Market Change Led Investor to Sell 500 Terry Francois Well Before Plan

By Jon Peterson

When Houston-based Lionstone Group bought the note secured by San Francisco’s 500 Terry Francois Blvd. in April 2010, it had no intention of flipping the empty Mission Bay offices.

“The plan was to get the property leased, and once it became stabilized, we would then look to sell it,” said Dan Dubrowski, one of Lionstone’s three founding partners. He did not say how long he thought that would be.

But everything changed when enterprise cloud-computing company announced that it would pay $278 million for 14 acres in Mission Bay, he said. That, coupled with other activity in the Mission Bay district persuaded the company that the time to sell the 291,000 square-foot property, which was in shell condition, was now, not later.

Salesforce said Nov. 1 that it planned a new company headquarters with two million square feet, enough to accommodate thousands of workers. The Salesforce site is steps from the Terry Francois property. Both overlook the San Francisco Bay. The events persuaded Lionstone to make a radical course correction, and at the end of last year—having foreclosed on the property—it put the still-empty building back on the block.

On May 17, the sale closed. The Sobrato Organization, one of the largest commercial property owners in Silicon Valley, purchased the building for approximately $320 a square foot, just more than $90 million. The price is not much removed from the original $90 million construction loan that The Lionstone Group acquired. However, Lionstone paid only $52.5 million roughly a year ago to buy the debt.

The Registry reported March 29 that Sobrato intended to buy 500 Terry Francois.

Sobrato is teaming up with San Francisco-based TMG Partners on 500 Terry Francois. TMG Chief Executive Michael Covarrubias said his company has no ownership stake in the property because it was acquired through a tax-deferred exchange process that did not allow their participation. “We will be acting as an advisor and have a management agreement on the property,” Covarrubias said.

Lionstone invested in 500 Terry Francois for its commingled fund, Lionstone Urban Investors II, which was formed in 2006 with equity of $400 million. Investors in the fund were a mix of corporate pension funds, foundations and endowments. The investment in the Terry Francois note was one of the last made for the fund.

A Lionstone fund currently holds one major asset in the San Francisco market, Page Mill Hill, a 170,000 square-foot office and R&D property in the Stanford Research Park. The company has owned the property since early 2007. It is held in Lionstone Cash Flow Office II, an investment fund formed in 2006 with the California State Teachers Retirement System.

Going forward, Lionstone wants to be a bigger player in the San Francisco Bay Area. The company would like to find assets in San Francisco in and around China Basin and Mission Bay and down the Peninsula in markets like Palo Alto, Mountain View and Sunnyvale. The investment firm buys assets that are located in areas that on a long-term basis have strong demand and are limited in the new supply that can be added.

Lionstone now has $400 million of capital available to invest in three separate investment funds. The Cash Flow Real Estate Partners One is a $250 million fund with the Teacher Retirement System of Texas. The $100 million Lionstone Cash Flow Office I is with the Oregon Public Employees Retirement System. U.S. Land Partners is a $100 million fund backed by capital from high-net worth individuals and Lionstone. This fund has an urban infill strategy.

West Coast Commercial Real Estate News