$31M Recapitalizes 500,000-SF Industrial Property

Friedman points out that the new financing enabled Magellan to buy the former note on the Grace Place property. He further explains that Magellan wound up buying the note because the former lender, an investment bank, wanted to clear the loan from its books.

Magellan had an option to acquire the $45 million note at a substantial discount, for $32.4 million, provided that it could ensure certainty of execution and could close within 30 days on the deal, which is where Mesa West came in. The privately held firm operates with its three partners serving as the investment committee, meaning that it can make decisions quickly and ensure certainty of execution. After Magellan applied for the loan, "We went out and looked at the property the next day," and made a commitment to the loan with 72 hours, Friedman says.

Despite the stagnation in the capital markets, Friedman says that Mesa West can execute deals like the Magellan mortgage if the borrowers and the properties meet its requirements. "Good sponsorship is extremely important," he says. Mesa West looks for sponsors with good track records, the capability to operate properties successfully and deep pockets so that the borrower can continue to support the property if conditions deteriorate. Mesa West also looks for properties in strong markets, like the City of Commerce industrial market, a solid infill submarket where vacancy is about 3.5% and little land is available for new construction.

Sponsorship by borrowers with good track records and a strong financial position is especially important in today's economy because commercial real estate fundamentals are likely to deteriorate for some time before they improve and borrowers need to be able to carry their properties during down times, Friedman explains. He says that Mesa West's target for 2009 is to lend between $500 million and $1 billion, "but that figure is entirely dependent on our seeing good opportunities," he adds.

Financings like the Magellan loan are serving as "first mortgage bridge loans" in today's capital markets environment, according to Friedman. He explains that, during the lending frenzy before the capital markets shut down, borrowers were easily able to arrange long-term, fixed-rate financing at low rates. But those long-term loans are either unavailable or unattractive today, so a three-year financing like the Magellan mortgage enables the borrower to put financing in place for now in expectation that the capital markets will have recovered three years from now when the loan matures.

Mesa West, whose capital come from public pension funds, typically lends at a loan-to-value ratio of 60% to 65%, at all-in rates of 7.5% to 9%. It focuses on properties in the West, from Colorado to Hawaii, providing funding for acquisitions, refinancings and recapitalizations on office, retail, industrial, multifamily and hotels. The company's principals have acquired and developed more than 12 million square feet of real estate, principally in Southern California, worth more than $1 billion.

Magellan's Grace Place project is at 5650 Grace Place and 972 S. Goodrich Blvd. in Commerce. Built in 1962 and renovated in 2008, the development is situated on 17.62 acres and is fully leased to four industrial tenants. Additionally, there is a 30,350-square-foot fully leased office building. Magellan bought it as part of a portfolio in 1998.

The financings by Mesa West and Penwood Select were arranged by Brian Halpern and Ben Wagner of CBRE Capital Markets. Penwood is a value-added real estate investment fund focused on Southern California industrial real estate.