Lenders Back $600MM in Projects with Pau’s Sand Hill Despite Litigation

Bay Area, Cupertino, Silicon Valley, CBRE Capital Markets’ Debt & Structured Finance, San Francisco, Sand Hill Property Company, HSBC Bank USA

Cupertino The Registry real estate

By Sharon Simonson

Peninsula-based real estate developer Peter Pau and his Sand Hill Property Co. have gained entitlements for and expect to construct more than $600 million in Silicon Valley development including a 180-room Marriott Residence Inn and 260,000 square feet of offices in Cupertino, home of Apple Inc. and a near-zero office-vacancy rate.

The projects include the $330 million mixed-use Main Street Cupertino on an 18-acre former Hewlett-Packard Co. site that has been the object of intense developer interest and community angst for a decade; a $37 million conversion of a senior living facility to a hotel in Menlo Park; and the first, $140 million phase of The Grove, a newly approved Los Gatos office complex leased to Netflix Inc.

According to multiple sources, Pau has faced an onslaught of questions and skepticism from lenders in the last three years after a high-profile legal battle over the Sunnyvale Town Center pitted the company and developer against two of the nation’s largest banks, San Francisco-based Wells Fargo & Co. and Bank of America. The litigation remains unresolved and is paused as the parties wait for answers from a state appellate court.

Now, Pau and others said, he is gaining backing for his projects from regional and international lenders and capital partners. “In 2011 and 2012, so many lenders said, ‘I won’t do business with Peter Pau.’ Even now every time we get financing we have to explain Sunnyvale Town Center. Some lenders will do business with you and others don’t.”

The New York branch of Natixis S.A., a publicly traded French asset management company, in July agreed to lend two limited liability companies controlled by Sand Hill $25.5 million, according to property records on file with the Santa Clara County Clerk Recorder. The money, along with $12 million in equity from Sand Hill, is to convert a Menlo Park retirement community just east of El Camino Real into a 138-room Marriott Residence Inn. The property is designed for extended-stay travelers with suites, kitchens and separate sleeping and work areas.

Joe Vassallo, a managing director for Natixis in New York, said the asset manager is aware of the dispute between the other lenders and Sand Hill but that its own experience with the borrower, CBRE and its broker John Nelson, and the caliber of the hotel project led it to do business with Pau.

“I can’t speak to what another bank’s history has been. We looked at our own history with all of the people involved, and that was the primary source of data for us with regard to the sponsor,” Vassallo said. “We had a good experience with [Pau] and a fantastic experience with CBRE.”

Before agreeing to finance the improvements, the Natixis considered the revenue and occupancy for surrounding hotels of comparable quality, appraisals and engineering and structural reports about the Menlo Park senior housing buildings. It also evaluated Sand Hill’s ability to complete the project and then to operate the hotel, Vassallo said. He personally was involved in the project’s underwriting.

The 24-month construction loan is non-recourse and carries an approximately 6 percent interest rate. Natixis was one of multiple lenders that competed for the hotel business, Vassallo said.

In April, San Francisco’s Preferred Bank lent Sand Hill $12.2 million to finance renovation and the construction of improvements at 16005 Los Gatos Blvd. in Los Gatos, according to a deed of trust filed with the Santa Clara County Clerk Recorder. The money is to finance an approximately 30,000-square-foot retail and office development next to a new home development by D.R. Horton, said Reed Moulds, managing director of Sand Hill Property.

Sand Hill also is building a 40,000-square-foot medical office building at 15400 Los Gatos Blvd. for lease to the Palo Alto Medical Foundation, said Cynthia Greaves, a spokesperson for PAMF. The site is expected to house family medicine, internal medicine, pediatrics, diagnostic imaging such as ultrasound and X-ray, a full laboratory and an urgent care center, she said. She declined to disclose the lease arrangements. Moulds said Sand Hill is in the final throes of securing a loan from Siemens Financial for the $30 million project.

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