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REA
May 06, 2020  

Deal for SF's Pyramid Tower Faces Hurdles

The coronavirus crisis is complicating one of the highest-profile deals of the year: Michael Shvo’s bid to pay $711 million for the iconic Transamerica Pyramid Center in San Francisco.

Sources said Shvo, a New York investor, and his German partners, BVK and Deutsche Finance, have been unable to line up financing. Meanwhile, loan spreads have widened so much in the past six weeks that the cost would be prohibitive even if the partnership could find a lender.

The property’s namesake owner, insurer Transamerica, and its parent, Dutch financial-services company Aegon, are willing to give the Shvo team more time, sources said. When the deal was announced, Transamerica said the transaction would be completed by the end of the second quarter. But with the clock ticking, the parties have yet to set a closing date. Transamerica is being advised by JLL.

The economic fallout from the pandemic has scuttled pending property trades nationwide, even in cases when buyers had put down nonrefundable cash deposits. Shvo and his partners haven’t put down a “hard” deposit, sources said. That’s in contrast to a deal another Shvo partnership is trying to close in Chicago, where it stands to lose a $20 million deposit should it walk away.

“The Pyramid deal is on ice for now, and who knows when it comes back,” said one West Coast broker.

A source with knowledge of the deal said it’s still on track. But local pros said it won’t close until the debt market loosens up and financing costs come down. And even then, it’s almost certain Shvo will seek to renegotiate the price.

“There is no way the pricing can hold up,” another broker said. “And when they can get debt, it will be significantly higher than their underwriting — and probably a lower [loan-to-value ratio]. If Aegon can get it done for a haircut of 10% or less, I would consider that a win.”

Added the West Coast broker: “There is so much uncertainty, Shvo needs to get paid for that additional risk.”

The deal, which Transamerica and the Shvo team reached in February, is for the 48-story tower at 600 Montgomery Street and two adjacent buildings, at 505 & 545 Sansome Street. The complex totals 735,000 square feet. The tower was built in 1972 as the insurer’s headquarters. The property hasn’t traded before.

Although well-leased, with a 90%-plus occupancy rate, Transamerica Pyramid Center is a dated property in need of repositioning, according to local pros. Value-added deals have become especially difficult to close amid the pandemic because of their higher risk profile. When the Transamerica property went under contract, San Francisco’s leasing market was running white hot. But forecasters expect vacancy to rise over time amid a drastically changed leasing landscape.

The biggest immediate obstacle is financing. Before the crisis, market pros said, lenders probably would have quoted rates in the range of 2.75% to 3%. But the coupon currently would be closer to 7-8%. “The market is simply not open for this deal profile right now,” said one investment-sales veteran.

Transamerica, which was acquired by Aegon in 1999, has since relocated its headquarters to Baltimore and no longer has offices in the Pyramid Center. But the tower remains an important part of its corporate identity and continues to be depicted in its logo.

The Pyramid tower, which ranks alongside the Golden Gate Bridge and cable cars as San Francisco icons, is noted for its signature 212-foot spire and its tapered, pyramidal shape, designed to allow more light on the streets below. The skyscraper, initially controversial, was hailed as an architectural achievement soon after its completion. At 853 feet, the building was long the city’s tallest structure. It was surpassed by the 1,070-foot, 61-story Salesforce Tower, which opened in 2018.