SFBT excerpt:
Citigroup Center going back to lender
Broadway Partners is preparing to hand One Sansome St. back to Prudential Real Estate Investors, the latest in a series of highly leveraged downtown San Francisco owners who are voluntarily giving distressed properties back to the lender.
In late March, Prudential will take title to the 550,000-square-foot tower, called the Citigroup Center, and has brought on the Barker Pacific Group to manage the property, according to multiple sources familiar with the transaction.
The deal comes on the heels of Morgan Stanley’s decision to transfer five office buildings to AREA Property Partners and Hines’ calculated move to default on 333 Bush St., which paved the way for Brookfield Real Estate Finance to take ownership. In recent months, nine downtown San Francisco office properties, totaling more than 2.5 million square feet, have either been foreclosed on by lenders or, in most of the cases, handed over to lenders in lieu of foreclosure in a consensual transaction.
Like most of the surrendered properties, One Sansome was purchased near the pinnacle of the building-buying boom. In December, 2006, Broadway Partners, a private real estate investment and management firm headquartered in New York, paid $3.3 billion for a 10-building national portfolio that included four San Francisco properties. While values were never broken out for individuals properties, One Sansome St. was likely valued at more than $600 a square foot, about $350 million, when Broadway bought it. In June of 2008, South Korea-based Mirae Asset MAPS Investment Co. had the property in contract for $365 million, but backed out when the financial crisis worsened that fall.
Since then commercial property values have plummeted 30 to 50 percent, depending on the income the building generates. In the current environment, the building would likely be valued between $175 million and $225 million.
Broadway seemed to have found a way to hold on to the portfolio as recently as June. At the time, Broadway and equity partner Lehman Brothers Holding announced that it had restructured and resolved near-term debt obligations on the 10-property portfolio. Under the agreement, Broadway agreed to contribute capital and retain an ownership interest in a majority of the portfolio, which includes 1000 Wilshire Blvd. in Los Angeles, 116 Huntington St. in Boston and two properties in Virginia. As part of that deal, one of the Broadway properties, 188 Spear St., was deeded to mezzanine lender Prudential Real Estate Investors. Prudential then sold the property to Shorenstein Properties for $25 million, or $173 a square foot.
At the time, Broadway said the capital investment would allow it to “maintain the Class A nature of the properties” and will ensure a “stable and positive experience for current and future tenants,” according to a statement from the two companies.
For now Broadway appears to be holding on to 100 California St., as well as to 50 Beale St., which is leased to the Bechtel Group and Blue Shield of California.
One Sansome St. has about 30 percent vacancy with 10 full floors and four partial floors available, according to the CAC Group, which leases the property for the owners. The biggest tenants are Citigroup, the law firm Lewis Brisbois Bisgaard & Smith LLP, and Lumetra Healthcare Solutions.
Diane Olmstead, a managing partner with W3 Partners, said she expects more downtown building owners who have seen their equity evaporate to hand properties over.
“The value of properties is down and that is working terribly against property owners because at the same time net operating income is down and you have few options, if any, for refinancing your loan,” said Olmstead.
For well-capitalized lenders like Prudential, it makes sense to hang onto the building until the market recovers, she said.
“Rather than choosing to sell the property at a significant discount to future values they have the flexibility to earn their way out of a loan, and they will do that by bringing in an outside partner with new equity to operate the property for them,” she said. “The return they will eventually get will be superior than if they brought it to market now.”
Broadway Partners and Prudential declined to comment.