BofA makes changes at Warner Center property.

As sale prospects dim, bank looks to ride out economy

Illustrating the dismal state of real estate capital and investment markets here today, Bank of America has apparently given up hope for a quick sale of a relatively well-positioned Warner Center office property it quietly took back from a Trammell Crow Co. partnership earlier this year.

Unable to move the 93-percent leased, 239,164-square-foot Warner Gateway project in Woodland Hills -- even at half the property's peak value -- the BankAmerica Corp. unit has removed the Crow team and assigned asset management responsibilities to Westside-based Tooley & Co.

Signaling that BofA intends to ride out the depressed market for local suburban office properties and pin its hopes for the asset on higher future values, Tooley takes over the "real estate-owned" property Dec. 1, Tooley principal Bob Ruth confirmed.

While BofA officials wouldn't comment, the bank's position has left many local real estate professionals shaking their heads. Uniformly requesting anonymity, they expressed surprise that BofA forced the Crow partnership to deed over the "successful" property when the partnership was unable to secure long-term financing as its BofA construction loan came due.

A loan extension, a "roll-over" of the existing obligation into a permanent mortgage, or some alternative "workout" agreement would have been more appropriate in this case, some sources suggested.

"That property just shouldn't be where it is (in the bank's real estate-owned or REO portfolio); it shouldn't be a bank (equity) investment," commented one local property professional, who noted Warner Gateway's relatively high occupancy rate, preferred location and long-term leases to strong tenants.

Real estate experts also expressed concern that other developers and investors who took out construction or other short-term "bullet" loans -- and have likewise failed to secure long-term mortgages -- may face similar fates.

Under today's "clamp-down" regulatory climate, banks are "forced to look at each property individually and determine what might be of greatest benefit to the project," explained Frank Hickman, executive vice president at Tishman Realty & Construction Co., which has developed speculative office properties across the U.S.

Tishman Realty's short-term loan from BofA on an Orange County office property comes due next fall, and the developer is still seeking a permanent financing package, Hickman acknowledged.

With so many borrowers struggling to service highly leveraged debts, as property values fall, lenders "are frequently taking the position that they can operate a property as well as the developer; they have talented people capable of handling REOs," Hickman continued. Banks are "betting on a property's upside potential, and feel that if they have to financially support a property, they should benefit" from their investment, he elaborated.

The Warner Gateway case illustrates that when a lender opts not to work a problem out with a borrower, a quick disposition in today's cautious capital environment is typically a losing proposition. After the Crowled Warner Gateway Limited Partnership deeded back the property to BofA last March, the bank was initially seeking to dispose of the asset for $54 million -- about $4 million below the construction loan amount.

BofA hired powerhouse brokerage Cushman Realty Corp. to market the two-building complex. Indicating the slack demand for such an investment, another knowledgeable source noted that "only a dozen or so" local multi-tenant office properties as large as Gateway have been acquired by "non-users" during the last 12 to 15 months.

The high-level Cushman team, led by Senior Vice President Bill Puget, with the help of Vice President Steve Marcussen and Senior Broker R. Todd Doney, wasn't able to generate an acceptable bid, "even though they put a beautiful package together and solicited all the right people," one source noted.

BofA had dropped its asking price to $42 million and were willing to consider "the right offers in the low $30 millions," one insider added. Cushman executives wouldn't comment on the record.

The Warner Gateway scenario isn't necessarily an exceptional situation, as banks are "working out problem assets on their own, if they're strong enough and can afford it," one consultant continued.

BofA's approach at Warner Gateway represents a trend of institutions opting to "work with third-party asset managers, but with heavy (REO department) oversight,." he said.

While another source indicated that "Crow didn't go away willingly," Crow Senior Vice President Mark Linehan said negotiations with the bank "were friendly, never adversarial." But he confirmed what public records show: the partnership deeded back the property to the bank on March 13.

BofA's failure to sell the project, and its apparent determination to now hold on to it, with Tooley's help, until market conditions improve, inspired one analyst to say, "It really shows the state of affairs in the market today."