Barry Sternlicht,the real estate bargain hunter

None of this deters Barry Sternlicht,the real estate investor who owns the building. The bones, he says,gesturing around the room. The bones are extraordinary!

Sternlicht plans to transform Paramount Bay into a haven for wealthy buyers who will one day want to live here. But he concedes that the buildings entrance needs work. This looks like an abandoned property, he says. We have to make it look like its alive.

Perhaps such brio is a prerequisite for an investor wading into the worst real estate wipeout in generations. Indeed,Sternlicht,49,has been one of the downturns busiest buyers. In the last year and a half,his private equity firm,Starwood Capital,has raised more than 3 billion. He has bought land in Florida and ski lodges in Colorado. He created a real estate finance company,Starwood Property Trust,which he took public last August in a successful initial public offering.

But his highest-profile deal has been the acquisition of the 4.5 billion real estate loan portfolio of Corus Bankshares,the nations largest condominium construction lender until it failed last September because it had financed too many projects like Paramount Bay. The following month,Sternlicht and a group of investors including TPG Capital,WLR LeFrak and Perry Capital won the loans in an auction run by the Federal Deposit Insurance Corporation,paying 554 million for 40 per cent of the package,valuing the debt at 60 cents on the dollar. The FDIC holds the remaining 60 per cent.

Sternlicht hopes to foreclose on many of Coruss errant borrowers,restyle their buildings and sell units for a significant profit once the real estate market recovers. He says he and his investors can afford to wait until then because the FDIC has provided them with 1.4 billion in zero-coupon financing and an additional 1 billion in low-cost loans that can be used to complete unfinished projects.

If all goes as planned,Sternlicht says,he and his investors are also positioned to do rather well themselves. Some are skeptical of Sternlichts projections. While real estate prices are no longer in free fall,a recovery still looks far away. Condo prices have plummeted since the 2006 peak,according to the National Association of Realtors.

Then theres that 554 million price that the Sternlicht group ponied up to snare its portion of the Corus portfolio it was 20 per cent higher than its two closest competitors. Everybody in the industry thinks Sternlicht overpaid, says Peter Zalewski,founder of Condo Vultures,a real estate brokerage and consulting firm.

But Linus Wilson,a finance professor at the University of Louisiana,Lafayette,who has studied the FDICs real estate sales,says he thinks the price Sternlicht paid for Corus will hobble his returns. Wilson points out that 59 per cent of the loans on Coruss books were no longer performing before the bank failed in September,meaning that they were generating virtually no income. Corus described another 558 million in the portfolio as problem loans that were near default.

Wilson argues that if Sternlicht doesnt sell condos right away,he may have trouble making his first loan payment of 150 million that comes due in October 2011.

And before Sternlicht can even change the lobby furniture and the landscaping at many of these Corus-financed projects,his investor group has to prevail in a slew of foreclosure proceedings against developers who have defaulted on their loans.

Some of these exhausted borrowers are simply handing over the keys peacefully. Others are fighting back and asking a politically charged question: Why is the federal government offering low-interest financing to Sternlicht and his private equity partners when it could be helping struggling condo builders finish their projects,which are keeping hundreds of people employed?

Sonny Astani,developer of one such project,the Concerto project in Los Angeles,says the government should support him rather than backing Sternlicht. I think Sternlicht is going to wind up flipping all this stuff in a year, says Astani. There are going to be huge lawsuits and bad publicity. His investors are going to get sick of it.

You might not expect to find Barry Sternlicht selling condos in Miami in a recession. He is best known for creating Starwood Hotels amp; Resorts Worldwide,a major hotelier that he built into a public company with 6 billion in annual revenue and brand names like Sheraton and Westin. He conjured up the Westins signature Heavenly Bed and the W Hotel chain,which introduced hip,boutique inns to the masses. In the last real estate recession,in the early 1990s,Sternlicht laid the groundwork for his hotel empire by snapping up distressed properties. Now Sternlicht,who left Starwood Hotels in 2005 after a dispute with the board of directors,is making a similar play with distressed condos in overbuilt cities like Miami,Las Vegas and Los Angeles.

Tanned,fit and sitting on the couch of his office in Greenwich,Connecticut,he apologises for his head cold and then starts a spirited defense of the Corus deal. The way he sees it,he and his partners are going to be the dominant players in all the cities where Corus poured its money. We are going to be like the Saudis in all these markets, he says.

The key,he says,is the cheap FDIC financing. Thats the beauty of this investment, he says.

Sternlicht boasts about some properties on which his group holds the notes like Terranea,a 475 million resort in Rancho Palos Verdes,California. Its got the second-largest ballroom in Southern California, he says. Its right on the water. It took 12 years to get the zoning. Other projects will need a bit of work. One of them is a condo project with five towers on the outskirts of the city. Its a mess, says Norman Radow,an expert on distressed real estate.

Sternlicht is more charitable about the property in Las Vegas. I think we are going to convert that one to rentals, he says. The units are pretty nice. And the views are great. In the meantime,he adds,the Corus portfolio had already generated 400 million in cash. Therefore,he says,nobody should worry about his groups ability to cover its debt payments.

Sternlicht says he is simply doing today what he did during the last real estate recession: amassing inexpensive real estate and finding ways to make it more desirable. Barry likes to buy real estate by the pound and then find the value in it, says Robert Wennett,a Miami Beach developer who worked with him in the 1990s.

A Harvard Business School graduate,Sternlicht spent the 1980s learning his trade at JMB Realty in Chicago,a leading deal maker at the time. He was let go after the real estate market collapsed in 1989. So he ventured out on his own,raising 20 million from the wealthy families in New York and buying loans from the Resolution Trust Corporation,which the federal government had created to mop up the real estate mess left from the savings-and-loan debacle. He journeyed to auctions and bid against guys in pickup trucks to buy the notes on apartment complexes at rock-bottom prices. He says one complex came with a llama farm and turned out to be a pretty good investment. The llama farmer,Sternlicht says,flew to Chicago to pay off a 1 million loan before Sternlicht could foreclose on it.

He also invested in hotels. In 1994,he bought the discounted debt on a publicly traded hotel company,Hotel Investors Trust,and used it to buy Westin Hotels. In 1996,Sternlicht surprised Wall Street when he outmaneuvered the Hilton Hotel chain and bought ITT Sheraton for 14 billion.

He was absolutely a minnow compared to Hilton, says Thomas Flexner,Citigroups global head of real estate,who advised Sternlicht on this deal and many others.

The new hotel king became known for his obsession with details. He says that the one time he totally lost it was when he arrived at the W Hotel on Lake Shore Drive in Chicago and discovered that the foliage at the front door was dead. I actually went over to the Smith amp; Hawken store and bought furniture and plants for them, he says. I didnt want to wait 18 months.

Sternlichts tenure as the hotel companys CEO would end badly. His friends say he wanted to relinquish his managerial duties and do deals. He recruited his successor,Steven Heyer,only to become disillusioned with him. The board didnt agree and Sternlicht resigned.

Sternlicht returned to Starwood Capital,his original investment vehicle,to do deals. But his timing couldnt have been worse. He raised a lot of money but couldnt seem to find his way. He tried to start an eco-friendly hotel chain called the 1,but nothing has come of that venture.

He also chased hotels and office buildings,but he says he couldnt bring himself to be the high bidder paying top dollar in such a frothy market.