The Highly Leveraged World Of David Sabey -- Sorting Out Sabey -- Complex Web Of Finances Reaches The Crossroad Of Success Vs.Failure

David Sabey was the perfect capitalist.

With borrowed money, he created value.

On raw land, he built buildings for Boeing.

He took hulks of old buildings and remade them into gleaming offices.

As a 230-pound Husky football player, Sabey once crushed opponents with his powerful body. Then as a developer he became a force in the Seattle economy, spreading wealth to a host of construction workers, title agents, commercial brokers, bankers and others.

His touch was golden.

He made millions. He needed a helicopter to survey all that he owned in Western Washington. As his empire extended further, it took a jet to see it all.

Then came the invisible hand of market forces, and today David Sabey is a millionaire feeling pinched.

Some say Sabey, 44, is Seattle's Donald Trump, another go-go developer who slapped his name on aircraft and made a play for ownership of a professional sports franchise - the toys afforded by real estate empires swelled during the easy lending of the 1980s. The comparison is unfair. People actually like David Sabey.

But one thing seems clear. Like Trump, Sabey is trimming his sails. The jet was sold. The helicopter is on the market. Sabey Corp. has reduced staff by half and slashed costs.

It's a reversal from the heady days of the '80s when Sabey, Martin Selig and other developers freely tapped banks, insurance companies and pension funds anxious for places to put cash. Real estate was appreciating so fast that it was hard to make a mistake, or so it seemed. Sabey's principal lender, Security Pacific Bank, suggested he buy the Mariners, an effort that failed.

Today it's a different story. Like other developers, Sabey faces a worsening lending climate. Banks are setting new terms for old loans, demanding cash, or raising payments, putting the squeeze on developers just when their properties may be hardest to sell.

"The bankers are running for their lives," says Dan Grimm, state treasurer. "They're in a retrenchment mode, not a lending mode."

"Hang on. That's all you can do," Sabey says of developers today.

A MOUNTAIN OF DEBT

Like many entrepreneurs who expanded their empires in the 1980s, Sabey sits atop a mountain of debt. The amount is something only he and his bankers know. Most of his holdings are private.

Many of Sabey's properties and other interests are pledged to Security Pacific, which is soon to become part of San Francisco-based BankAmerica.

Sabey and the bank decline to reveal his exact indebtedness. But for one project, expansion of Spokane's Northtown mall, he's on the hook for $112 million. He borrowed $30 million from Security Pacific the day before he closed the deal to buy Frederick & Nelson, Seattle's major department store chain.

Two years after Sabey bought F&N, the retailer filed for Chapter 11 bankruptcy protection. The chain now faces a do-or-die Christmas season, but its own sales projections cast doubt on its survival after Jan 31.

Sabey has worked hard to reposition F&N by closing stores and changing its merchandise, but the climate for retailing nationwide is bad.

F&N desperately needs breathing room but its principal lender, Citibank, has financial problems of its own. Under a court-approved financing plan, Citibank is keeping F&N on a short leash. Citibank can pull its cash out if the chain falls below financial targets.

The bright spot may be Sabey's expansion of the Northtown Mall, a $125 million project that eventually could become a cash cow. The mall is 75 percent leased, but still under construction.

Sabey says his finances overall are fine and he would survive if both F&N and Northtown fail - which they won't, he insists. His other business interests - a hazardous waste company and an apparel company - are doing well. Falling interest rates are bringing a dramatic drop in his interest payments, he says.

Sabey says it bothers him to lay off people, but it doesn't hurt to sell airplanes or helicopters.

"I started out with nothing. I don't need those things," the former construction worker says of his aircraft. "I used them as tools."

BIG MAN, BIG PLANS

As a boy, David Sabey wanted to be big. He prayed that God would make it true.

"Please, God," said the boy, as he knelt in his Burien home, clutching his rosary. "Make me as big as Big Daddy Lipscomb."

Today, at 6 feet 1 inch, Sabey comes within 5 inches of reaching the height of the legendary Baltimore Colts lineman. As a football player, Sabey starred at Highline High School, although he warmed the bench at the University of Washington.

But Sabey made himself big in other ways.

Starting as a construction worker in college, Sabey soon evolved into a consummate deal maker who built a business empire in construction, real estate, property management, apparel and retailing. He got there by leveraging against a steadily expanding base of assets, whose value grew with time. As soon as one building was built and leased, it was used to obtain a loan for the next project.

Throughout it all, he specialized in staying away from what other people wanted. He let others buy popular property and fancy offices. He looked for old warehouses. He developed in South Seattle and the suburbs, not in downtown Seattle. For his headquarters, he bought a 30-year-old Western Farmers Cooperative building on Elliott Avenue and remodeled it into a waterfront office complex. Where people once chopped chickens, Sabey today cuts deals.

In the early days, he had a job in Vancouver, Wash., and saved money by sleeping in his truck. One of his first major jobs was to bid on a job to demolish the old Bank of the West Building in Bellevue. Instead of destroying the building, as others planned, Sabey simply moved it to another site and found a tenant. Sabey says he enjoys finding "ducks" - something of value missed by others. He insists that the ailing Frederick & Nelson department-store chain is such a duck.

A millionaire many times over, Sabey is proof that hard work, brains, luck and loads of borrowed cash can bring success beyond the dreams of the aspiring youngster.

But some wonder if Sabey's luck has come to an end.

Sabey is deep into two of the nation's most troubled sectors - real estate and retailing. Indications are that he is highly leveraged, with a good chunk of the debt carried by his principal lender, Security Pacific Bank of Washington.

Rumors of Sabey being in trouble have been circulating for months, fueled, in part, by cuts at his headquarters, his interest in selling properties and problems at F&N and Northtown Mall in Spokane.

Sabey is under close watch by Security Pacific and Citibank, the principal lender to F&N. When F&N filed for Chapter 11 bankruptcy protection, Citibank insisted that an independent consultant be brought in to help run the retailer.

How Sabey finesses his risky projects in the coming months will have a major impact on the Northwest, Sabey personally and the employees who work for his businesses. F&N alone employs 1,800 people.

Could a single break in Sabey's web of interests - such as the demise of F&N - cause the collapse of the Sabey empire?

Sabey is famous for playing the local boy who lacks sophistication. But woe to anyone who underestimates his brains, say those familiar with his business skills.

A key question is to what extent his interests, as a whole, are pledged to his lenders. That answer is confidential. Sabey's equity in his properties, therefore, is unknown, as is the extent to which his other business interests support those that are not making money.

Now is not the time for any bank to show extended patience with a borrower. Feeling pressure from regulators to tighten policies, banks are trying to get rid of problems loans, are less likely to lend new money and often are demanding accelerated loan payments.

With the exception of Sun Sportswear, a public company he controls, Sabey's interests are closely held by him and other investors. F&N is a separate corporate entity whose liabilities appear to be separate from Sabey Corp. and other Sabey interests.

Because of this, it appears unlikely that an F&N collapse would do serious harm to Sabey's other interests, say several sources familiar with Sabey's operations and legal strategies.

Much of what can be known about Sabey and his holdings is revealed in property records, public filings for his public corporation and the bankruptcy court file for F&N.

The resulting portrait is a reminder of what Winston Churchill once said about the Soviet Union being a riddle wrapped in a mystery inside an enigma. Sabey's financial dealings are complex, a mingling of private and public enterprises, where assets are pledged to secure loans to Sabey Corp. or to David Sabey personally.

A lawyer who once examined Sabey's network of enterprises described it as "an octopus devouring itself." He said he found 40 different business entities, some of which were shells with no assets.

Sabey has never given a public estimate of his net worth. In 1988, he claimed he was qualified to buy the Mariners, which required a net worth of at least $100 million. With the Mariners once again on the market, Sabey says he is not interested in buying. Sabey today says he doesn't know if he meets the net-worth criterion, given the uncertain market for real estate.

Sabey's major jobs are saving Seattle-based Frederick & Nelson and filling Northtown Mall, which he bought for $25 million in 1989 and is expanding at a cost of $100 million. When completed, Northtown will be as big as Bellevue Square, but it is now more than a year behind schedule.

Sabey predicts eventual profits on both fronts, but some retail experts say otherwise. Northtown, which is showing signs of success, must generate huge sales figures to service its debt. Typically, mall owners get a percentage of the retailers' sales. F&N's own financial reports project losses extending through Jan. 31, when short-term financing expires.

Northtown will be the largest retail complex between the Cascades and Minneapolis, and if it fails it would be a huge blow to Spokane's economy. Sabey says there is no question Northtown will survive, because major tenants with long-term leases already are showing strong sales.

If F&N is forced into liquidation, employees would lose their jobs, Seattle would lose a major department store, and five stores could go on the market, including major locations in the Seattle and Spokane downtown retail cores.

Sabey is determined to prove the skeptics wrong. In a recent pep talk to F&N employees in Spokane, Sabey said what may be his personal motto these days: "There's nothing more pleasurable than doing something people tell you that you can't do."

Security Pacific bankers won't comment on the bank's relationship with Sabey or the debt it carries on his projects. And Sabey declines to be specific about his borrowings or his equity in real estate - the collateral for much of his debt load.

Both Security Pacific and Citibank are facing significant changes that could be generating additional pressure on borrowers such as Sabey. Security Pacific and BankAmerica have announced plans to merge, and the parent of Citibank, the nation's biggest bank, is trying to restructure itself as protection against loan defaults.

Sabey acknowledges that Security Pacific would like to reduce its exposure in Sabey affiliates. Sun, his wholesale sports-apparel company, recently shifted its line of credit from Security Pacific to two other lenders.

According to a filing last year with the state Department of Licensing, Sabey pledged to Security Pacific all cash and non-cash proceeds from the disposition of any of his real estate, except his personal residence and recreational property.

Rejected as a buyer of the Mariners, Sabey in 1989 went on a shopping spree. That year, he purchased both Northtown Mall and F&N. He also raised cash by taking Sun Sportswear public.

Records filed with King and Snohomish counties show Sabey or Sabey Corp. has title to 21 properties assessed at about $108 million. Among them are his headquarters on Elliott Avenue; the building occupied by the Seattle Post-Intelligencer; several large office or warehouse buildings occupied by Boeing, Group Health and other tenants; and Sabey's 11,100-square-foot residence on Hunts Point, valued at $4.91 million.

Counting a $112 million construction loan on Northtown from Security Pacific, Sabey has taken on loans since 1989 that, if counted together, would total $189.3 million. The total could be higher from loans elsewhere. Sabey declines to disclose all the locations of his properties, calling it a private matter.

Apart from F&N's loans with Citibank, the bulk of the loans to Sabey or Sabey Corp. are with Security Pacific, followed by Confederated Life Insurance Co., Prudential Insurance Co. of Americaand the Benaroya Co.

Sabey says several of the loans represented permanent financing for projects. Without revealing details, he cautions against totaling the Security Pacific loans, saying some represent temporary bridge loans.

To Sabey, properties are pieces assembled into a package big enough as collateral to satisfy a lender. Some properties are inserted and later removed to create the appropriate package, he says.

Sabey property records from 1989 show a brisk series of transactions that year in which various loans or other commitments are secured by parcels of property.

"We move these assets around and use them," Sabey says. "We've got so much velocity going on. We're constantly moving these things around to appropriately position them. . . . We're in the business of development. It shows that we're active."

Capital, Sabey says, is something that is rented from a bank and services a developer, like a forklift or any other tool. "It's nothing more and nothing less. We use capital to create value and jobs," he says.

Ironically, the very size of Sabey's indebtedness to Security Pacific gives him leverage, says a Seattle-area developer who knows Sabey's bankers.

"A big bank gets so far in, the only way out is to go farther in," another developer says.

The property records and other documents show that the bank's collateral in Sabey affiliates has grown in recent years. Part of that reflects new loans and also may reflect the bank attempting to increase collateral on previous loans, a common practice by lenders today.

Going public with Sun in 1989 netted Sabey about $8.4 million. Sabey also collected $1.9 million that year in Sun stock dividends - a one-time arrangement - and received a $600,000 loan from Sun.

Sabey has pledged all of his stock in Sun Sportswear to Security Pacific, meaning that his 67.7 percent ownership share in Sun isvirtually controlled by the bank. Upon default by Sabey and "certain of his affiliates," the bank may foreclose on the stock and take control of the company.

Under the same agreement in which Sabey pledged his Sun stock, he pledged at least some of his interest in Burlington Environmental, a hazardous-waste company, according to a 1989 filing with the state Department of Licensing. Sabey also pledged his interest in a real estate partnership, in F&N and in all stocks, bonds, cash and other items dedicated to a reserve account, according to the filing.

Both Sabey and the bank may have been counting on one outlay of cash that did not go forward.

Last year, plans were dropped to convert Burlington Environmental to public ownership. Sabey, who holds a 44 percent interest, planned to raise $23.5 million to $27 million through the stock sale. Burlington Resources, which owns a controlling interest in the stock, decided not to take the company public. Sabey said the change did not cause problems for him.

If Security Pacific is losing any sleep over Sabey, its main focus could be Northtown, an enormous undertaking for the bank, for Sabey and for Spokane. The Security Pacific construction loan to Sabey expires in 1995. Sabey says his personal exposure, in the event the project fails, is "very little."

Last fall, Sabey tried to find investors for Northtown to cut his exposure by half. Sabey said he talked with several potential investors but they could not agree on price.

If successful, the project could be a cash cow. But skeptics say there is simply not enough shopping dollars in that region to sustain the mall. Sabey says the mall already is drawing a higher volume than experts predicted. He says the mall pulls shoppers from throughout the Inland Empire.

Commercial brokers and appraisers familiar with Sabey's properties say the real estate holdings, as a group, are sound. The buildings have reliable tenants and are making money for Sabey. Unlike some developers in town whose real estate assets may have declined in value, Sabey's have increased, strengthening his hand with lenders.

Although Sabey has expressed interest in selling his properties, he is not offering anything at distressed prices, say brokers and others. Sabey says he is a "merchant builder" who is willing to sell anything, even his home, if someone wants it more than he does. The last sale by Sabey, of the Holgate Center office park in June, fetched a good price - $11.1 million. Sabey says his inventory is increasing in value because few commercial projects are being built now.

Sabey acknowledges that F&N is his most difficult challenge. According to court records, Sabey has sunk $25 million into F&N since buying it and has personally guaranteed a $3 million note to a group of lenders holding title to F&N real estate. Sabey has filed an unsecured claim against F&N for a loan of $40.6 million, a figure that includes his invested capital and "lots of pieces," Sabey says.

Sabey has not said publicly what he paid for F&N, but a financial statement distributed to suppliers and creditors last year says Sabey bought F&N for $19 million, plus a $16.25 million cash contribution to the company. The group that sold F&N to Sabey says he had trouble financing the purchase.

Sabey is suing the group - Basil Vyzis, Herman Sarkowsky, George Lobisser and others - charging that he was misled as to the financial health of the chain.

The group replies that Sabey was fully briefed on the company's health and says Sabey delayed closing the sale because of financing problems. According to the reply, Sabey's lenders would not let him pledge additional stock (which stock is not specified) as collateral to buy F&N.

Sabey "failed to arrange the financing he needed to make the acquisition at the agreed price" and demanded a sale price reduction of 20 percent, with 40 percent of the reduced price financed as a loan, the reply states.

Sabey called the group's statement "interesting," but declined further comment.