Equastone Takes Hit on 1331 California Circle

Equastone paid South Bay Development approximately $111 per square-foot for the property and sold it for less than half of that to private investors Yong K. Pak and Yong S. Pak, according to local sources familiar with the transaction. The brokers in the deal – Sherman Chan and Vince Machado, with Matt Wersel, Reed Payne and Jef Henderson of CBREs Silicon Valley private client group – declined to confirm the price or the name of the buyer, which CBRE described as "an aggressive local investor who closed on the asset within a seven day escrow period."

"The new owner is currently weighing the repositioning options for the asset, and may potentially utilize the new acquisition for his existing companies," the brokers said in a prepared statement.

Located in the northeast corner of the Santa Clara County, the 24-year old building has visibility along Highway 880 and is built out with 95% drop-ceiling office space. It has two dock-high door, three grade-level doors and 3.6 parking spaces per 1,000 square feet of building area. The building, parking and landscaping cover 6.34 acres.

Equastone acquired 1331 California Circle from South Bay Development and initially marketed it for lease at $1.35 per square foot per year (NNN) and sale at $125 per square foot. By early 2009, the asking lease and sale prices had been lowered to $0.79 and $85, respectively, according to local sources.

The building is not the only underperforming asset for Equastone, which was an active acquirer in 2006 and 2007 with three "value" funds. A foreclosure auction for downtown Atlanta's Equitable Building (100 Peachtree) was originally set for May 5 but is now scheduled for June 2.

Equastone acquired the 33-story building across from Woodruff Park for $56.8 million in May 2007 and reportedly owes $52 million to its lender, Capmark Bank, a division of Horsham, PA-based Capmark Financial Group, while the current market value is believed to be closer to $42 million. The building is approximately half empty.

Equastone also defaulted on River Walk, an 18-story Class A office building that it acquired in San Antonio, TX in 2006. Multiple reports from March citing Bexar County public records name Wells Fargo Bank NA as the trustee for the holders of commercial mortgage-backed securities on the property. The building is approximately 70% leased, up from 50% when Equastone acquired the building. Equastone reportedly owes $14 million and is hoping renegotiate the financing.

The Milpitas property and the Equitable building are in Equastone's second fund. At the time it acquired 1331 California Circle--shortly before things began to collapse--neighboring markets had recently up-zoned their commercial land, which was expected to spark the redevelopment of a lot of underutilized class B properties like 1331 California.

"It's going to displace a lot of tenants that prefer the product type and lower occupancy costs while also decreasing the supply, which will put continued upward pressure on rents as the Valley's job market continues to improve" Equastone's then acquisitions director told GlobeSt.com at the time. "And since there is substantial room for market rents to grow before rents can justify new construction, we believe existing properties will only become more valuable."