For a guy who's built a $400 million business in three years, Richard A. Heitmeyer doesn't get much respect from his peers.

His company, West Palm Beach-based Capital Asset Research Corp., is emerging as the nation's dominant player in the multibillion-dollar business of buying property tax liens from county governments.

His rivals aren't too happy about that. Although Heitmeyer is a personable fellow, demonstrating his computer system to a visitor by pulling up Donald Trump's Palm Beach property tax records and saying he wants to be viewed as a "gentle giant" by competitors, they see him as a threatening giant who is hurting them with a reckless and ruthless investment strategy.

Pretty strong stuff considering Heitmeyer fell into the property tax sales business the hard way. Several years ago, Heitmeyer invested in a homebuilder that fell behind on an $80,000 property tax bill during a sales slump. Heitmeyer says he tried to pay the bill as soon as sales picked up, only to find a private investor had paid it and had a lien on their property. They had to pay $84,000 - the taxes plus a 5% penalty - to remove the lien. A light went on in Heitmeyer's head. "I was lucky enough to stumble into the business," he says.

When Heitmeyer, an accountant by training, looked into buying tax liens himself, he says he found a highly inefficient business, populated by small-time investors who were making tidy profits without taking much risk.

He convinced Wall Street investment bank Lehman Brothers that he could bring efficiency to this market by buying in bulk and secured a $500 million credit line. Capital Asset, Lehman Brothers and a $3.6 billion (assets) Virginia company, Resource Mortgage Capital, then formed a limited partnership to buy tax liens. Capital Asset manages the partnership and owns 20%. Lehman and Resource Mortgage own the rest.

In 1994, Capital Asset took Florida by storm. It bought $200 million worth of tax lien certificates auctioned off by counties around the state, about 30% of all the liens sold in Florida that year. In big counties like Dade and Palm Beach, Capital Asset bought more than 40% of the liens up for sale.

Capital Asset also bought heavily in Illinois and New Jersey and continued its spending spree in 1995. Through the end of last year, it had purchased $700 million in tax liens. Taxpayers had redeemed about $300 million, leaving Capital Asset with a portfolio of $399.9 million worth of liens in 12 states, according to financial statements obtained by Florida Trend.

Not surprisingly, Capital Asset's voracious appetite stunned rivals. Almost from its inception, they have criticized its strategies and questioned Heitmeyer's ability to run such a business. They note that his home building venture, Town Crier, ultimately went out of business and that he'd worked at four different stock brokerages from 1990 to 1993, when he started Capital Asset.

Observers also note Capital Asset's short history has been punctuated by disputes between Heitmeyer and associates. Capital Asset recently settled a two-year-old lawsuit with Heitmeyer's former 50% partner, Jerome Arcy, a real estate finance expert at Big 6 accountant Coopers & Lybrand. Arcy claimed Heitmeyer cheated him out of his half-ownership of Capital Asset in a 1994 stock transaction. The settlement was undisclosed, but Arcy is no longer involved with the business. Arcy's lawyer wouldn't comment.

Capital Asset failed to pay a $181,000 commission to David R. Pawlowski, a broker who negotiated a $4 million purchase of tax certificates from Wall Street firm Kidder Peabody Mortgage Capital Corp. in 1994. A federal judge recently ordered Capital Asset to pay the full fee plus interest and legal fees. "He [Pawlowski] would've settled for $50,000," says Pawlowski's lawyer, Thomas Meeks, who describes Capital Asset as "devoted" to litigation.

Atlanta tax certificate consultant Roger Finnegan helped Capital Asset buy $33 million worth of Georgia tax liens, but then Capital Asset sued him, alleging he passed on trade secrets. "They claimed I divulged their trade secrets and I said, 'Fellas, if there are any secrets, you tell me because nobody has figured out what they are,' " Finnegan says. "The only trade secret I know is just how bad things are."

Looking for another lender
Heitmeyer downplays these disputes. "With any company that grows and grows, there is always the opportunity for litigation," he shrugs. He says Capital Asset no longer uses outside brokers because "it is very difficult to control them."

But with Florida's 1996 tax lien auctions beginning this month, the questions and criticisms of Heitmeyer and Capital Asset have intensified. Recently, Capital Asset began circulating financial statements in an effort to raise $18 million to buy out Lehman Brothers' and Resource Mortgage's equity in the tax lien partnership. Heitmeyer also acknowledges Capital Asset is trying to find another lender.

But Heitmeyer says reports that Lehman Brothers cut off his credit line and wants to sever ties to Capital Asset are "totally untrue." He says he's buying out Lehman Brothers and Resource Mortgage simply to increase his personal ownership of the business.

"The relationship with Lehman Brothers is an extremely healthy one. They have been great partners," Heitmeyer says.

What's happened, he says, is that Capital Asset has been looking for another lender so it can grow. Lehman Brothers credit line is $500 million, but with Capital Asset holding $400 million of liens at the end of 1995 and wanting to buy more this year, it needs more money. Heitmeyer says Capital Asset plans to buy as many tax liens in Florida this year as it has the previous two. Maybe more.

Lehman Brothers officials won't comment on Capital Asset. At Resource Mortgage, a spokeswoman says the company doesn't comment on specific investments.

Why does Capital Asset so stir its rivals? First, because there are a limited number of tax liens sold every year, Capital Asset's big buying leaves less for everyone else.

Second, some rivals say that if Capital Asset and Lehman Brothers do indeed suffer a falling out, Wall Street financing may dry up for them.

The property tax sales business works like this: If a Miami property owner doesn't pay his real estate taxes, Dade County obtains a lien against the property and auctions it off to private investors. The county gets its tax money hassle-free this way.

Investors buy liens - called tax certificates - by bidding the lowest interest rate they will accept from a property owner in exchange for paying his taxes. Essentially, investors are making loans to delinquent taxpayers. In Florida, a delinquent taxpayer must pay a minimum 5% penalty, even if he pays his taxes the day after an auction.

A tax certificate usually is a safe investment, akin to a well-collateralized bond. Capital Asset's financial statements say its average lien amounts to just 4.6% of the value of the underlying real estate, giving taxpayers a strong interest in paying up to avoid foreclosure.

There are risks, however. Investors steer clear of certificates on properties that are heavily encumbered by other tax liens, have been devalued by abandonment or environmental damage or are in bankruptcy proceedings. These conditions can make it difficult to foreclose at a profit.

Tax certificate investors say investing wisely requires a lot of research. Prior to an auction, they pore over real estate records identifying desirable properties - and ones to avoid.

Backed by Lehman Brothers
In the past, bidding tended to be at high interest rates. Heitmeyer says that when Capital Asset first began buying certificates, bids of 16% frequently won liens.

Backed by Lehman Brothers' money, Capital Asset began buying tax lien certificates in huge volume in 1994 by bidding interest rates that were shockingly low. At times it agreed to take no interest payment (except the 5% redemption penalty) and commonly bid 3% or 4%. This is lower than the 4.5% an investor could earn on a three-month Treasury bill at the time. Many small buyers - people used to bidding 16% -were chased out of the market.

"There are an awful lot of people who think he's crazy," gripes one South Florida competitor with about $50 million invested in tax liens.

One obvious reason Capital Asset bids low in Florida is the 5% redemption penalty. A certificate that gets redeemed quickly is quite profitable, no matter what interest rate was bid.

(Oddly, the system can reward taxpayers for not paying right away. For example, if a taxpayer who owes Capital Asset 3% on a certificate settles up one month after the auction, he must pay the minimum 5% fee, which amounts to a 60% annualized interest rate. But if the taxpayer waits two years to pay, he owes just 6% on the certificate, or 1% over the minimum.)

Capital Asset also appears to rely on the fact that some taxpayers who default in one year will do it again the next year. In the second year, Florida law permits a lienholder to pay the new taxes and charge 18% interest to the delinquent taxpayer. Those subsequent certificates, known in the industry as "subs," can pump up an investor's returns.

Four of Capital Asset's larger competitors all claim Capital Asset does less research on individual properties than they do. One, Allen Gordon, the president of Tax Certificate Associates in Fort Lauderdale, surmises Capital Asset is buying in such bulk that it can predict the overall performance of its portfolio - which certificates will redeem right away, which won't - without researching each lien it buys.

"They are living by statistics now more than by specifics," says Gordon. "If you are buying a great number of certificates, you are governed by statistics a lot more than a smaller buyer." Others, who won't go on record, insist this strategy has resulted in a portfolio riddled with liens on chemical dumps, abandoned slum properties and the like, which won't ever be redeemed and eventually will force Capital Asset to write them off as bad investments.

Hogwash, responds Heitmeyer. "We know what we are buying," he says. "I would say that the amount of due diligence we do would amount to an hour-and-a-half to two hours per every property we buy." Heitmeyer says Capital Asset has advantages over its competitors, such as a superior data gathering and computer system. He says Capital Asset's 95 employees can track the property tax records on any parcel in Florida going back seven years, without leaving the office.

Unaudited financial statements that Capital Asset has been quietly circulating among prospective investors don't suggest any serious problems with its portfolio. They show Capital Asset held $399.9 million worth of certificates at the end of 1995 and earned a $3.7 million profit for the year. Stockholders equity was $25.8 million.

"We are totally scrutinized up and down, primarily because we've brought efficiency to the market," Heitmeyer says. "We're ahead of the curve, and we intend to stay ahead of the curve."