Loan on Mission Bay Offices Sold at Deep Discount

By Jon Peterson

A $90 million construction loan on the 500 Terry Francois office building in the Mission Bay district of San Francisco has been sold to a private-equity group in Houston for $52.5 million, according to sources familiar with the transaction. The loan had been held by US Bank, which inherited it when it took over Pacific National Bank late last year.

US Bank did not respond to several calls seeking comment.

The owner of the building is Los Angeles-based CB Richard Ellis Investors. The term on the construction loan ends in June 2011.

No tenants now occupy the property, which is in shell condition and accommodates 291,000 square feet. CB Richard Ellis is also the leasing agent on the property, which could be built out as either a single- or multi-tenant facility. According to industry sources, talks are in process now with potential tenants.

The private-equity group paid $200 a square foot, significantly below the projected $450 a square foot for replacement cost, real-estate industry sources said. The expectation is that it would take roughly $100 per square foot of tenant improvements to make the property habitable.

CB Richard Ellis Investors bought 500 Terry Francois in the summer of 2008 for its CBRE Strategic Partners US IV fund. The real estate manager completed its capital raise for the commingled account in December of 2005 with $1.18 billion in equity. The fund was marketed as an investment vehicle to acquire properties whose value could be enhanced with upgrades and repositioning. In 2005, fund managers projected that investors in the value-add fund would achieve leveraged internal rates of return in the 20 percent range over a three- to seven-year holding period.

Investors in the fund include Los Angeles City Employees’ Retirement System with a $25 million investment, a $20 million contribution from Ohio Police and Fire Pension Fund and a $40 million commitment from School Employees Retirement System of Ohio. Ohio Police and Fire put a value on its investment of $8.5 million through the end of March 2010.

The property next door to 500 Terry Francois, 550 Terry Francois, was sold at the end of last year for $135 million or $479 a square foot, according to data from Eastdil Secured and Jones Lang LaSalle. The cap rate was in the low 10 percent range based on the existing net operating income. The buyer was GLL Real Estate, which has regional offices in San Francisco. The seller was New York City-based Tishman Speyer Properties. The deal included assumable financing totaling $107.5 million. The property is 100 percent leased to the Gap through 2017.

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