Lionstone Files Default Notice on Mission Bay Building

CB Richard Ellis says negotiations continue

Submitted July 30, 2010, 6:14 PM

UPDATED August 2, 2010

By Sharon Simonson

A private, Houston-based real estate investment company has filed a notice of default on a loan backed by a high-profile Mission Bay office building in San Francisco.

The Lionstone Group paid $52.5 million three months ago to acquire the $90 million construction loan on 500 Terry Francois St. The 291,000 square-foot office building and support retail is in the emerging biotech and life-sciences hub anchored by the University of California, San Francisco.

The building is owned by CBRE Investors' Fund IV, which is managed by CB Richard Ellis Investors LLC.

Meade Boutwell, a senior vice president for CBRE in San Francisco and a listing broker for the Mission Bay property, said negotiations are ongoing with Lionstone, and fund managers continue to work toward "a win-win" for everyone. "Bottom line is we're still working with several prospects," Boutwell said in an email message.

"500 Terry Francois was bought at a very different time in the market and, like other commercial buildings bought in 2007 and 2008, the hangover effect of unfavorable market and lending conditions ... remains challenging," the company said in a prepared statement.

The default notice has no impact on other CBRE Investors holdings, the company said, including Oakland City Center, which was acquired by CBRE Investors' Fund V earlier this summer for $356 million. It is 1.5 million square feet.

Lionstone executives did not return calls or emails seeking comment.

The six-story property, which was described by sources as spectacular, overlooks the San Francisco Bay and is close to light rail, BART and other transportation connections. The Mission Bay district, on the city's southern flank, connects directly to Interstate 280, making it a reasonably close commute to Peninsula cities and even Silicon Valley.

The building is in warm shell condition and includes more than 13,000 square feet of ground-floor retail. It has earned a Silver certification under the Leadership in Energy and Environmental Design program of the U.S. Green Building Council. Such certification should reduce the property's operating expenses compared to a like building without the improvements.

The loan matures in June 2011. It had been held by US Bank, which acquired the asset after San Francisco-based Pacific National Bank was taken over by the Federal Deposit Insurance Corp. on Oct. 30. US Bank acquired all of the deposits and nearly all of the assets of Pacific National.

The property appears to fall on the bull's eye of targeted assets for the Lionstone Group. The company seeks to acquire office buildings valued from $10 million to $70 million and urban assets valued as high as $150 million, according to its Web site. Principals seek office buildings "with scenic views of water or mountains, or adjacent to specific industry concentrations." Location trumps other considerations. They also seek to invest in the country's most populated urban areas with abundant nearby amenities.

The filing "is going to ring the bell of a lot of tenants," said one source. At their current investment basis and current market rents, the property's owners are struggling to make deals work. Assuming Lionstone ultimately takes the property, their lower cost should allow them to sign leases at current market rates and complete needed improvements while still making money.

A notice of default precedes a trustee sale by several months and not all default notices lead to foreclosure, meaning that CBRE could remain a partner in the deal.

At the end of the second quarter, the Mission Bay/China Basin submarket was 23.2 percent vacant but was showing signs of life, with net absorption of 36,630 square feet in the period and nearly 140,000 square feet of net absorption in the year's first six months, according to CBRE market research reports. Net absorption is the change in occupied square feet from one period to the next.

Mission Bay/China Basin has 2.5 million square feet of net rentable office space, or 3.2 percent of the city's office stock. Average full-service, asking-lease rates in the area are $35 a square foot a year.

CBRE Investors owns or manages more than 160 million square feet of commercial property worldwide through its direct investment programs.


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