Interview with Kenneth Leventhal

Kenneth Leventhal, founder of Kenneth Leventhal & Co., is a dedicated Life Trustee of the University of Southern California

In 1949, Mr. Leventhal and his wife Elaine founded an accounting firm in their one bedroom apartment on South Shenandoah Street in Los Angeles. Mr. Leventhal went on to build one of the world's largest and most respected accounting and consulting firms, specializing in real estate and complex real estate related transactions. 

When asked why he pursued real estate clients, Mr. Leventhal replied that it was a matter of asking, "Who needs a new accountant?" Big firms dominated the field-he realized that in order to differentiate himself, he needed to specialize. He determined that he would pursue an industry that is characterized as entrepreneurial with easy ingress; capital intensive with high leverage; and an organization that allowed him to work directly with its corporate leaders. He contemplated three industries-oil exploration, cattle raising and real estate. While all three fit his criteria, Mr. Leventhal recognized that Southern California was on the verge of rapid growth and young builders were becoming more prominent. At the time, most homebuilders were tradesmen, who needed guidance and assistance with the increasingly complicated tax rules and accounting aspects of their businesses. Mr. Leventhal was able to fill their need and help negotiate with lenders, and in return, his clients recommended Kenneth Leventhal & Co. to all of their homebuilding colleagues. Those young builders included venerable names such as Ray Watt, Monty Fisher, and General William Lyon.

Mr. Leventhal and his partners were innovators and pioneers in the real estate accounting field. One such innovation was the "combined financial statement." In the 1950s, homebuilders formed multiple corporations for a single tract of housing because each corporation paid a lower tax rate on the first $25,000 of income. To avoid IRS scrutiny, Mr. Leventhal's firm devised an intelligent order to the corporations whereby one corporation was responsible for development, another for building and third for sales. Homebuilders realized a significant tax benefit, but found it difficult to attract construction lenders. This led to Kenneth Leventhal & Co.'s innovation of the combined financial statement, which created a complete picture of the homebuilder's assets even though the companies were not cross-collateralized. This gave lenders the confidence to loan to homebuilders, and lenders quickly recognized the Kenneth Leventhal & Co. name as a stamp of approval.

When asked his opinion about his greatest contribution to the real estate community, Mr. Leventhal did not point out the combined financial statement that allowed homebuilders to grow, or his contribution of advice, introductions and valuation services during the mergers of the 1960s. Instead he recalled his work on consensual reorganizations, or "workouts". Prior to the 1970s most real estate insolvencies ended in bankruptcy court, but starting with the real estate downturn of the early 1970s Mr. Leventhal had a simple formula to rescue the failing homebuilders. He would bring together the homebuilder/borrower and all of the borrower's lenders together in the same meeting, disclose the financial condition of the company, the company would agree to treat all creditors of the same class fairly and uniformly, and agree not "lie, cheat or steal". In exchange, the lenders uniformly agreed to extend loans, exculpate the borrower and reduce interest rates ("take a little haircut" on the interest). That would allow the builder and his projects to survive the downturn and repay the lenders as prices and occupancy improved. This allowed the companies to survive. Because of this work, numerous homebuilders survived a difficult market and eventually returned to greatness. Beneficiaries included US and Canadian companies such as John Portman, Trammell Crow, Warmington, Trump, Hovnanian, Daon, Nu West and Carma, as well as companies in Europe and Asia.

When developers are faced with challenging market conditions such as those in the 1970s, Mr. Leventhal advises that it is important to select a strategy that allows survival during periods of low returns. Mr. Leventhal notes that with public and private debt at an all time high, the balance of trade at a severe deficit, the USA's continued exporting of its manufacturing capability, and the snowball effect of the sub-prime mortgage problem, that the country could be sitting on an economic time bomb. He mentions tensions in the Middle East and international competition for oil as additional factors affecting the markets. Nonetheless, he thinks that real estate is still a safe investment, provided that investors have long-term goals and can survive short-term volatility.

Mr. Leventhal's contribution to the real estate community goes beyond his success at Kenneth Leventhal & Co. Mr. Leventhal and his wife Elaine have been active supporters of the USC community since the 1970s-Mr. Leventhal joined the Board of Trustees in 1977 and is now a Life Trustee of the school. With respect to contributions, in 1995 the Leventhal's generous gift of $25 million helped advance USC's accounting program, which is now named the Elaine and Kenneth Leventhal School of Accounting. In addition to his financial contributions, USC and The Lusk Center can thank Mr. Leventhal for recruiting Stan Ross, his co-managing partner from Kenneth Leventhal & Co., to get involved at USC. Mr. Ross has since become chairman of the USC Lusk Center and founded the Ross Minority Program in Real Estate. Mr. Leventhal's contributions clearly continue to flourish. Mr. Leventhal truly embodies the Trojan Spirit, stating, "What they say about the Trojan Family is true."

Darren Fancher (MRED 2003) is a former employee of Ernst & Young Kenneth Leventhal Real Estate Group (the firms merged in 1995). Darren is currently an Investment Manager at Lakeside Capital Partners.