2 Westwood office towers file Chapter 11: VMS-owned buildings' move avoids foreclosure sale.

2 Westwood office towers file Chapter 11

The largest two Westside office buildings outside Century City have been put into Chapter 11 bankruptcy, narrowly averting a foreclosure sale that was scheduled to take place the following morning.

News of the Westwood buildings' bankruptcies, filed in Chicago on May 29, spread rapidly through the Westside brokerage and tenant communities last week, sparking widespread concern that the already ailing Westwood office market could be devastated.

"Westwood's been hit very hard lately; and these (bankruptcies) are wreaking havoc," confirmed David Thind, a partner at Zugsmith/Thind Commercial Real Estate Services. "We're seeing more tenants moving out of those buildings than any others."

The two buildings, located at 10960 and 10880 Wilshire Blvd., are owned by limited partnerships of VMS Realty Partners. That Chicago-based firm controls a huge portfolio of distressed properties nationwide, much of which the firm has been trying to unload for more than a year.

"In the wake of a difficult real estate market throughout the United States, VMS is in the process of trying to orderly sell properties and service its debt," said Gerald Murray, a VMS spokesman. "In some cases there have been foreclosures or bankruptcies."

Few, if any, of those VMS bankruptcies, however, have been as large or as hard-felt as its two Westwood bankruptices.

VMS's Westwood buildings together contain nearly one-third of Westwood's total inventory of office space. And tenants have been fleeing the buildings almost as quickly as if the structures were ablaze.

About one-third of the space in each of the two buildings is currently sitting vacant, and that amount of empty space is likely to increase now that the buildings are in bankruptcy, sources said.

Several of the buildings' long-time tenants, including the 10960 building's ground-floor tenant, Security Pacific National Bank, are negotiating to relocate elsewhere, Thind confirmed.

Harvey Mahler, executive vice president of Tishman West Co., which manages both structures, conceded that "because of what's been going on, people have been looking elsewhere."

Reasons given by tenants for exiting VMS' bankrupt towers include deteriorating conditions of the buildings, uncertainty about the buildings' future management and upkeep, uncertainty about their lease agreements and severe unresponsiveness on the part of the buildings' owners and managers.

"You yourself can come over here and look at the floors and the bathrooms, and see that everything has become second-rate," said one tenant, who wished to remain unnamed.

ERLY Industries, for example, had been leasing about 16,000 square feet of space in the 10960 building. With its lease term nearing expiration, the company hired Westside brokerage CityPacific Commercial Real Estate to help it renew its lease or find alternate space.

"We contacted the landlord (VMS) repeatedly for nine months, asking them to quote us terms for renewing the tenant (ERLY)," explained Dan Powell, CityPacific president. "All we ever got from them was |We'll let you know.'"

Powell added, "I have a business policy, which is |Don't keep beating your head against the wall.' This is a brain-damaged business to begin with, why make it any more brain-damaged by working with unmotivated people?"

The result: ERLY moved out in February and is now ensconced in the Oppenheimer Building next door.

Attracting new tenants has been just as difficult as keeping old ones, if not more so, because VMS is not able to offer prospective tenants any concessions.

Meanwhile, other Westwood landlords are offering tenant improvement allowances of $40 a square foot, or more. That translates to $400,000 on a 10,000-square-foot lease.

"That means tenants have to go out and finance tenant improvements themselves," Thind explained. "And getting money for anything real-estate related these days is very tough. Tenants would rather just go elsewhere."

VMS's May 29 bankruptcy filings came just hours before a scheduled foreclosure sale of its two buildings. Bankruptcy typically brings foreclosure proceedings to a halt, indefinitely.

The buildings' senior lien holder, Swiss Bank Corp., however, has already rescheduled another foreclosure sale for July 30, according to Continental Lawyers Title Co.

Continental Lawyers would conduct a future foreclosure sale, if the situation between VMS and Swiss Bank is not resolved beforehand.

Swiss Bank has a $144.5 million claim against the 10960 building, and a $92.1 million claim against the 10880 building, local title records revealed.

Both buildings are also encumbered by numerous "junior liens," which can't be collected until Swiss Bank gets all its money.

"I won't even try to enumerate all the loans made on this property," said Martin Evans, chairman and CEO of Burbank-based Gateway Title Co. "It would take two days to research these properties."

The main junior lienholders for both properties are Banyan Mortgage Investors and VMS Mortgage Investors L.P.

VMS Mortgage Investors, which recorded about $80 million in junior liens against the two buildings, is also controlled by VMS Realty principals.

A former partner in several of VMS's troubled partnerships, local businessman Joseph Guglielmo, filed suit last fall against VMS principals Robert Van Kampen, Peter Morris and Joel Stone, as well as Stone's brother-in-law Leonard Levine, charging that the VMS junior liens were part of an elaborate "refinancing scheme."

That "scheme" allegedly involved VMS principals raising money through the sale of limited partnership units, then buying buildings or mortgages with the proceeds, and finally refinancing those buildings without notifying Guglielmo.

Guglielmo also alleged VMS principals used much of the refinancing proceeds to enrich themselves and their personal, unrelated ventures.

Guglielmo's attorney, Edward C. Broffman, reported last week that his client and VMS principals have since settled the matter out of court.

Meanwhile, Swiss Bank and the buildings' other creditors continue trying to collect.

PHOTO : Wilshire West Plaza: 10880 Wilshire Blvd.

PHOTO : 10960 Wilshire Blvd.: Tishman building