`Paranoid' Mall Baron Lowy Anticipated Slump, Now Fights Taxman


Frank Lowy, founder and chairman of Westfield Group, poses for a portrait in his Sydney, Australia, office on Aug. 29, 2008. Westfield is the world's biggest owner and operator of shopping malls and has 118 centers in Australia, New Zealand, the U.K. and the U.S.

Photographer: Warren Clarke/Bloomberg Markets via Bloomberg News

Billionaire Frank Lowy, Holocaust survivor, one-time Israeli commando and now the world's biggest shopping mall landlord, raises his hand to his forehead to indicate a shrapnel scar hidden beneath a shock of white hair.

As a 13-year-old Jewish boy in Nazi-occupied Budapest during World War II, Lowy supported his mother by foraging for food after his father was deported to Auschwitz and beaten to death by a camp guard.

He got the head wound helping Israel fight for independence from 1947 to '49 after he'd joined the exodus to Palestine.

Lowy carries inner scars as well.

``All those events shaped my life,'' says the founder and chairman of Westfield Group, owner of 118 malls stretching from Century City in Los Angeles to Bondi Junction in Australia as he sits in his headquarters overlooking Sydney Harbor. ``It's a requirement here to have some sort of paranoia. You have to think of what can go wrong even when times are good. So you can never enjoy your success fully.''

Six decades later, Lowy, 77, is sharpening his survival instincts once again. After selling properties and cutting debt to insulate his empire and its 63 billion Australian dollars ($51 billion) in assets against the global real estate slump and what's become a financial crisis on Wall Street, he's embroiled in his third bout in 16 years with tax authorities.

The U.S. Internal Revenue Service and the Australian Taxation Office, or ATO, are investigating claims he hid $68 million from tax officials.

`Disturbs and Upsets Me'

A U.S. Senate panel alleged in July that the Lowy family and LGT Group, a bank owned by Liechtenstein's royal family, had used a foundation and companies registered in Delaware and the British Virgin Islands to conceal that the Lowys owned the $68 million.

The Senate got its information from Heinrich Kieber, who sold stolen records on 1,400 LGT accounts to German authorities for as much as 5 million euros ($7.2 million).

``It disturbs and upsets me,'' says Lowy, a soccer fan who, at a stocky 5 foot 7 inches (170 centimeters), still leaps out of his stadium seat when Sydney FC, in which he owns a 60 percent stake, scores. ``I do not believe I have done anything wrong.''

Lowy has had better luck navigating the real estate meltdown. So far, he's blunted the impact, thanks to his self-described paranoia.

In the three years ended in late 2007, while rivals were expanding amid easy credit and record consumer spending, Lowy raised A$10.5 billion by trimming properties and selling shares. He shed 14 malls and whittled his stake to 50 percent in others while remaining a manager and raking in the management fees the centers produce in addition to rents.

War Chest

From the end of 2005 to June 2008, he reduced net debt as a percentage of assets to 33 percent from 41 percent. By the time credit dried up last year, Westfield had built a A$7.3 billion war chest for new malls and deals.

Lowy's company hasn't emerged unscathed. While operating profit in the first half climbed 15 percent to A$928 million, net profit dropped 35 percent to A$1.29 billion as the rising property values that had buoyed Westfield began to grow less quickly.

There may be more pain ahead. Merrill Lynch & Co. analyst John Kim told investors on Aug. 27 he was worried about conditions in the U.S.

``With high exposure to struggling U.S. retailers including Steve & Barry's and Sears, we are concerned that Westfield's vacancy rate may increase,'' Kim wrote. Still, 6 of 12 analysts monitored by Bloomberg, including Kim, rate Westfield a ``buy''. Five say ``hold'' and one says ``sell.''

`Jedi-Like'

``We didn't foresee the credit crunch,'' says Lowy's youngest son Steven, 45, who's a Westfield joint managing director with middle brother Peter, 49. ``But we asked how long things could go on being so good.''

The answer: not long -- as Australian rival Centro Properties Group discovered. In 2006, Centro bought seven U.S. malls from Westfield for $524 million. For its last fiscal year, the company reported a A$2 billion loss compared with Westfield's A$3.4 billion profit in 2007. Centro's share price plunged to 8 Australian cents on Sept. 22 from A$10 on May 7, 2007. The company faces a Sept. 30 deadline to repay $1.1 billion to U.S. investors.

``These guys at Westfield are the best,'' says Matthew Hoult, Singapore-based global head of property at Fortis Investment Management, who oversees $6 billion including Westfield shares. ``The way they raised all that money before the credit crunch has been described as Jedi-like. They are totally ahead of the curve.''

Banking Probe

Now, as Westfield embarks on a record A$4 billion of construction this year, Lowy will need to marshal his resiliency -- again.

In a broad probe of overseas bank secrecy, the U.S. Senate Permanent Subcommittee on Investigations alleged that LGT and UBS AG, Switzerland's biggest bank, held billions of dollars that hadn't been disclosed to the IRS.

LGT, which counted the Lowys among its top clients, helped them hide funds from Australian tax authorities between 1997 and 2001, when $68 million was transferred from Liechtenstein to a Swiss bank, the panel said in its report.

`Utmost Seriousness'

UBS hid as much as $17.9 billion for 19,000 Americans who didn't declare assets to the IRS, the report said. The Lowys weren't named in conjunction with UBS.

Michael Robinson, a Washington-based spokesman for LGT, declined to comment directly on the Lowy case, citing Liechtenstein banking laws. In a July 15 statement, LGT denied it had conducted or assisted in illegal activities.

``LGT's practices were consistent with accepted industry standards of the time and do not reflect the way in which LGT conducts business today,'' Robinson says.

UBS apologized to the panel for any compliance failures. In July, it said it would stop offering offshore banking services to U.S. clients through non-U.S. branches. U.S. and Swiss authorities are investigating the bank's cross-border business with U.S. private clients, and UBS is conducting an internal review, spokeswoman Karina Byrne said on Sept. 15.

``UBS is treating those investigations with the utmost seriousness,'' she said.

`Spy Novel'

The Lowy family also denies the allegations, saying they didn't hide money and had distributed the $68 million years ago to Israeli charities they declined to name publicly.

In a July 17 statement, a Lowy spokesman said the Senate subcommittee had relied on stolen documents without verifying the contents and had denied the family justice by not giving them a chance to be heard. Neither the IRS nor the ATO would comment.

Subcommittee Chairman Carl Levin says the Lowy case stands out because of the size of the account, the measures to keep it secret and the use of a U.S. corporation, Delaware-registered Beverly Park Corp.

``The complex structure that was set up and the movement of tens of millions of dollars from Liechtenstein to a Swiss bank seemed like facts more out of a spy novel than related to a normal bank account,'' he says.

The subcommittee subpoenaed Peter Lowy, a U.S. citizen who lives in Los Angeles. On the advice of attorney Robert Bennett, who represented U.S. President Bill Clinton in the Monica Lewinsky investigation, Peter refused to answer questions, invoking his Fifth Amendment right against self-incrimination.

Deli Owner

Frank Lowy, a former truck driver and delicatessen owner, has until now refused to talk face to face about his tax affairs. Gesturing to mementos in his 893-square-foot (83-square-meter) office, he ignores a Sidney Nolan painting of Australian folk hero Ned Kelly to point out the lesser-known ``The Corner Store'' by Swiss-born Australian painter Sali Herman.

He says he keeps the work above his desk to remind him of the shop he once ran.

Lowy built 24-story Westfield Towers in 1974. His executive floor, while showing its age, commands uninterrupted views of Sydney's Opera House and Harbor Bridge. Lowy's 74-meter (243-foot) yacht, called Ilona IV after his mother, is berthed nearby.

When Lowy isn't overseeing his 10 million square meters of retail space on three continents, he's likely to be cheering Sydney FC from his corporate box barely a mile away.

The team won the national competition in 2006 and is a contender this year. Still athletic enough to enjoy tennis once a minor back ailment heals, Lowy never played soccer in his youth.

``I had other things to occupy me -- like staying alive,'' he says dryly.

`Brilliant but Brutal'

All the same, he learned how to outmatch the competition at business. Stephen Mayne, a Melbourne-based shareholder activist and publisher of the Mayne Report Web site, who has jousted with Lowy and News Corp. CEO Rupert Murdoch, says Lowy is the tougher foe.

``The Lowys are brilliant but brutal,'' Mayne says. ``You don't want to stand between them and a bucket of money.''

Lowy has fought his way out of tax messes before. In 1992, he settled a claim for A$18 million lodged by the ATO, according to an authorized biography, ``Frank Lowy: Pushing the Limits'' (HarperCollins, 2000), by Jill Margo. In 1994, he paid A$25 million to settle another ATO claim.

``Wealthy people like him are always pushing the envelope when it comes to tax,'' says Chris Seage, principal of Sydney-based Rambo Taxation Services, who was an ATO audit manager from 1973 to '96. ``It may be legitimate tax planning, but sometimes it crosses the line.''

Today, Lowy and his three sons, deputy chairman David, 53, and joint managing directors Peter and Steven, control 55 malls in the U.S., 44 in Australia, 12 in New Zealand and 7 in the U.K.

Lavish to Ordinary

The centers vary from the lavish to the ordinary. The new Westfield London at White City features a mall within a mall called The Village that has 40 designer boutiques and a champagne bar. Westfield Bondi Junction, near Sydney's famous surf spot, offers fine dining and harbor views.

The family's 9 percent stake in Westfield is worth A$3.3 billion, based on Westfield's market value of A$36.6 billion on Sept. 22. The Lowys also own a majority share of Tel Aviv-based fund manager Ion Asset Management through a closely held family company called LFG Holdings Ltd.

So far, the tax allegations haven't depressed Westfield's stock. Since the panel's July 17 report, the shares have jumped 25 percent to A$18.80 on Sept. 22 on the Australian Securities Exchange compared with a 2 percent rise in the Standard & Poor's/ASX 200 Index.

``If it is not directly affecting the company, there's nothing to worry about,'' say Rob Patterson, who manages A$4 billion, including Westfield shares, at Adelaide, Australia-based Argo Investments Ltd. ``It's only the smell that's attached to it.''

Investors who've stuck with the Lowys have enjoyed the ride. Anyone who put A$1,000 into Westfield when it first sold shares in 1960 would have A$207 million today, management says. Foreign ownership of Westfield shares has climbed to 32 percent from 13 percent in 2004.

High Profile

Lowy's business success has gained him positions at the heart of Australia's financial system, public policy and sports.

In 1994, he was appointed to the board of the Reserve Bank of Australia. He stayed until 2005. He's a member of the international advisory council of the Washington-based Brookings Institution, an independent research and policy institute.

Beginning in 2003, he's spent A$40 million to establish the Lowy Institute for International Policy, modeled on Brookings and the New York-based Council on Foreign Relations.

Also that year, Lowy took over the chairmanship of the ailing Football Federation Australia at the request of then prime minister John Howard. Lowy hired Dutch coach Guus Hiddink. In 2006, Hiddink led the national team to World Cup qualification for the first time in 32 years. Now, Lowy is spearheading a drive to host the 2018 World Cup.

`Rags-to-Riches'

``It's a fabulous rags-to-riches story,'' Patterson says of Lowy's life. ``To have done it from little old Australia is an incredible achievement.''

Lowy arrived in Australia in 1952 among a wave of European immigrants. He was born in Fil'akovo, an industrial town in what's now Slovakia, one of four children of a traveling salesman, according to his biography.

During World War II, the family moved to Budapest to seek anonymity from persecution in a big city. It didn't work.

``Any minute you could have been taken,'' he says. ``It's a miracle anyone stayed alive.''

He keeps photos of two cherubic-looking young cousins, Renee and Rebecca Grunfeld, his family had tried to save before the girls disappeared into death camps.

``When I look at those pictures, I think what those kids could have been,'' he says, the trademark grin fading.

Birth of Westfield

After Germany's defeat in 1945, Lowy joined the Jewish exodus to what was then Palestine. He volunteered for the Haganah Zionist army. In 1952, he followed his mother and sister to Australia. Lowy's first job was working a grinding machine in a toolmaking factory. In 1955, he teamed up with another Holocaust survivor, John Saunders, to open his deli.

Along with salami and rye bread, newcomers from Europe needed homes. Lowy and Saunders borrowed from a local bank manager and used profits from the deli and a coffee shop they owned to buy farmland.

Westfield Investments Ltd. took its name from its location in Sydney and the fields it was subdividing.

The pair read about the popularity of U.S. malls, and Saunders flew to America to check them out. On his return, Westfield built a supermarket, 2 department stores and 12 shops around an open square.

They remained partners until 1987, when Lowy bought out Saunders. In 1997, Saunders died at age 75.

`Loved and Loathed'

As Lowy prospered, he became both loved and loathed.

``Just as he was adored by thousands of shareholders who had made their fortunes with Westfield, so he was abhorred by tenants who saw him as a harsh landlord,'' Margo writes.

Some Westfield shopkeepers resent the power the Lowys have to charge high rents in the poorest Australian suburbs because of their market dominance, says Craig Kelly, president of Southern Sydney Retailers Association.

``Their success has come at the expense of the small retailer.''

Lowy says he isn't always tough.

``You have to do your best to get the best possible return for your shareholders,'' he says. ``I had very good relations with most of the tenants, and if they deserved some concession they would get it.''

Lowy got some concessions too. He recalls that when he and Saunders were struggling, the bank manager in the Blacktown neighborhood, Les Irwin, twice wrote personal checks when they needed more money than the bank would lend.

`Why Not?'

``It's an essential part of business to know the needs and requirements of the other side,'' Lowy says. ``If you can comply with them and still get what you want, why not?''

In 1977, Lowy and Saunders made their first move into the U.S., buying a shopping mall in Trumbull, Connecticut, for $21 million.

They installed as manager 22-year-old David Lowy, newly graduated with a bachelor of commerce degree from the University of New South Wales. Peter and Steven Lowy later graduated from the same university, worked briefly in investment banks in the U.S. and London and then joined the family company.

Today, Westfield Trumbull has more than 170 stores including JC Penney, Lord & Taylor, Macy's and a Target that's due on Oct. 12. The mall has a book value of $316 million and generates sales of about $400 per square foot.

That's about two-thirds of the sales of Westfield's Garden State Plaza in Paramus, New Jersey, one of three malls Lowy bought from Macy's Inc. in 1986 for $363 million.

Profitable Malls

Together with Valley Fair in the heart of Silicon Valley, Garden State is one of Westfield's two most profitable U.S. malls, delivering $800 million a year in sales, Steven Lowy says.

The Lowys, and their shareholders, have done less well when the family has strayed from retail. In 1987, Lowy paid Murdoch A$842 million for Australia's smallest national television network, Channel 10, plus additional media assets. Three years later, he sold. Investors took a A$450 million loss; Lowy's personal fortune was depleted by A$100 million, according to his biography.

After Westfield's tax settlement in 1992, the ATO came back in 1994. This time, it demanded A$50 million in tax, penalties and interest for A$47.8 million that had appeared in the accounts of a Lowy family company in 1987 and '88.

The Lowys said the money was a capital injection from an unknown investor. The tax office claimed it was income. Lowy paid A$25 million in a 2004 settlement. In his biography, he denied wrongdoing.

`Lily-White'

The 2008 Senate subcommittee report links the disputed $68 million to these earlier matters. The panel said the Lowys wanted to hide the money with LGT in case Australian tax collectors came after them again.

According to the report, Lowy and his team met LGT officials in Sydney, San Francisco and London in 1996 and '97.

``LGT memoranda following these meetings note that Mr. Lowy had reached a settlement with the Australian Tax Office, did not want to bring new funds into Australia and was concerned that if Australian tax authorities learned of his having additional assets, the government might try to subject them to additional claims,'' the report said.

The tax dispute was the second time in just over a year that Lowy found himself part of an investigation. In May 2007, he was questioned by police looking into Israeli Prime Minister Ehud Olmert's role in the sale of state-owned Bank Leumi Le-Israel Ltd.

Lowy, who'd joined a group to bid for the bank, was cleared of any wrongdoing.

``Don't think of me as being lily-white, but I was lily-white in that case,'' Lowy says.

Years of Experience

As Lowy navigates tax investigations on two continents, Westfield is expanding amid declining consumer confidence in its major markets. Britain is facing arguably the worst economic conditions since World War II, Chancellor of the Exchequer Alistair Darling said on Aug 30. U.S. unemployment hit a five-year high of 6.1 percent in August.

Steven Lowy says Westfield is confident because of its 48 years of experience weathering real estate cycles.

In August, Westfield disclosed it had paid the equivalent of A$200 million for a 3 percent stake in London-based Liberty International Plc, Britain's biggest mall operator.

Westfield is scheduled to open its 1.1 billion pound ($1.9 billion) Westfield London, about 3 miles (4.8 kilometers) from the city's West End, in late October. Work has begun on a 1.45 billion pound center next to the site of the 2012 London Olympics.

Westfield also has a preliminary agreement for retail space on the grounds that once were the site of the World Trade Center in New York to replace the 400,000 square feet it acquired before the September 2001 attack.

`Best Selections'

``Westfield really has one of the best selections of property assets globally,'' says Fortis's Hoult, who says its properties are matched by its management strength.

``The family owns enough of the company to make it count for them, but not so much that they have become complacent of minority shareholders' interests.''

Chief Financial Officer Peter Allen, 47, says Westfield is no longer managed like a family company.

``I can see a day when it isn't run by a Lowy,'' he says, referring to a time after Lowy's sons retire.

Frank Lowy, who has 11 grandchildren, agrees. Even so, he shows no sign of slowing down. Rather than spend days on his yacht or at his waterfront mansion in Wolseley Road, Point Piper -- described by the Sydney Morning Herald as the most expensive street in Australia's most expensive suburb -- Lowy puts in a full week at Westfield.

A few times a month, he plays poker. Lowy says he gambles for stakes high enough to be painful if he doesn't win.

``It has to hurt you a little bit when you lose,'' he says, declining to say how much a billionaire might be tempted to wager. ``And I don't like to lose, period.''

On the eve of the credit crunch, Lowy knew when to cash in some of his chips. Now, as he defends himself against tax investigators, he's facing opponents who hate to lose just as much as he does.

http://www.bloomberg.com/news/articles/2008-09-22/paranoid-mall-baron-lowy-anticipated-slump-now-fights-taxman