Lender forecloses on Water Garden's next phase.

CalFed takes over undeveloped property, seeks fast sale

The undeveloped Santa Monica property slated for the second phase of the ritzy Water Garden office complex was taken over through an "uncontested" foreclosure last week and immediately listed for sale by the lender.

A spokesman for lender California Federal Bank said the thrift had "already received offers" for the approximately seven-acre property, which has strict "entitlements" in place through 1997 for two office buildings totaling 600,000 square feet. CalFed spokesman Frank Moore said a listing price would be set this week, but some Westside real estate sources concluded that prevailing "effective" rents simply wouldn't support the planned phase's construction costs today.

Miracle Mile-based developer J.H. Snyder Co.'s inability to secure construction financing -- and repay the $54 million debt to CalFed -- seems to support that conclusion.

"It's been impossible" to find debt or equity financing for the second phase amid oversupplied Westside office market conditions, said Snyder principal Cliff Goldstein. "No one is prepared to put up $150 million" to pay off the CalFed debt and build office space on the site when "there are better returns on their money available today," he said.

The development firm had previously made an offer -- which CalFed did not accept -- to "buy back" the $45 million loan on the property, according to Goldstein. Interest and penalties brought the balance due up to about $54 million, according to a Feb. 15 Notice of Trustee's Sale filed against J.H. Snyder Co. by a CalFed subsidiary.

Goldstein declined to specify how much the development firm offered for the note. But he noted the offer was probably "well in excess" of what the site's new listing agent -- CB Commercial Real Estate Group Inc. Senior Associate Jay Honigblum -- is likely to achieve through an immediate sale in the soft real estate environment.

Snyder began negotiating a complicated development agreement with the Santa Monica city officials for the two-phased, 1.26-million-square-foot complex -- bounded by Colorado Avenue, 26th Street, Olympic Boulevard and Cloverfield Boulevard -- nearly a decade ago.

CalFed was the developer's initial joint venture partner, Goldstein explained. Snyder and the thrift had also teamed up to develop the 1 million-square-foot Wilshire Courtyard project completed in 1987 in the Miracle Mile district. CalFed is headquartered within that project.

As construction got under way on Water Garden's two-building, 666,000-square-foot first phase in 1989, Snyder formed a partnership for that phase with a real estate group headed by billionaire investor Marvin Davis.

Snyder retained separate ownership of the phase-two site, securing a June 1989 loan commitment which was the object of CalFed's foreclosure action last week, J.H. Snyder Co. founder Jerry Snyder explained. If the second phase is completed under the development agreement guidelines, the phase-two ownership would share use of Water Garden's common areas and some other infrastructure completed with the project's first phase, Snyder principal Milt Swimmer added.

The initial phase, completed in 1991, is about 95-percent leased, with software developer Candle Corp. and law firm Haight Brown & Bonesteel as the biggest anchor tenants.

Recent news reports and statements from the Snyder and Davis camps indicate some confusion over Snyder's current stake in Water Garden's first phase. But Jerry Snyder and a spokesman for Century City-based Davis Cos. said Davis is the property's managing partner and Jerry Snyder is a general partner.

J.H. Snyder Co. had negotiated sufficient commitments from tenants in downtown L.A.'s California Mart wholesale apparel center to justify construction of Water Garden's second phase, Goldstein noted. Other sources added that Snyder and owners of the nearby Arboretum property -- which is also within Santa Monica's "special office district" -- had endeavored to combine forces in developing a big wholesale apparel complex. But the developers weren't able to secure the necessary financial commitments.

Westside real estate sources also suggested that Davis -- perhaps even in some type of partnership with the Snyder firm -- would be the most likely party to pursue the phase-two property as financial and office market conditions improve in the years ahead.

"Down the road Marvin is the most logical buyer," said one Westside real estate veteran who asked that his name not be published. "My gut feeling is that the rights to develop the second phase are worth more to someone who controls the existing Water Garden property.

"If Davis wanted to sell sometime down the road, he could get a lot more value" by controlling both phases than the combined value of the two phases under separate ownership, the source elaborated. And with speculative office development essentially non-existent here today, Davis "realizes he has time; it's doubtful anyone will jump in and buy (the phase-two site) right away."

The Davis spokesman said Davis hasn't made an offer for the phase-two site, nor is he interested in acquiring it at this time.

At a price of $45 million, 600,000 square feet of development rights amounts to $75 per buildable square foot -- a land price sources said they consider prohibitively beyond what's achievable today. Considering that use under the development agreement is restricted to the two office buildings until the development agreement expires in 1997, "some people have suggested that the value is zero today," Goldstein noted.

"It's obviously not worth $40 million or $50 million -- or even $20 million," he added. Other sources pointed out that any investor willing to wait until the development agreement expires, and attempt to negotiate an alternative use with the notoriously restrictive city government, would be assuming a substantial risk.

"That would be a fate worse than foreclosure," one source quipped.