Sunnyvale Town Center On the Cusp of Change
Lenders spend $30 million to stabilize massive development.
Submitted May 10, 2010, 10:44 PM
Another chapter begins in the long and winding journey that is the Sunnyvale Town Center.
Finnish mobile-phone maker Nokia Inc. has signed a 156,000 square-foot office lease at the stalled project, potentially offering a crucial jump-start to its renewal.
Meanwhile, the Sunnyvale City Council is slated to take up proposed changes to a development agreement aimed at making the partially constructed mixed-use shopping center more attractive to buyers. Gerald Hunt, a court-appointed receiver whose company is managing the center through the foreclosure process, says the proposed agreement is “a critical juncture” toward the center’s completion. While the scope of the project does not change, the timelines for the development will. The existing agreement did not contemplate phasing; the proposed agreement does.
“The existing agreement was created in a vastly different market. This agreement pushes out certain timeframes and allows flexibility for things to happen as the market returns,” he said.
At the same time, the center is attracting broad investor interest, which could escalate with the announcement of the Nokia lease. Jon Knorpp, a partner with Wilson Meany Sullivan, a San Francisco real estate development company advising construction lenders, said interested parties run the gamut.
“There are people who smell blood in the water and there are others who think it is a well-positioned project in a great market and say they want to be associated with it,” Knorpp said.
John Pilger, a spokesman for the city, said staff is elated with the Nokia news. Hopes are building that the company’s December move into the offices at West Washington and South Mathilda avenues turns momentum for the larger project. “This is a great vote of confidence,” Pilger said.
The town center has become a South Bay poster child of the commercial real estate bust that has escalated since the financial crisis began in fall 2008. But the city has sought for at least a decade to remake the former Town Center Mall, a so-called fortress mall originally developed in the l970s. In the last decade, starting with the dot-com bust in 2001, three separate developers have all been thwarted in trying to fulfill the remake dream.
The most recent attempt was pursued under an agreement signed by the city in February 2007 with partners Rreef, a real estate investment advisor with San Francisco offices, and San Mateo developer Peter Pau. The city granted a special development permit to their partnership to build, lease and operate 275,000 square feet of offices, 292 for-sale housing units and nearly a million square feet of retail space. That included a a 2,600-seat movie complex, an existing Macy’s and a new Target.
The partnership borrowed $108 million from a collection of banks led by Wachovia (now Wells Fargo) and Bank of America and contributed in excess of $220 million in equity, the staff report shows. The developers defaulted on their loan last year and Wachovia sought Hunt’s appointment as receiver last fall. The development is roughly 40 percent complete.
Hunt said May 10 that since he assumed his post, the lenders, which include others beyond Wells and BofA, have forwarded $30 million to stabilize the property, to settle outstanding litigation with Devcon Construction Inc. and to satisfy more than 70 subcontractor liens. Devcon, a well-respected, large South Bay general contractor, is back on the site today, he said.
The lenders also will finance the build-out of the 156,000-square-foot building that Nokia will occupy, he said. Hunt declined to give the lease term or rates.
“So, in a world where there is lots of uncertainty, there has been a major move forward on this project and in this community” toward certainty, he said.
Pau and his Sand Hill Property Co. have sought since February to buy the town center. In a “media advisory” issued May 7, Sand Hill said an all-cash offer to the bank had not elicited a response. The advisory did not give a sum.
“Sand Hill Property has a new capital partner providing funding that will allow work to resume immediately and completion of work already started—without the need for a construction loan,” the advisory stated.
A company representative is expected to appear before the Sunnyvale City Council on May 11, when the council takes up the proposed amendments to the development agreement.
In a prepared statement from Wells Fargo, the bank said, “Wells Fargo representatives have met with Mr. Pau and the details of those discussions are private. The lenders, including Wells Fargo, continue to thoughtfully explore all options for the property that will benefit the city and all parties involved.”
Technically, the bank does not yet own the property, since it has not completed the foreclosure process.
