Citicorp unit slaps loan default notice on 2 Cal Plaza team.

Developers of downtown L.A.'s 52-story Two California Plaza office highrise hav defaulted on the tower's construction loan after an affiliate of financially strapped Cadillac Fairview Inc. stopped funding its share of the monthly mortgage payments, the Business Journal has learned.

However, real estate sources noted the development partnership isn't likely to face ultimate foreclosure -- despite the soft office market, big mortgage and mounting woes at general partner Cadillac Fairview, the Canadian real estate giant.

Their explanation: the development partnership's managing general partner -- Metropolitan Structures -- is affiliated with a huge financial institution heading a group that has already invested more than $90 million in equity. That institution, Metropolitan Life Insurance Co., isn't about to let the partnershi lose that investment when the team's account with lender Citicorp Real Estate Inc. is just $3.5 million in arrears.

Real estate sources also point out that most lenders prefer to restructure troublesome loans amid the depressed commercial real estate environment -- rather than take over debt-burdened downtown highrises.

Chicago-based Met Structures is the Two Cal Plaza partnership's managing genera partner. Cadillac Fairview's California affiliate is the general partner of the other 50 percent general partner. Local developer/manager Goldrich & Kest Industries also has an interest in the partnership headed by Cadillac Fairview.

The $3.5 million figure is the amount specified in the Notice of Default that Citicorp recorded earlier this month in the L.A. County Recorder's office. The document also states that the Two Cal Plaza development partnership failed to make the monthly mortgage payment due last March 15 and all subsequent payments

Citicorp's move -- as one source put it -- is considered a negotiating ploy aimed at "lighting a fire" under the development team while borrower and lender continue negotiations to restructure the mortgage.

Sources also noted Citicorp is likely positioning itself strategically -- as ar other creditors -- in anticipation of further corporate and financial restructuring at Cadillac Fairview.

If the developers don't cure the default within 90 days of the recorded notice, Citicorp could take the next step toward foreclosure and schedule a "trustee's sale" of the property. But real estate sources said Met Life and its developmen affiliate won't let that happen.

However, the Met Structures/Met Life team shouldn't expect help from the Cadillac Fairview side any time soon.

Spokesman Pat Howe said Cadillac Fairview announced early this year that it would make only interest and principal payments on most of its Canadian mortgag obligations "to the extent available from the cash flow of the affected properties." With respect to Two Cal Plaza and many other U.S. properties, a decision was made "much in same manner to limit payments to the available cash generated" by rental revenues, Howe added.

Cadillac Fairview Corp., the Toronto-based parent's main operating subsidiary, posted a net loss of more than $2.7 billion (Canadian) for the fiscal year ende last Oct. 31, and it reportedly has defaulted on $800 million (U.S.) in bank debt this year.

Its recently restructured board of directors is seeking a capital injection while struggling to restructure some $2.6 billion (U.S.) in debt.

U.S. institutional investors advised by Chicago's JMB Realty Corp. bought Cadillac Fairview in 1987. The California Public Employees Retirement System is said to remain the biggest shareholder with a 15 percent stake.

Meanwhile, much of Cadillac Fairview's shares and senior debt have changed hand in recent months as Wall Street-backed "vulture" funds scooped up pieces at steep discounts.

Citicorp real estate lending officials weren't available for comment. Greg Schultz, local vice president with Metropolitan Structures -- which is half-owned by Met Life -- said Citicorp officials informed the property owners after "several months of dialogue" that the lender "will begin the process of foreclosure to protect their legal position."

He added that Citicorp's action "doesn't signal an end of the negotiations between Citicorp and California Plaza -- that process continues."

While Schultz wouldn't comment on Cadillac Fairview's reported travails, he noted the 1992-vintage glass-clad highrise is now 67 percent leased in a market of high vacancies amid a slowed local economy. Met Structures affiliate MS Management Services continues to manage and lease the property on a day-to-day basis and no change is planned, he added.

In 1989, the real estate subsidiary of New York-based banking giant Citicorp financed construction of the second of three planned office towers at the ritzy California Plaza redevelopment project -- 1.4 million square feet. The original principal balance of the construction note, reportedly funded in part by big Japanese banks, was $310 million.

As construction was nearing completion in early 1992 -- amid a highly competitive downtown leasing market -- the Business Journal reported Citicorp was insisting the developers inject at least another $50 million in equity into the project.

Title records indicate the Citicorp construction loan agreements were amended i June 1992. Knowledgeable sources said the effect of the amendments was to build the partnership's aggregate equity investment in the development to nearly $95 million, and reduce the loan's principal balance by perhaps $75 million. However, those figures couldn't be confirmed.

"Big Six" accountancy Coopers & Lybrand was Two Cal Plaza's first "anchor"-type tenant, leasing 175,000 square feet of office space for 15 years. The Metropolitan Water District has since leased about 400,000 square feet on an "interim" basis through the end of 1988.

While MWD was seeking a permanent headquarters earlier this year, Two Cal Plaza's developers offered to sell the tower to the agency for less than it cos to construct the building.

Met Life now owns Cal Plaza's first 1 million-square-foot tower, which was completed in 1985. A team headed by Met Structures continues to negotiate with the City of L.A.'s Community Redevelopment Agency over a revision of the Disposition & Development Agreement for the adjacent site of the planned third tower.

CRA Bunker Hill project manager Jeffrey Skorneck said the Two Cal Plaza partnership is current on the "ground lease" payments -- $1.5 million annually, or $125,000 monthly -- it makes to the agency, which owns the land beneath the tower.

"We're hoping it's something they can work out," Skorneck said of the lender-borrower dispute, which presumably won't make marketing the empty office space any easier.