Lender forecloses on California Plaza tower.

Debt on highrise far exceeds its market value

An international mortgage lender syndicate led by Citicorp Real Estate Inc. has taken over downtown L.A.'s 1.4 million-square-foot Two California Plaza office highrise through a foreclosure action.

Although the developers, a Metropolitan Structures-led team, had invested some $90 million in cash equity in the project, they were apparently unable to restructure their huge mortgage debt on the property. That loan carried a principal balance vastly beyond the 52-story Bunker Hill tower's current market value.

Nor did the development team opt to hold onto its big investment by bringing the mortgage account current - even though it was only $3.5 million in arrears when the borrowers received their formal "notice of default" last September.

The foreclosure on one of downtown's biggest and newest office towers illustrates the depths of the district's commercial real estate depression - and the perceived risks of investing there. In addition to huge losses for Two Cal Plaza's developers and lenders alike, it has also created a situation in which the project's two signature office towers are under separate ownership, property management and leasing teams.

But some downtown real estate sources predict the new Two Cal Plaza team might be a temporary arrangement. They noted an anticipated sale to a group led by Chicago investor Sam Zell - a deal slated to close concurrent with the foreclosure - fell through at the last minute. Hence, they expect the lender group to aggressively market the property for sale over the next few months.

Anchor tenant to go

Despite downtown's woes and the pending late 1998 loss of the tower's 400,000-square-foot anchor tenant - the Metropolitan Water District - "it's a salable asset if it's positioned well," said downtown broker Bob Caudill. "Everything has its price, so it represents a good opportunity for someone."

Representatives of Citicorp and Metropolitan Structures weren't available for comment on the CalPlaza situation. Nor were executives at new Two Cat Plaza leasing agent Cushman Realty Corp. or property manager PM Reality Group Inc.

(Met Structures affiliate MS Management Services continues to manage and lease the One California Plaza highrise. A similar team developed that tower, which is now owned outright by Met Structures part-owner Metropolitan Life Insurance Co. One Cal Plaza is nearly 100 percent leased.)

When the Citicorp-headed mortgage group took tire on March 24 to the 1992-vintage Two Cat Plaza, its trustee conducted the transaction at a revised property Value 60 percent below the mortgage balance.

A title document recorded in early January in connection with the trustee's sale specified that the unpaid balance on the Two Cal Plaza mortgage totaled more than $250 million. But the "trustees deed upon sale" document just recorded specifies a new value of only $102 million - with the new owners apparently recognizing the downtown marketplace's sobering realities.

Loan topped $300 million

Property records indicate the original principal balance of bank consortium's 1989 construction loan to the Two Cat Plaza development team was $310 million. That team was headed by Chicago's Metropolitan Structures and included Toronto's troubled Cadillac Fairview Inc. as well as local real estate investors Jona Goldrich and Nathan Shapell.

With leasing activity light both before and after the tower's completion, the mortgage lenders asked the development team to inject additional equity into the project's finances.

Then Cadillac Fairview, which is operating under Canadian bankruptcy court protection, reportedly stopped funding its share of the monthly mortgage payments a year ago. But even after Two Cat Plaza's lenders flied the initial default notice last September, knowledgeable sources said the borrowers and lenders would resolve the situation amicably - protecting the former's investment in the project.

Sources confirmed at the time that the development partners have invested at least $90 million in equity into the project over the years. But now it all appears lost. And, of course, the new $102 million valuation suggests a huge write-off as well for the lender group, which is thought to include some big Japanese financial institutions.