If B. F. Saul II ever talked publicly about his business, he would probably dispute the old saying that people can't get rich by taking in each other's laundry.
In the Saul family's financial empire, it's a basic moneymaking technique for in-house companies to sell services back and forth to each other, with the owners--Saul and his relatives--getting paid for each transaction.
It must be effective, because what began as a local real estate and property management company, founded in Washington by Saul's grandfather in 1892, has grown into a far-reaching network of real estate ownership and management, mortgage banking, financial services and savings institutions, all run out of Saul's headquarters at 8401 Connecticut Ave. in Chevy Chase. xcept for the B. F. Saul Real Estate Investment Trust, which sells stock to the public and therefore must disclose some information about its operations and earnings, every link in the Saul chain is privately held by the reticent family, so there is no way to know what its total size and worth are, or how much Frank Saul, as B. F. Saul II is known to friends, is worth personally.
But the organizations he controls are known to have assets of more than $2 billion. Among them, in addition to the REIT, are the original B. F. Saul Co., Chevy Chase Savings and Loan Inc., and Westminster Investing Co., a family-owned real estate development firm.
Even though the REIT sells shares to the public, it is controlled by Saul, who owns more than 38 percent of the stock, either personally or through his other companies. These other organizations in the Saul network are structured to ensure that ownership remains within a tight circle of family members and trusted advisers.
The certificate of incorporation of Columbia Securities Co., for example, provides that its stock is voting stock only so long as it is held by Frank Saul's father, Andrew, or one of Andrew's brothers and sisters. If any of them dies, his or her stock becomes nonvoting.
Columbia is only one of a score of organizations run by Frank Saul and controlled by the family, most of them making money doing business with and for each other. The companies include:
* The B. F. Saul REIT, one of the nation's largest, which survived the two recessions of the past decade that destroyed many REITs and recently returned to profitability. The REIT owns shopping centers, hotels, and commercial and residential property in several states. An independent appraiser concurred last year with an in-house estimate that the market value of the REIT properties is over $315 million. The REIT has consistently paid a dividend of 20 cents per share per year, which means that Saul, owner of 2.13 million shares, takes in over $425,000 from the REIT alone.
* B. F. Saul Co., the original real estate development, mortgage banking and property-management firm created by Saul's grandfather. This company has been the originator of mortgage investments in the Washington area for Aetna Life Insurance Co. for half a century, and is also the originator for John Hancock, Nationwide and Life Insurance Co. of Virginia. By its own account, Saul services a total mortgage portfolio of more than $2 billion, and originates another $500 million annually.
* B. F. Saul Mortgage Co., packagers of conventional and government-insured residential loans. This company issues second trusts, purchases mortgages, and provides end-loans for the REIT's condominium conversions. Last year, this company was paid $35,000 by the REIT for condominium loan processing.
* Westminster Investing Co. This subsidiary, in a presentation to the Pennsylvania Avenue Development Commission, described itself as a real estate investing corporation with an "audited net value" of $10 million and assets worth more than $30 million in the market. Westminster was selected by the PADC to develop a $112 million complex at 6th Street and Pennsylvania Avenue NW--a project Westminster says it can finance from its own resources. The president and chief executive officer of Westminster is B. F. Saul II. The construction manager selected by Westminster for the Pennsylvania Avenue project is the B. F. Saul Co. The exclusive leasing agent for office space in the complex is also the B. F. Saul Co.
* Franklin Property Co., a wholly owned subsidiary of B. F. Saul Co., leasing and management agent for properties owned by the REIT and the manager of its condominium conversions. In 1982, according to documents filed by the REIT with the Securities and Exchange Commission, the REIT paid Franklin $3.25 million for these services. The president of Franklin Property, Michael F. Johnson, is also a senior vice president of B. F. Saul Co. and a vice president of the REIT.
* B. F. Saul Advisory Co., which is investment adviser to the REIT and also carries out the REIT's routine administrative, management and acccounting functions. In 1982, the REIT paid the Saul Advisory company $1.92 million for these services. Frank Saul is president of this company.
* MHC Corp., another wholly owned subsidiary of B. F. Saul Co. MHC was set up to operate five motels owned by the trust because federal tax rules restrict REIT operation of motels. This company was later acquired by the trust, and pays Franklin Property Co. to run the motels.
* Chevy Chase Savings & Loan, the largest state-chartered savings institution in Maryland. B. F. Saul II is president of Chevy Chase and Andrew Saul is chairman. Founded in 1969, this institution listed total assets as of Dec. 31, 1982, of $951 million. Its headquarters are in the same building as B. F. Saul Co. and Westminster. The developer of Chevy Chase's new Prince George's County banking center in Laurel is B. F. Saul Co. This S&L bought $4.2 million worth of condominium loans from the Saul REIT in 1982.
* Government Services S&L, acquired by Chevy Chase last year for $8.56 million. Together, Chevy Chase and Government Services report total assets exceeding $1.5 billion.
* Donald H. Richardson Co., a Washington insurance broker and "mortgage correspondent" acquired by B. F. Saul Co. in a 1980 merger.
* Columbia Securities Co., which describes itself in papers filed with the D.C. Recorder of Deeds as engaged in "real estate and investments." This company was incorporated in Delaware in 1922. Its current president is B. F. Saul II. The other directors are Andrew Saul and George M. Rogers Jr., a partner in the Washington law firm of Shaw, Pittman, Potts & Trowbridge. Rogers is also attorney for the REIT, a director of Chevy Chase S&L, and a director of Westminster Investing.
Also in the Saul network are several smaller, less visible companies--Manor Investment Co., Columbia Credit Co., Chevy Chase Property Co., Agricultural and Timber Management Co. and others--that are not all known even to Saul's close associates. For example, Agricultural and Timber Management is listed on the door as sharing Westminster's office in Saul's building, but William A. Wildhack Jr., secretary of the REIT and a vice president of B. F. Saul Co., said he knows nothing about it.
It is on the other side of "a little Chinese wall" between Saul divisions, he said. "I don't know what those people do."
Saul, who has a reputation among associates as a brilliant but demanding boss and an aloof personality, declined to be interviewed. "I have never given a personal interview," he said. "Our style is to be low-key and private." He said his companies "advertise when we need to, but otherwise we just try to do our job and stay out of the limelight."
Except for a brief stint as head of the D.C. Mortgage Bankers Association, Saul has always steered clear of public attention. He made news only during the 1979-1981 period when, as chairman of the board of Financial General Bankshares Corp., he negotiated the controversial takeover of the banks by Middle Eastern investors. At the time of the takeover, Saul owned, either personally or through his companies, 1.35 million shares of Financial General, parent company of the First American Banks. The stock brought a price of $33.80 per share when the takeover was completed. According to documents filed with the SEC at the time, Saul paid an average of about $14 per share, which means his personal profit may have exceeded $25 million. Saul is still a member of the company's board of directors.
Saul, 51, was born wealthy, but he was never a playboy rich kid. He has been no more flamboyant in his personal life than in his business career. Unlike his party-giving, globetrotting aunt, Rose Saul Zalles, he has never appeared on the society pages.
He went to college at Villanova, graduated from the University of Virginia law school, and went directly into the family business.
In his biography in Who's Who, Saul lists himself as a Republican, and a member of such upper-crust, conservative clubs as Burning Tree, The Brook in New York, and Wianno on Cape Cod. A lifelong resident of Chevy Chase, he lives with his wife, Elizabeth, and their five children in a house valued by Montgomery County appraisers at $494,120--modest by the standards of Potomac or McLean. aul's reputation as a man who keeps his eyes open and his mouth shut, and his well-honed sense of where interest rates and real estate demand are going, have earned the respect of business associates and analysts.
A report on the REIT's stock, issued last month by the brokerage firm of Johnston, Lemon & Co., said that "the trust's ability to survive is, in our opinion, testimony to management's skill and its adherence to a successful and prudent business strategy."
Saul is "ethical but extremely tough," a former colleague said. "If you're going to deal with him, do your homework." He said Saul is a "very strong leader" and "not a consensus director. He doesn't call a meeting to talk about what to do. He'll say, 'here, interest rates are going up, we'll do this or that,' and he doesn't like to delegate authority."
Saul has been successful, this source said, because he is usually right in his calculations about interest rates and market demand. "If I want to know where interest rates are going," he said, "I look at the rates Saul is offering on the REIT's long-term notes. That's the best indicator."
The Johnston, Lemon report noted approvingly that the REIT survived where others failed because it has been run like "a real estate development company," not a "passive investor in real estate projects developed and managed by others."
The REIT was hit hard by the collapse of the Woolco discount chain, a primary tenant in several of the REIT's 26 shopping centers, the report said, but even in the midst of the nation's worst recession in 50 years "virtually all the space formerly occupied by Woolco has been re-leased at substantially higher rates and under leases more advantageous to the Trust . . . management indicates that the shopping centers provide steady cash flow."
Among the properties owned by the REIT in the Washington area are the Holiday Inns in Gaithersburg and Tysons Corner, the White Oak shopping center, the Leesburg Pike shopping center in Baileys Crossroads, and the Avenel Business Park in Gaithersburg. The REIT's leasing agent for Avenel is B. F. Saul Co.
Because the overall market value of the REIT's properties is more than $315 million, the Johnston, Lemon report said, the stock is actually worth considerably more than the $13.75 per share at which it has recently traded. The stock price dropped as low as 4 7/8 last September. Saul and the B. F. Saul Co. own more than 35 percent of the 6 million shares outstanding.
In 1978, the REIT borrowed $51 million from Aetna, the Saul Co.'s longtime partner in the mortgage banking business, in a transaction that shows how Saul keeps money from the business circulating within the family's operations.
First, the REIT paid B. F. Saul Co. a fee of $100,000 for placing the loan. Then Aetna made it a condition of the loan that the REIT continue at least until 1988 to employ as its investment advisor either the B. F. Saul Advisory Co. or "another entitity the majority of voting interest in which is owned by B. F. Saul Company or B. Frank Saul II," according to documents filed with the SEC.
When a REIT is losing money, as Saul's did from 1975 to 1979 and again in 1982, arrangements such as the one with Franklin Property and B. F. Saul Advisory Co. "raise questions because the public entity is losing money while the insiders are making money," according to Kenneth Campbell, a New York investment counselor who specializes in REITs.
But, he said, "there is a cost of operating a real estate portfolio, you can't do it on zero," and the services have to be performed by somebody. The Saul REIT, like all others, employs a board of outside trustees, not part of the Saul family, whose function is to ensure that the public stockholders are getting a fair deal from the REIT's advisor and property manager.
Among these independent trustees are Gilbert M. Grosvenor, president of the National Geographic Society, Thomas J. Owen, chairman of Perpetual American Federal Savings and Loan, and Garland J. Bloom Jr., executive vice president of the Smithy Co., a competing property-management firm. Bloom was formerly a senior vice president of B. F. Saul Co.
Another independent trustee is Philip C. Jackson Jr., vice chairman of Central Bancshares of the South, which owns an Atlanta bank that finances the REIT's property developments in the Atlanta area.
In some money-losing years, these trustees requested B. F. Saul Advisory Co. to waive or reduce its fees, and the advisory company did so, according to papers filed with the SEC.
Saul himself and Rogers, the attorney for the REIT and member of the Chevy Chase S&L board, are trustees of the REIT, but not members of the Committee of Independent Trustees charged with reviewing the REIT's relationship with Franklin Property and B. F. Saul Advisory Co. Rogers is also a director of Westminster Investing Co.
According to the proxy statement for the REIT's annual stockholders' meeting in January, the REIT paid Rogers' firm $391,000 in legal fees in the 1982 fiscal year. "The Trust believes that the fees paid to this law firm are competitive with amounts charged by other firms for similar types of legal services," the proxy statement said.
Campbell, the New York REIT analyst, said he has "never regarded as fat" the fees paid by the Saul REIT for services provided by its family-owned property manager or investment adviser. Some REITs "shop for property management services," he said, but "portfolio management is always done in-house." otential investors in the "senior notes" that the REIT sells to the public to raise capital are notified bluntly in the prospectus that they do not have exclusive access to the investment expertise of the REIT management. The prospectus says that Saul, Rogers and "other persons who are officers and directors of the B. F. Saul Co. control Chevy Chase savings and loan company which may on occasion make investments of a type that might be attractive to the Trust. The Trust will have no priority with respect to such investment opportunities."
Campbell said any REIT has "an inherent conflict of interest" in such a situation between the duty of the REIT trustees to make money for public investors and their other roles outside the trust. Some management groups, he said, give their REIT an "absolute right of first refusal" on any project. Others give the REIT "a right to cherry pick any project." And others do it on a rotating basis, giving the REIT every third or fourth project. But he said Saul is not unique in leaving this decision solely at the discretion of management.
According to the Johnston, Lemon report, the Saul REIT sold $9.2 million worth of its "senior notes" to the public in 1982.