which totaled $30.3 million in 1968, the peak for the decade, the Realty Corporation also cooperated closely with the firm's activities in distributing and making a market in certificates of the Government National Mortgage Association (GNMA), a corporate entity of the federal government under the Department of Housing and Urban Development Authorized by the National Housing Act of August 1968, GNMA was designed to stimulate residential construction by making it attractive for institutions to invest in first mortgages. The means to achieve this objective was the GNMA-guaranteed mortgage-backed certificate, a debt security, usually issued by the mortgage banking firm qualified to organize the pool of approved residential mortgages. The certificates, generally issued in amounts greater than $25,000, carried the federal government's guarantee on "the timely payment of both principal and interest." These instruments fitted the portfolio needs of a wide group of individual and institutional investors. GNMA certificates added a new investment medium to Kidder, Peabody's growing assortment of securities the firm distributed.

Urban renewal provided Kidder, Peabody with still another area of business opportunities. During the 1960s, while the federal government spent billions on slum clearance and the construction of low-income dwellings, private developers also were involved in projects designed to rehabilitate the down-town sections of the nation's older cities. In November 1964 Lewis Kitchen, a prominent Kansas City, Missouri, developer with several successful projects to his credit, joined with Kidder, Peabody and the Prudential Life Insurance Company to organize the City Reconstruction Corporation. The company, a subsidiary of Kidder, Peabody Realty which owned 10 percent of its preferred and 50 percent of its common stock, was designed to recruit long-term capital for large downtown urban renewal projects. Kidder, Peabody, which previously had raised $3 million for Kitchen's Mansion House project in St. Louis, was expected to provide City Reconstruction with the long-term equity capital it required by recruiting it from individuals in high tax brackets, partnerships, and other sophisticated investors, not from public sales of the company's securities. Kendall Lutes, a vice president of Kidder, Peabody Realty and chairman of City Reconstruction's finance committee, also saw the firm's role in the new company as one of adding "the discipline of investment banking" to a new and increasingly important area of business and finance.

City Reconstruction yielded few of the profits its organizers had anticipated. Soaring construction costs and high interest rates made real estate ventures increasingly less profitable. This together with differing views among the company's top officials convinced Kidder, Peabody to quit financing redevelopment projects. Early in 1967, less than three years after it had helped organize City Reconstruction, the firm took the first step that led to the company's final dissolution in 1976. By then Kidder, Peabody Realty also had become less active, its chief function being to hold the equities in properties it had financed.

Kidder, Peabody's real estate operations proved to be one of the firm's least successful activities. "We broke even," said one of the firm's retired partners, "and that was no small accomplishment."

Displeasure with its experience in real estate financing was more than compensated by the firm's success in planning and negotiating leasing arrangements that allowed companies to secure the use of expensive capital equipment-computers, jet airplanes, oil tankers, chemical plants-without using their own or borrowed funds to pay for it. The job of the investment banker in a lease financing-whatever the type, leveraged or non-leveraged-was similar to the responsibility of arranging a public offering or direct sale of securities. Whatever the method employed in raising the required capital, the investment banker was expected to serve the best interests of both borrowers and lenders. In a leasing transaction the banker had to weigh a host of complex variables and decide, in the words of a Fortune analyst, the "optimal point at which the lessee has the lowest cost and the lesser, the highest yield." Kidder, Peabody moved into lease financing in the early 1960s when this centuries-old method of raising capital regained favor. And though the "cost" of leasing equipment almost always was greater than its total purchase price, many companies found it to their advantage to employ their capital in ventures that yielded profits in excess of the cost of the rental. This, together with possible tax benefits, mounting inflation, tight money, and the desire of some companies to limit the amount of debt appearing on their balance sheets, sparked a leasing boom that by the end of the decade attracted to the business not only investment houses, commercial banks, and credit companies, but also some large industrial corporations that found it profitable to add this kind of financial intermediation to their usual operations. During the three-year period between 1967 and 1969, when the volume of lease financings soared to new highs reaching close to $50 billion, Kidder, Peabody managed thirty-seven plant and equipment transactions ranging in size from $204,000 to $10.7 million. The firm's total for that three-year period exceeded $120.7 million and was growing rapidly. By the early 1970s, according to a Fortune survey, the firm ranked eighth among the top twenty-five institutions in the country engaged in financing leases.
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