Diversify, diversify

Key players in a $150 million financial failure affecting investments of agencies and members of the 279,000-member Christian Reformed Church were headed for a showdown this month. A CRC-headed creditors' committee warned IRM Corp., a real-estate investment operation based in Concord, Calif., and run by prominent CRC members, it must find a white knight with a suitable buyout offer. Otherwise, the committee said, it would press for immediate action in a lawsuit it filed last month asking that a receiver be appointed to oversee IRM and find a buyer.

It all started with an announcement by IRM last October stating it no longer could pay its debts and was halting payments to investors. Numbered among the 1,537 corporate and individual investors were many CRC members and several denominational entities that stand to lose millions of dollars.

IRM (the initials stand for Investment Research Management) was founded in 1967 by John O. "Jack" Van Hofwegen, a life insurance salesman and prominent CRC member. It was structured around investor-funded limited partnerships and related "loan groups" designed as tax shelters. Under a complex arrangement, the general partners (members of the Van Hofwegen family) would borrow investment funds to acquire apartment and office buildings in northern and central California. Typically, they would place second mortgages against the properties. They used some of the proceeds for improvements, some for other purposes. The partners would use rental income to pay the bills and fund interest payments to investors. The higher the property values climbed in California's surging real estate market, the greater IRM's revenues.

For more than 20 years, investors made money; the 9 to 11 percent returns were modest compared to recent stock market performance, but they were double what banks and other secure sources were paying. Members of the Van Hofwegen family and IRM executives sat on boards of CRC agencies and CRC-related Calvin College. The Home Mission Board, the Back to God Hour broadcast ministry, and Calvin all invested in IRM. CRC and Calvin spokesmen insisted the investment decisions were not influenced by IRM's people on the boards. As IRM promoters spread the word throughout western Michigan, hundreds of individual CRC members signed up, some with their life savings. Its clients mainly CRC members, the Barnabas Foundation, a non-profit estate-planning foundation in Orland Park, Ill., that manages more than $100 million in investments, also became an investor in IRM to the tune of some $25 million.

Trouble began developing for IRM in the late 1980s after U.S. tax laws were changed to phase out tax shelters. Then, in the early 1990s, California's economy slumped, and real-estate values declined in the area where IRM's properties were concentrated. Some of IRM's holdings were over-encumbered with loans, and IRM found itself owing more than the properties were worth. Income sagged. Investments soured.

Worried about market trends in California, officials at Barnabas conducted a "due diligence" audit of IRM in 1994. They were alarmed by what they discovered: properties leveraged above a 75 percent loan-to-value-ratio limit, figures in financial statements IRM gave Barnabas that did not match those IRM supplied to the Internal Revenue Service. Barnabas struck an agreement with IRM and in 1996 began pulling out its funds. Later, other CRC investors would blame Barnabas for both hastening IRM's demise and failing to sound an alarm.

By the time of the freeze last fall, Barnabas still had $12 million at IRM, some of it so designated by CRC donors. CRC Home Missions had $7.9 million invested, Calvin College $2.4 million, and Back to God Hour nearly $1 million. IRM's debt on 55 properties was about $400 million, with their valuation estimated at around $270 million, according to unaudited figures.

A creditors' committee, organized to work with IRM, tried to resolve the mess; Ken Horjus, CRC's top financial administrator, was appointed chair. It ordered audits, endorsed the hiring of John Barnard, a specialist in turning around ailing businesses, and demanded slashes in executive salaries at IRM. (Salaries were reduced "significantly," Mr. Barnard told WORLD this month. He also said the Van Hofwegen family and IRM executives themselves have large sums invested in IRM and at risk. He said they have acknowledged making mistakes in trying to deal with the crisis.)

A minority group of creditors broke ranks last month and, with the assistance of IRM executives, opened negotiations with the Eenhoorn Group, a property management firm in suburban Grand Rapids. Eenhoorn offered to buy out the investors at five cents on the dollar and attempt to pay the remaining principal over 10 years from whatever profits can be generated. Hardship cases could get 75 percent of their investment back immediately.

Caught by surprise, the Horjus-led creditors' committee saw the alliance of IRM with the rebel group as a threat to a possibly better deal for investors. The committee filed suit against IRM, accusing it of fraud and asking the court to appoint a receiver to manage the firm and seek potential buyers. IRM heeled, agreed to cooperate more closely with the committee, and received a postponement until Aug. 14 in receivership proceedings to find a buyer.

Two prospective buyers have surfaced, and several others have made inquiries, Mr. Barnard told WORLD last week. Because of tax-exposure issues and other reasons, it's not a matter of selling buildings, he said. "We need to find someone to take over the partnerships." As for the IRM investors, satisfaction still is $150 million plus interest away.