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SAN FRANCISCO-The pending $1.05-billion sale of the Bank of America Center here is turning IPC US REIT’s year-old $49-million preferred equity investment in the 1.8 million-sf complex into more than $85 million. The proceeds represent a 54% internal rate of return for the Toronto-based company focused on US real estate.

Without saying whether it is the company’s best return on investment to date, the company’s chief investment officer Dov Meyer tells GlobeSt.com it is “a great return” for the company. “We’d be happy if they were all like this,” he says.

In September 2004, IPC invested $49 million ($51 million incl. fees) of preferred equity in Bank of America Center as part of the then new owner’s effort to consolidate ownership of the asset into a single entity in preparation for a quick flip. The effort was successful, and the property was tied up recently by Hudson Waterfront Associates on behalf of a trio of Hong Kong investors.

The investment entitled IPC to an annual return of 12% for a certain number of years and, after full repayment of capital, a 10.5% interest in the property. Meyer tells GlobeSt.com that because the owner will not be holding the asset very long, part of the proceeds are coming in the form of a prepayment penalty. “It was a very complicated waterfall,” he says.

There’s plenty of profit to spread around, however. The group paying out to IPC–a New York investment group that includes David Werner and Mark Karasick–accumulated an 89.5% ownership of the three-building complex for approximately $875 million, or about $175 million less than Hudson Waterfront Associates has agreed to pay for the asset.

The investment by IPC is part of a concerted effort by the REIT to add structured investments to its investment strategy, mainly in response to escalating real estate values. “These investments can provide significant profit while at the same time protect the downside and enable us to participate in trophy buildings in the largest markets with better risk adjusted returns” says IPC chief executive Vinay Kapoor in a prepared statement.

IPC is the only REIT in Canada that invests exclusively in US commercial real estate. The REIT beneficially owns an 86.4% interest in IPC (US) Inc. and IPC (US) II Inc., which have ownership interests in 11.3 million sf in 39 office and retail buildings. Eastdil’s Doug Harmon represented the seller in he deal.

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