Mezz Lenders Taking Over Cabi Portfolio

The senior lenders on a heavily overleveraged California office portfolio have agreed to let four investors convert their mezzanine debt into equity as part of a restructuring that will significantly dilute the $100 million investment of a Calpers-Hines joint venture.

The Calpers team originally held the $100 million junior slice of debt on the 4.6 million-square-foot portfolio. It converted that debt to equity and took over the 33 properties in December, after owner Cabi Developers was unable to make payments on its $1.3 billion debt package.

Now the Calpers joint venture is largely being squeezed out. Under the restructuring, BlackRock Realty Advisors, Gramercy Capital, KBS Realty Advisors and Square Mile Capital will convert the remaining roughly $500 million of mezzanine debt into equity.

Hines, the Houston-based developer and fund operator, is expected to retain the management rights to the properties. But the Calpers-Hines team will lose most of its equity stake in the portfolio. It's believed Calpers put up the bulk of the original $100 million mezzanine-debt investment.

The restructuring was precipitated by a looming deadline for the debt package, which would have come due in full next month if certain performance tests weren't met. Specifically, the portfolio couldn't exceed a prescribed loan-to-value ratio - but it was already over the level because of a sharp drop in the properties' revenues.

The holders of the roughly $700 million senior loan - New York Life and German lenders DekaBank, Munchener Hypothekenbank and West Immo - were reluctant to leave it in place. But they finally agreed to do so under the condition that the remaining mezzanine debt be converted into equity. While the senior loan may well exceed the market value of the portfolio now, the lenders decided that it made more sense to wait than to foreclose now, according to people familiar with the restructuring.

A partnership led by Cabi, the U.S. arm of Mexico's largest developer, acquired the portfolio for $1.5 billion from GE Real Estate's Arden Realty in August 2007 - at the top of the market. Wachovia, which arranged the debt package, placed the $100 million junior tranche with Calpers and Hines, the $75 million second-loss tranche with Square Mile and the next-junior piece, which also has a $75 million balance, with KBS.

Since Cabi acquired the portfolio, the net operating income has dropped by at least $10 million, to about $50 million, because of the softer leasing market. At an 8% capitalization rate, that income would indicate the properties are now worth about $625 million.

Cabi, of Aventura, Fla., and its partners tried to negotiate a workout last year after missing a $150 million principal payment. But New York Life gave the plan a thumbs-down, prompting Cabi to surrender the portfolio to Calpers and Hines.

Operating the mostly Class-B portfolio has been a challenge for Hines, which is more accustomed to managing Class-A properties. The portfolio includes three large buildings in Los Angeles County's South Bay submarket: the 443,000-sf Gateway Towers in Torrance, the 224,000-sf Pacific Gateway in Torrance and the 203,000-sf South Bay Centre in Gardena. Also included are the 393,000-sf complex at 900-1255 Corporate Center Drive in the Los Angeles County community of Monterey Park, the 392,000-sf Skyview Center in Los Angeles, and the 303,000-sf Fountain Valley City Centre and the 107,000-sf Fountain Valley Plaza in the Orange County community of Fountain Valley.

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