Revamped ownership group eyes new lease on life for Arboretum.

An Oakland-based real estate partnership has converted the loan it acquired for $10.5 million through a Resolution Trust Corp. auction -- at a huge discount from the note's $35 million-plus "face value" -- into a half-interest in Santa Monica's Arboretum redevelopment project.

The restructured ownership team, which no longer includes one of the venture's original partners -- Brentwood-based Lowe Development Corp. -- is also attempting to breathe new life into the slow-moving project by hiring a national brokerage to secure "build-to-suit" opportunities. If the refined marketing team arranges the right deal, the new partnership may even sell the property outright.

The entity now assuming Lowe's 50 percent interest in the 10-acre balance of the Arboretum property is a partnership between two Bay Area real estate development and investment firms, Transaction Cos. Ltd. and Swire Properties Inc.

While the changes eliminate Lowe's ownership interest in the property and diminish its marketing role somewhat, the prominent developer/asset manager will continue handling marketing and management of Arboretum's 100,000 square feet of existing structures and seek additional development and/or sale opportunities in tandem with Grubb & Ellis Co. brokers.

As the new team targets scarce build-to-suit client prospects, Lowe also retains the "development manager" title and hopes to manage any subsequent development projects on a fee basis.

An affiliate of Boston-based pension fund advisor Aldrich, Eastman & Waltch had been Lowe's financial partner in the investment/redevelopment venture since the partnership acquired the 12-acre Arboretum site in early 1989. Since then, the only new development there has been the 95,000-square-foot headquarters custom built on two acres for, and entirely leased to, Sony Music Entertainment.

Transaction Cos. Ltd. claims a portfolio totaling about 4 million square feet of income property. Most of that portfolio is in the Bay Area, but it also includes the 795-unit Lincoln Place apartment complex in Venice and some local shopping centers, according to principal Bob Bisno. Steve Swire's Swire Properties has been Transaction Cos.' partner in about 10 ventures.

Through an RTC sealed-bid auction this spring, the partnership acquired the mortgage underwriting AEW/Lowe's acquisition of the site. The AEW/Lowe venture acquired the property from an affiliate of now-defunct San Jacinto Savings, which also financed the purchase. The Transaction/Swire partnership bought the $35 million-plus (face-value) note for approximately $10.5 million, records indicate. While the borrowers had not defaulted on the mortgage, they had been involved in "ongoing modification negotiations" with the RTC, explained Lowe Development Vice President Rick Newman.

Terms of the note purchase, which was financed by the RTC, stipulate that the thrift bailout agency will receive a 50-percent share of any profits Transaction/Swire earns through the eventual sale of the assets behind the note.

Transaction/Swire has essentially agreed to release AEW/Lowe's obligation under the note in exchange for a 50-percent equity interest in the property. While office market conditions are abysmal, Bisno said he's "optimistic about holding entitlements" in a well-positioned, "growth-restricted" location such as Santa Monica. The veteran builder/investor said he will take a "hands-on" role in marketing and development decisions, visiting his local teammates weekly. AEW Trust retains its half interest, while Lowe will continue to participate in the project as development manager on any build-to-suit project the owners design, build and lease to a tenant. Of course, Lowe will pitch its services to any parcel buyer as well.

"We're still excited about our continued involvement in a project entitled for another 950,000 square feet" of commercial development, including a 270,000-square-foot hotel, commented Newman.

The "flexibility" behind the entitlements -- which are vested for another seven years -- implies a competitive advantage under today's real estate capital environment, he added. "We can do relatively inexpensive build-to-suit buildings as small as 35,000 feet."

However, the restructured ownership team's decision to hire Grubb & Ellis Co. to market redevelopment proposals -- a function Lowe had been handling amid declining demand for new office space -- supports the trend in which only deals with major corporate users can trigger additional construction. The Newman-led Lowe team at the site will continue seeking short-term leases for Arboretum's 100,000 square feet of existing structures, primarily older brick low-rises.

A trio of Grubb & Ellis brokers assumed the Arboretum listing two weeks ago, and are now primarily targeting build-to-suit prospects, along with other investors and developers. The owners are necessarily taking a flexible approach toward sale and development options, noted G&E sales associate Joseph Gabbaian, part of the team that also includes senior marketing consultant Peter Best and leasing specialist Roy Longman.

The options include selling the property in its entirety (listing price: $25 million) or in parcels; offering "for sale" or "for lease" build-to-suits; inking major ground leases to corporate users or other developers; or entering into joint venture development deals with other builders or users.

"This is all predicated on the end user," Gabbaian explained. "Nothing speculative will go up unless someone buys it from us" and secures financing, he added.

The broker said he remains optimistic about the local office market's longer-term prospects, noting that Santa Monica's tenant base grew by 910,000 square feet -- not including the recent 200,000-square-foot Metro-Goldwyn-Mayer Inc. lease -- during the year's first three quarters. And the Arboretum's immediate neighborhood, which includes the Colorado Place/MGM Plaza and Water Garden developments, has become a "niche market," boasting a growing roster of software and entertainment tenants, Gabbaian added.

Now that Arboretum's restructuring is complete, the owners are proposing a new wholesale garment mart in cooperation with the J.H. Snyder Co.-led partnership developing Water Garden. Combining the two projects' entitlements, the developers hope to woo California Mart tenants with a new mart complex potentially exceeding 1.5 million feet of space, including the Arboretum's proposed hotel.

The California Mart's tenant association heard Snyder partners pitch a 600,000-square foot Water Garden proposal two weeks ago, and the tenants have not yet responded to that pitch.

Newman suggested that some "indecisiveness" on the part of the garment tenants can be expected with all the changes in Arboretum's ownership. Newman added, "AEW has expressed interest in financing" the proposed mart project.