08/26/2009

Lenders Weigh Options on Dallas Portfolio

Lenders GE Real Estate and Transwestern Investment are weighing their options on a portfolio of Dallas-area office properties that is underwater.

Fund operator Equastone acquired the 2.9 million-square-foot portfolio for $382 million in July 2007, near the top of the market. It financed the deal with a $300 million senior loan from GE and a $31.9 million mezzanine loan from the seller, Crescent Real Estate Equities, which flipped the credit to Transwestern soon after.

The market downturn has pushed the portfolio's value below the senior loan's balance, according to estimates by local pros, putting Equastone in a squeeze. The senior and mezzanine loans are scheduled to mature next summer, although it's unclear if there are extension options.

Transwestern, a Chicago-based fund operator, has been quietly contemplating maneuvers to take over the Class-A portfolio, according to people familiar with the matter. But such a move would likely need the support of GE. Transwestern, which holds the investment via its $427 million Mezzanine Realty Partners 3 fund, would likely ask GE to kick in some equity to help lease up the buildings, the sources said.

But if estimates of the portfolio's current value are right, Transwestern's mezzanine position would also be in jeopardy, reducing its leverage to strike a deal. GE could ultimately push to take over the portfolio itself. Transwestern and GE declined comment, and a call to Equastone wasn't returned.

The portfolio encompasses 13 buildings, plus parcels. Equastone acquired it via its second value-added fund, a $172.5 million vehicle raised in 2005. The fund intended to immediately flip about half of the properties, and lease and sell the others within a few years. But that plan faltered amid the tight credit market and economic downturn.

The properties are in the Far North Dallas, Las Colinas, Uptown, Richardson/Plano and Stemmons Freeway submarkets. They include Stemmons Place (634,000 sf), Palisades Central 1&2 (421,000 sf) and The Aberdeen (320,000 sf).

The portfolio was about 86% occupied in 2007. Updated figures were unavailable, but the Dallas area has seen little improvements in average occupancy rates and rents recently. The average occupancy rate for the 196.9 million-sf market has hovered around 78% for two years. Asking rents have declined for three straight quarters, to $18.98/sf.