The Wall Street Journal
A venture of Prudential Financial Inc. and Barker Pacific Group Inc. hopes a cash infusion of about $20 million is enough to bring a zombie office building in San Francisco back to life.
Zombie buildings, which have been mushrooming throughout the commercial real-estate landscape, are those that are worth less than their mortgages and are deteriorating in value because neither the owner nor lender is willing to infuse new capital to retain existing tenants or attract new ones.
The 43-story office building at One Sansome St. was suffering these types of problems until recently. It was appraised at $333 million in 2007, when it was acquired by Broadway Partners. But since then, it steadily declined in value while its occupancy rate decreased to 75% from about 87% in 2007. Last year, Lehman Brothers Holdings Inc., which financed the Broadway Partners purchase, took a controlling ownership stake in the building as part of a debt restructuring.
This spring, a unit of Prudential Financial took control after foreclosing on a defaulted $107.6 million mezzanine loan tied to the building. Prudential also brought in Barker Pacific, a privately held real-estate investment firm, as a partner.
Broadway Partners and Lehman declined to comment. Michael Barker, managing director of Barker Pacific, said the building's new owners assumed a current $139 million first mortgage on the tower and wrote down the mezzanine loan by about 50% in a deal that valued the property at about $190 million.
"Foreclosure is never the outcome we want, but in this case we decided to take ownership instead of restructuring the loan," a Prudential spokeswoman said.
Mr. Barker said the new venture will invest about $20 million to upgrade the building, which is named Citigroup Center after the bank that built it in 1983 to house some of its West Coast operations. The to-do list includes renovating the lobby, and addressing such issues as peeling paint and lackluster lobby art. Just as important, the venture is offering aggressive rental packages to prospective tenants that are competitive with the rest of the market. Mr. Barker said the venture is offering about $60 a square foot to fund prospective tenants' buildout of upper-floor space.
"With new equity in the project, it will be in a position to compete," said Mr. Barker, whose firm put in $2.5 million for a minority stake in the property.
The capital infusion has made the property more attractive to tenants and, just as important, their brokers, who stopped steering business to the property because the former ownership was unable to make competitive deals.
"At some point, after you've tried a few times, you stop bringing your clients to the building," said Steve Barker, an executive vice president in San Francisco with Studley, a real-estate-services firm, and no relation to Michael Barker. "Broadway couldn't do anything with it because their basis was too high."
The building's new owners have put it back in the running to keep at least one tenant. The law firm of Knobbe Martens Olson & Bear LLP has a lease on the 35th floor that was set to expire in September. The firm began to consider moving out after it got no answer on its request for a new lease from the landlord, according to Adeel Akhtar, a managing partner in the firm's San Francisco office. That changed when Prudential and Barker took over, he said. Knobbe obtained an extension and is considering staying put, Mr. Akhtar said.
One Sansome St. sits atop a base that includes portions of a historic building that once housed the Anglo & London Paris National Bank. Broadway Partners had planned to increase revenue by signing on new tenants at higher rents, according to Trepp, a New York real-estate-research firm.
Instead, rents and vacancies in the San Francisco market and nationwide weakened. About 65,000 square feet of upper-floor space that had been occupied by Bear Stearns Cos. was left vacant in 2009, more than a year after J.P. Morgan Chase & Co. acquired Bear Stearns.
Mr. Barker of Barker Pacific said demand for upper-floor space with views of the Golden Gate Bridge is rising. "As we have recapitalized it, it's going to be anything but [a zombie building]," he said. "It needs attention, that's all."
Zombie buildings, which have been mushrooming throughout the commercial real-estate landscape, are those that are worth less than their mortgages and are deteriorating in value because neither the owner nor lender is willing to infuse new capital to retain existing tenants or attract new ones.
The 43-story office building at One Sansome St. was suffering these types of problems until recently. It was appraised at $333 million in 2007, when it was acquired by Broadway Partners. But since then, it steadily declined in value while its occupancy rate decreased to 75% from about 87% in 2007. Last year, Lehman Brothers Holdings Inc., which financed the Broadway Partners purchase, took a controlling ownership stake in the building as part of a debt restructuring.
This spring, a unit of Prudential Financial took control after foreclosing on a defaulted $107.6 million mezzanine loan tied to the building. Prudential also brought in Barker Pacific, a privately held real-estate investment firm, as a partner.
Broadway Partners and Lehman declined to comment. Michael Barker, managing director of Barker Pacific, said the building's new owners assumed a current $139 million first mortgage on the tower and wrote down the mezzanine loan by about 50% in a deal that valued the property at about $190 million.
"Foreclosure is never the outcome we want, but in this case we decided to take ownership instead of restructuring the loan," a Prudential spokeswoman said.
Mr. Barker said the new venture will invest about $20 million to upgrade the building, which is named Citigroup Center after the bank that built it in 1983 to house some of its West Coast operations. The to-do list includes renovating the lobby, and addressing such issues as peeling paint and lackluster lobby art. Just as important, the venture is offering aggressive rental packages to prospective tenants that are competitive with the rest of the market. Mr. Barker said the venture is offering about $60 a square foot to fund prospective tenants' buildout of upper-floor space.
"With new equity in the project, it will be in a position to compete," said Mr. Barker, whose firm put in $2.5 million for a minority stake in the property.
The capital infusion has made the property more attractive to tenants and, just as important, their brokers, who stopped steering business to the property because the former ownership was unable to make competitive deals.
"At some point, after you've tried a few times, you stop bringing your clients to the building," said Steve Barker, an executive vice president in San Francisco with Studley, a real-estate-services firm, and no relation to Michael Barker. "Broadway couldn't do anything with it because their basis was too high."
The building's new owners have put it back in the running to keep at least one tenant. The law firm of Knobbe Martens Olson & Bear LLP has a lease on the 35th floor that was set to expire in September. The firm began to consider moving out after it got no answer on its request for a new lease from the landlord, according to Adeel Akhtar, a managing partner in the firm's San Francisco office. That changed when Prudential and Barker took over, he said. Knobbe obtained an extension and is considering staying put, Mr. Akhtar said.
One Sansome St. sits atop a base that includes portions of a historic building that once housed the Anglo & London Paris National Bank. Broadway Partners had planned to increase revenue by signing on new tenants at higher rents, according to Trepp, a New York real-estate-research firm.
Instead, rents and vacancies in the San Francisco market and nationwide weakened. About 65,000 square feet of upper-floor space that had been occupied by Bear Stearns Cos. was left vacant in 2009, more than a year after J.P. Morgan Chase & Co. acquired Bear Stearns.
Mr. Barker of Barker Pacific said demand for upper-floor space with views of the Golden Gate Bridge is rising. "As we have recapitalized it, it's going to be anything but [a zombie building]," he said. "It needs attention, that's all."
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