Real-Estate Slump Hits Howard Hughes's Heirs By Kris Hudson Wall Street Journal 10-23-2009

Real-Estate Slump Hits Howard Hughes's Heirs By Kris Hudson Wall Street Journal 10-23-2009

Real-Estate Slump Hits Howard Hughes's Heirs
General Growth Bankruptcy Filing Puts Payout in Limbo
By Kris Hudson
The Wall Street Journal
October 23, 2009

Reclusive billionaire Howard Hughes was an only child, dying in 1976 with no will or children.

Mr. Hughes's estate now has more than 1,000 heirs and beneficiaries who are hoping for one last, big payout from a swath of Las Vegas land bought by the tycoon in the 1940s to establish an inland base for his aerospace operations.

They are likely to get little. The housing bust has shriveled the value of the 7,000 acres left in what is now called the Summerlin development in Las Vegas, once thought to be worth as much as $2 billion. The property also has gotten bogged down in the bankruptcy of mall giant General Growth Properties Inc., which controls the land and was supposed to make a final payment to the Hughes group early next year.

"There's terrible disappointment," says Platt Davis, a retired lawyer in Houston and second cousin of Mr. Hughes who leads the group of heirs along with two other beneficiaries. The 2010 payment is supposed to be equal to half the appraised value of the remaining land at the end of this year.

Summerlin represents the last chapter of the Hughes-estate saga, which is almost as extraordinary as the life of the aviator, film director and entrepreneur who set world speed records for flight, romanced Katharine Hepburn and founded Hughes Aircraft Co.

When Mr. Hughes died, his holdings encompassed 26 disparate companies that included seven Las Vegas casinos, a struggling helicopter maker, several aircraft, a television station, private airport, regional airline, mining claims and a bag of casino chips he neglected to redeem. Summerlin was then 22,500 undeveloped acres of desert and scrub.

Because Mr. Hughes had no will or children, his estate initially was divided among his cousins, aunts, uncles and other relatives. Law firms and other professionals that did the initial work to sort out the estate and fix up some assets for disposition accepted small shares of the proceeds as payment for their services.

The number of claimants and their beneficiaries has grown to more than 1,000 people, including more than 200 relatives of Mr. Hughes. They so far have collected more than $1.5 billion from the liquidation of his estate, according to figures provided by the group.

The heirs include schoolteachers, ministers, college professors, homemakers, architects, a federal judge and a rancher. Mr. Davis and the other co-leaders of the group, second cousin David Lummis and former lawyer David Elkins, say they have fielded questions and concerns by phone, email and even in person at reunions of various Hughes family branches.

Catherine Russell received her share of Mr. Hughes's estate in her 1986 divorce from her husband, a lawyer whose firm did work for the Hughes heirs. The money she received every year amounted to at least a few thousand dollars but never more than half her annual salary, helping to cover college for her son and daughter and medical costs after a drunken driver hit her in 1989.

Ms. Russell, a deputy commissioner in California's Department of Real Estate, also steered yearly proceeds toward the care of her son, now 38 years old and mentally disabled because of a 1994 motorcycle accident. She planned to use the final Summerlin payout to establish a trust for her son and put a deposit on a house.

Now that the payment is on hold with General Growth's other debts and obligations, Ms. Russell describes her situation as "very disconcerting and depressing." While many people assume that all of the beneficiaries of the Hughes estate are rich, she says, "it is very depressing to be 60 years old and no longer be able to afford a piece of property and to pass something on to my children, especially considering my son's disability."

General Growth, owner of more than 200 U.S. shopping malls, says it wants to resolve the Hughes claim.

"The company is optimistic that a fair resolution will be reached with the Hughes heirs, as with all of our stakeholders, as we proceed through the process of emergence from bankruptcy," President and Chief Operating Officer Tom Nolan says.

Mr. Hughes bought the Las Vegas land, which the heirs later named Summerlin after his grandmother, because he was concerned that the Japanese attack on Pearl Harbor in 1941 had exposed the vulnerability of the aircraft industry along coastal California.

By the mid-1990s, the area was hot real estate. In 1996, the Hughes group agreed to sell the property to Rouse Co., a large developer.

In the negotiations, Rouse and the Hughes group couldn't agree on a purchase price because so much of Summerlin had yet to be developed. Instead, they formulated a profit-sharing agreement, in which the heirs would receive half of each year's profits from sales of Summerlin land to home builders over 14 years. And instead of cash, the heirs decided to receive payments in stock, which helped them defer taxes.

Those payments amounted to roughly $570 million in stock as Summerlin was developed. Roughly 95,000 people live there now. But land values have fallen so drastically in Las Vegas that the Summerlin claim might now be worth less than $100 million, says analyst Kevin Starke of CRT Group LLC.

One other problem facing the Hughes group: General Growth bought Rouse in 2004, inheriting the pact with the heirs. In April, the mall owner, struggling under $27 billion of debt, sought Chapter 11 bankruptcy protection. Heirs who held on to General Growth stock from earlier payments saw its value fall 92% from its high of $67 in March 2007.

Now that General Growth is in bankruptcy, the Hughes group must get in line with the hundreds of other creditors, submitting a claim to U.S. Bankruptcy Judge Allan Gropper next month. Stuck in the pecking order with shareholders, Mr. Hughes's heirs and beneficiaries get nothing unless General Growth's lenders and debt holders recoup the full amounts of their claims.

As part of the process, General Growth and the Hughes group will need to decide whether to keep the old deal, revise it or strike a new one subject to the judge's approval.


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