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SAN FRANCISCO-The largely vacant 770,000-sf Market Center development in Downtown San Francisco is being sold for about $80 million to a new fund of Divco West Properties, a Palo Alto, CA-based private real estate investment, development and management firm with a 10 million-sf portfolio.

The two-tower property came to market this spring in a lender-driven disposition that followed a loan default by building owner Tishman Speyer Properties, which paid $190 million for the property in 1999. Sources tell GlobeSt.com that Divco West “will go hard next week,” meaning its refundable deposit will become nonrefundable. The sale is scheduled to close escrow in the next couple of weeks.

With $160 million in financing from Morgan Stanley Dean Witter, Tishman-Speyer acquired the former Standard Oil of California headquarters in 1999 for $190 million and proceeded to fill it up with Internet-related tenants that were paying rents as high as $70 per sf per year. By early 2001, however, the dot-com boom was bust and the 1970′s development was back to half empty.

Moody’s downgraded the loan at the end of January, saying the property was 17.1% occupied and not generating enough cash flow to cover debt service or even all of the operating expenses. “Debt service and operating expenses are being paid from a cash collateral account that has a balance of approximately $56 million,” stated the report. “Midland Loan Services, the special servicer, continues to explore resolution strategies for the debt.”

The loan matured on Feb. 1, according to Moody’s. A source told GlobeSt.com in April that Tishman “technically went into default” on the loan before reaching an agreement with Morgan Stanley and Midland “to take it out of default so they can maintain ownership until it is sold.”

Secured Capital was handed the disposition assignment. The property was brought to market without an asking price. Divco West officials were not immediately available for comment Thursday afternoon.

Market Center is a two-building class A office complex located on Market Street in the center of San Francisco’s financial district with views of the city and the bay. 555 Market Street contains 21 stories of leasable space totaling 283,333 sf. 575 Market Street has 40 stories totaling 486,711 sf. Local sources tell GlobeSt.com that the building’s occupancy remains in the 15% to 20% range. One of the buildings is entitled for an upper-floor residential conversion.

Divco, founded in 1993 by Stuart Shiff and David Taran, is acquiring the property on behalf of its new fund, Page Mill Properties LP, which closed late last year with equity commitments of $255 million from major institutional and private investors. Divco itself committed $10 million.

Targeting 20% returns, Divco says its Page Mill Properties fund makes value-add plays in Northern California and similar, technology dominant markets such as Seattle, Boston and the Dulles Corridor in Northern Virginia. “The key to the success of this fund is to remain patient and buy the right properties at the right basis,” said Shiff last year.

In July, Page Mill acquired a 50% interest in the 12-story, 282,000-sf Mission Towers Two building in Santa Clara, CA for $16.35 million. The seller was publicly traded chip maker PMC-Sierra Inc., which had just purchased the building from a joint venture of Tishman Speyer, Travelers Real Estate Venture and Whitehall Street Real Estate Limited Partnership IX in order to void a $215-million lease obligation to the sellers. Like Market Center, the building remains largely vacant.

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