06/15/2012

Fortress Team Dealing San Francisco Building

A Fortress Investment partnership is shopping the office building at 50 Beale Street in San Francisco, where property valuations have rebounded to near-peak levels.

The 662,000-square-foot property is expected to attract bids of at least $300 million, or $453/sf. Eastdil Secured began marketing the Financial District property last week for Fortress and its partner, Broadway Partners, both of New York.

The occupancy rate is 90%. The tenants include Blue Shield of California (273,000 sf through 2019) and Bechtel (148,000 sf through 2014).

The 23-story building, which was developed in 1968, is at Mission Street in the heart of San Franciscoís booming downtown, where a parade of high-profile office towers has hit the block in the past year. Two weeks ago, Union Investment of Germany acquired the 557,000-sf property at 555 Mission Street for an eye-popping $800/sf, or $445 million. That building, which was completed only four years ago, is a couple of blocks away, in the more-desirable South of Market district.

Broadway took over 50 Beale Street in 2007 via its $5 billion purchase of a 24-property portfolio from a fund sponsored by Beacon Capital of Boston. Lehman Brothers backed the purchase with a complex financing package that included mezzanine debt and bridge equity.

The Beale Street building and 10 others in the portfolio ended up with $460 million of cross-collateralized bridge equity and subordinate debt. At the time, 50 Beale Street was appraised at a sky-high $354 million. Lehmanís financing package allocated $231 million of debt to the building.

When the downturn worsened, Broadway was unable to repay the bridge equity and subordinate debt. In 2009, it negotiated a restructuring with Lehman, which took a majority interest in 50 Beale Street and six of the other cross-collateralized properties, with Broadway retaining a stake. Broadway also surrendered its interest in three other office properties to Lehman. Last year, Lehman sold its interest in 50 Beale Street to Fortress, a New York fund shop.

As part of the restructuring, the maturity date of the debt was extended to last month. The Fortress team has refinanced the loan with a $185 million floating-rate mortgage, which the buyer has the option of assuming.

The building has had several major renovations, including a lobby makeover and elevator modernization this year.

Broadway briefly marketed 50 Beale Street in 2008, but pulled it back when bids didnít reach its goal of $315 million, or $475/sf. It and Fortress are likely to find a more receptive pool of bidders this time. Rents and leasing demand have soared in San Francisco, fueled by job gains in the technology industry. The average occupancy rate in the Financial District is 95%, and rents are growing at a 9% annual pace, according to Marcus & Millichap.

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