Lauth’s future in question-WEB ONLY

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Struggling developer Lauth Group Inc. has cut about 90 percent of its staff and lost control of part of its portfolio to a major equity partner-developments that raise doubts about whether the locally based company can survive the recession.

The firm started 2008 with about 450 employees but after several rounds of layoffs, it now has fewer than 50. And the staff continues to shrink.

Lauth is pinning its hopes for survival on managing properties, seizing limited opportunities in construction and exploiting a lonely bright spot in today’s development world-health care projects, said Mike Curless, the company’s president.

“We continue to size our company for the realities of the economy that we’re dealing with,” Curless said. “Our business model is going back to basics.”

Demand has dried up for speculative office, retail and industrial developments, the bread and butter behind a rapid growth spurt that began about five years ago for Lauth. The company doubled its revenue from 2004 to 2005, then doubled it again from 2005 to 2006. During the same period, its project lineup jumped from $143 million to $592 million, and its employee count bolted from 168 to 405.

Lauth emerged as a national powerhouse in part by making big bets in some of the nation’s hottest real estate markets, including Arizona and Florida. But its fortunes turned quickly as the market nose-dived. In March, Lauth closed its Orlando office and scaled back its Charlotte, N.C., operation from about 60 employees to eight.

“We’ve had a great run,” former Lauth Southeast regional partner Flint McNaughton told the Charlotte Business Journal for a story last month. “It’s painful where we are now.”

McNaughton blamed the cutbacks on “recessionary pressures.” In 2007, Lauth built more square feet in Charlotte than any other developer, and earlier this year wrapped up the $100 million Nascar Plaza, a 20-story office tower in downtown Charlotte.

But funding and tenant interest has dried up for such projects, leaving speculative developers like Lauth stuck with expensive land and under-performing buildings.

The company particularly is feeling heat from Chicago-based Inland American Real Estate Trust Inc., which in June 2007 invested $227 million to fund the development and ownership of about 50 Lauth properties in 23 states. In return, the company is entitled to an equity stake and a 9.5-percent preferred dividend in those projects.

Inland officials declined to discuss the firm’s investment with Lauth, citing Securities and Exchange Commission rules related to its status as a non-traded real estate investment trust. But a recent Inland regulatory filing suggests the firm’s investment is not performing as hoped.

Inland in January took a third seat on a five-member board that manages a joint venture called Lauth Investment Properties LLC, giving it effective control.

“The current economic environment will likely delay or extend the development time lines in many of these projects,” the filing says.

In a separate section, the filing describes the status of Inland’s joint venture projects as a whole: “Although we have no additional obligation to fund these ventures, our investment could be at risk without the funding of additional capital.”

Curless said Inland took an additional board seat after a Lauth subsidiary that owns eight properties violated some of its loan agreements. He said the local owners still control Lauth Group Inc., the operating company.

“Every real estate joint venture is stressed,” Curless said. “Look around.”

Curless would not say whether his fellow partners in Lauth, including Chairman Bob Lauth, CEO Greg Gurnik and CFO Larry Palmer, will remain with the company as it restructures. He said there will be a “time and a place” for those announcements.

“We’ve been dealing with lots of challenges and lots of change,” he said. •

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