Garrison Seeks to Seize 4 Buildings Near DC

Mezzanine lender Garrison Investment is moving to take control of a struggling 514,000-square-foot office portfolio in suburban Washington.

The four buildings, at an office park in Reston, Va., have seen their value plummet since Penzance Partners acquired them in July 2007 for $142 million. Washington-based Penzance started emptying out the 1980's-vintage buildings in order to plow millions of dollars into capital improvements and re-lease the space at higher rents. But the plan was stymied by the economic downturn, and the occupancy rate now stands at only about 45%.

In August, Penzance was unable to refinance a maturing $107 million senior loan from UBS and Garrison's $31.5 million mezzanine loan. Now Garrison, a New York hedge-fund shop, is seeking to seize the properties via foreclosure. A foreclosure auction has been scheduled for Nov. 1 in New York.

Last month, Eastdil Secured shopped the mezzanine loan for Garrison, but didn't receive any acceptable offers. Eastdil is now marketing the portfolio to try to drum up interest in the auction. But market pros doubt Garrison will get an offer high enough to persuade it to walk away.

Garrison's game plan is unclear if it ends up with the portfolio, as expected. But market pros presume the firm would have to stabilize the buildings before it could try to sell them.

That could be a challenge. First, Garrison, which is operating via its flagship Garrison Special Opportunities Fund, would need to negotiate a loan extension with Berkadia Commercial Mortgage, the master servicer of the senior securitized mortgage, or else find new financing. Market players estimate that the portfolio's current value is well below the $107 million balance of the senior loan, perhaps as low as $75 million. That would mean that Garrison's position is currently out of the money. For Berkadia to sign off, it would need to be persuaded that Garrison's strategic plan is the best way to maximize the properties' value.

Also, although Reston is just 25 miles west of downtown Washington, it is outside the Capital Beltway loop. That would leave Garrison with a lot of vacant space in a slightly less-desirable location. But the average occupancy rate in the local Dulles Corridor submarket is about 85% - almost double the level at the Penzance portfolio. So an aggressive leasing campaign should bring results.

The properties in the portfolio are:

*Reston Corner 1, at 12001 Sunrise Valley Drive (100,000 sf). Built: 1982. Occupancy rate: 29%.

*Reston Corner 2, at 12005 Sunrise Valley Drive (109,000 sf). Built: 1983. Currently vacant.

*Parkridge Center 2, at 10803-10805 Parkridge Boulevard (95,000 sf). Built: 1985. Occupancy rate: 100%.

*Parkridge Center 5, at 10780-10790 Parkridge Boulevard (209,000 sf). Built: 1999. Occupancy rate: About 50%.

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