250 Montgomery Changing Hands for $200 Per SF

SAN FRANCISCO-Realty Finance Corp. of Connecticut has sold its original $47-million loan on a class A office building here for approximately $25 million or $200 per square foot, according to a source familiar with the transaction. The building is 250 Montgomery St., a 15-story, 126,736-square-foot office building completed in 1989 at a cost of about $41 million.

The borrower, Lincoln Property Co., paid approximately $47 million or $405 per square foot for the building in late 2006 and defaulted on the loan in late 2008. Prior to the note sale Lincoln agreed to hand over the property to its new creditor in lieu of foreclosure.

The note sale reportedly drew at least one dozen offers. The identity of the ultimate buyer was not immediately available, though it is said to be a private equity firm from the US. A local executive with Lincoln Property Co. did not return a phone call seeking comment. The brokers in the deal, Kurt Altvater of CB Richard Ellis on the sell side and Daniel Cressman of Grubb & Ellis on the buy side, could not immediately be reached Wednesday for comment.

In its first quarter filing with the SEC in March, Realty Finance said the loan matured in March 2009 without payment, pushing it into default. At the time, Realty Finance expected to lose between $0 and $11 million on the sale. The actual loss appears to be closer to $22 million. Whitehall Street Real Estate Funds reportedly had an additional equity position in the building that has been completely wiped out.

Chris Seyfarth, a partner in Ernst & Young’s transaction real estate group tells GlobeSt.com the pricing of the 250 Montgomery note sale–50 cents on the dollar, just like the Hancock Tower sale in Boston–suggests that San Francisco is no different than any other major metro in that real estate values have plummeted. That having been said, he adds that 250 Montgomery is only 55% leased so it’s hard to suggest that the new price point is definitely 50% of what it was at the peak.

“It is class A, and it is a transaction, of which there have been precious few, but this is just one transaction and there is significant vacancy–vacancy the buyer felt was lower than the market average, I suspect,” Seyfarth says. “So while [the deal] is depressing to real estate owners it’s too early to tell. Obviously we may see more of these [types of sale] as more maturities come due.”

Seyfarth says hasn’t looked into the question of why Realty Finance Corp. opted to sell the note at this time but, generally speaking, the answer is this: “If you don’t have to sell into this market, you don’t,” he says.

As a result of the recession, Realty Finance says it has been unable to conduct loan originations or other investment activity and that it is experiencing lower operating margins due to a lack of scale, has a reduced access to capital, if at all, and reduced operating cash flows due to the breach of loan covenants and a reduced asset base.

Realty Finance’s $1.2-billion investment portfolio, which has lost 26% of its value since the start of 2008, is encumbered by non-recourse long-term financing through two CDOs, according to SEC filings. In February, the company was notified that it failed the overcollateralization test for CDO I and that payments—including $488,000 that month–are now being diverted to pay down principal of senior bond holders rather than being paid to Realty Finance until such time the covenant is back in compliance, if ever. At the time Realty Finance said it fully expected CDO II to fail the overcollateralization test as well sometime in 2009.

“With both CDOs out of compliance with overcollateralization covenants, we will have minimal incoming cash flows from our primary business and there is no assurance when or if we will be able to regain compliance with these covenants,” states the SEC filing. “The breach [gives] CDO bondholders the ability to terminate the existing collateral management agreement and remove us as the collateral manager.”