Tuesday, July 28, 2009
James Temple, Chronicle Staff Writer
The 42-story office tower is at 333 Bush St. in San Francisco
The owners of a premier San Francisco office tower plan to forfeit the property to their lenders, the city's second distressed transaction involving a major commercial building in recent weeks and another sign of the growing pressures in the sector.
Hines and Sterling American Property decided to transfer their interest in 333 Bush St. to the original financers, following the surprise dissolution of law firm Heller Ehrman in September, according to a letter Hines sent to local real estate brokers and obtained by The Chronicle. The 118-year-old law firm defaulted on its 250,000-square-foot lease, leaving the nearly 550,000-square-foot property 65 percent vacant.
Industry watchers have been openly speculating the building would fall into default in the months since. Hines and Sterling bought the tower for $281 million in 2007, near the top of the market, when it was 75 percent leased.
The partnership is handing the property to Brookfield Real Estate Finance and Munich Hypo Bank for the amount of the outstanding loan, the letter said.
"We diligently worked with the lender, but were not able to come to a mutually satisfactory restructure of the existing debt," it said.
Hines spokeswoman Kim Jagger declined to address the talks or letter, saying via an e-mail: "As a matter of policy, we don't comment on ongoing lender discussions."
The letter said that Hines is "financially sound and well positioned," but the Houston real estate investment company has defaulted on two other Bay Area properties in recent months. Those include the three buildings at the 1.2 million-square-foot Watergate Office Towers in Emeryville that it held in a joint venture with CalPERS, as well as the nearly 500,000-square-foot Marin Commons office property in San Rafael.
Earlier this month, The Chronicle reported an undisclosed private equity fund bought the $40.8 million note on 250 Montgomery St., about half of its face value, after owner Lincoln Property Co. fell into default on the loan. Less than two weeks later, it emerged that the Four Seasons Hotel on Market Street defaulted on a $90 million loan. A handful of other small office buildings, hotels and multifamily properties in San Francisco also have gone into default in recent months.
More distressed deals are expected. Nearly three-quarters of Class A office buildings downtown sold between 2005 and 2007, a bonanza that drove up prices to all-time highs and squeezed the ratio of rental income to cost to record lows. But the economic collapse sharply reduced rent and occupancy levels, making it increasingly difficult for landlords to meet their debt obligations.
"San Francisco will have a whole new slate of players within three years," said David Klein, senior vice president with San Francisco brokerage NAI BT Commercial.
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