The Registry November 2009 Issue

THE

Registry BAY AREA real estate JOURNAL

November 2009

F I N A N C I A L MARKET REPORT CalPERS, CalSTRS Ponder Future pg. 12

Caveat Emptor pg. 14

New Lease Accounting Changing the Terms pg. 16

HOAs are DOA pg. 8

Homebuilders Want ABAG to Talk pg. 10

Apartments in the Sweet Spot pg. 18

Zombie Retailers for the Holidays pg. 22

Green Report: When Zero Is Good pg. 20 Re-using Old Stuff pg. 24 By the Numbers: Taking Banks’ Temperatures pg. 35

Final Offer with Financier Brad Zampa pg. 36

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Contents november 2009

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events from select cities, news about the industry and people on the move

Special November Issue Supplement

Foods

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A summary of recent planning

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Cooking land is 12 OakSuccess Up historic

g tion of Renova is rejuvenatin y rs theate urant industr the resta

8 Residential Market Report

Oh-Oh Condo

10 Residential On Balance

12 Feature Package:

staurant

n’s B Re

Downtow

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Re gist

Spe cia

THE

ry

Financial Market Report • Recoiling From Real Estate • Straining Stress Out of Distressed-Debt Acquisition • Lease of Your Concern

18 Multifamily Living for Tomorrow

20 Design Much Less is Much More

22 Retail Finding a New Look

23 Hospitality Inhospitable Times

24 Green A Penny Saved–Sometimes

26 Rob’s REality A Well-Done Hamburger

The First Annual

Commercial Interior Contractors Awards pg. 27

27 Commercial Interior Contractors Awards Winners of the First Annual CICA Awards

30 Calendar of Events 31 REal People: ULI San Francisco TOD Marketplace

32 Commercial Lease Report 34 Commercial Sales Report 35 By the Numbers Taking Banks’ Temperatures

36 Final Offer | Brad Zampa Sense on the Dollar

co v er and this pa g e illustrations B Y lisa gloria

THE

Registry

®

Letter from the Publisher

P.O. Box 1184 San Mateo, CA 94403 415.738.6434 Publisher Vladimir Bosanac vb@theregistrysf.com President Heather Bosanac 415.738.6434 heather@theregistrysf.com Editor-in-Chief Sharon Simonson 408.334.2512 ssimonson@theregistrysf.com Advertising & Marketing 415.738.6434 Creative Director Karyn Charm Photographer Chad Ziemendorf Writers Michael Fitzhugh, Heather Fox, Eugene Gilligan, Ron Nyrenk, Broderick Perkins, Jon Peterson Jessica Saunders, Sharon Simonson, Sasha Vasilyuk Contributors Rob La Eace, Patrick Valentino Send Us Your News news@theregistrysf.com Feedback letters@theregistrysf.com Subscriptions subscriptions@theregistrysf.com Printer Bay Area Graphics www.bayareagraphics.com Mission Statement The Registry is a real estate journal that aspires to fulfill the need of Bay Area professionals for accurate, unbiased and timely news, analysis and information.

Ethics Policy The Registry embraces a strict ethics policy for its staff and contributing writers, including columnists and freelance reporters. No person employed by or affiliated with The Registry has accepted or will accept any compensation, monetary or otherwise, in exchange for editorial content. All information that appears in the magazine is selected solely for its informational value to readers.

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Dear Reader, The magazine you hold in your hands marks a significant milestone—it is The Registry’s second anniversary issue. We launched our publication in 2007 with very little indication about where the real estate industry would be today. While some predicted an imminent adjustment in our economy, few understood the looming disaster, and no one anticipated the scale of its impact on global markets.

We have made it our focus to bring forwardlooking, fresh and honest perspective to our industry. We see this as the best way to inform readers about relevant and timely issues and to enable them to be better professionals. The approach remains our overarching mission in the magazine, on our Web site and with the events that we put together.

Identifying relevant topics is a continuous part of that process, and it includes building and nurturing relationships throughout the industry.

I would like to highlight two relationships that are especially important for this issue. The first is our relationship with the Downtown Oakland and Lake Merritt/Uptown District associations, the two new business improvement districts in the heart of Oakland. At their request, we have produced a special supplement included in this issue, showcasing the two associations and the work they perform for their communities. It also includes feedback from business owners and property investors on the effects these BIDs are having on the city of Oakland. We believe this supplement brings an honest perspective about Oakland and its promise, which is founded on the pride that residents and investors alike take in the city.

The other relationship that I would like to highlight is that with the Urban Land Institute.

San Francisco has the largest ULI district council in the world. If you have seen The Registry’s past issues, you probably have noted the ads for ULI’s national conference in San Francisco from Nov. 3 to Nov. 6, the 2009 Fall Meeting & Urban Land Expo. As a ULI media partner, we sat with Kate White, ULI’s San Francisco executive director, to learn more about her organization, including its evolving role as not only a professional forum but also as a rising advocate for land use practices that balance preservation of the natural environment with human development.

As a nonprofit, ULI is required to remain apolitical, White said. At the same time, White describes a growing awareness within the organization of its duty to contribute meaningful, scientific information to national and regional discourse on best practices in city planning.

“The organization was solely a national organization until the last few years,” White said.

“There are now 18 regional directors, so there has been a big shift away from Washington to the district councils. The positive side of that is, as more of us are involved on the ground in our regions, we have come to realize [that] for an organization like ULI, we want and need to be at the table when major decisions are made that impact our industry, the environment and economic health.”

Since White became executive director, San Francisco ULI membership has grown by more than 30 percent to 2,100 individuals. White credits her professional history in organizational development for some of the growth but acknowledges the Bay Area’s fertile ground of progressive and creative professionals.

“Four years ago, I walked in and tapped and organized the unbelievable resources of some very forward-thinking, creative and successful business men and women in real estate,” White said.

While White in no way celebrates the global financial meltdown and its extremely deleterious effects on commercial real estate, she does note what she sees as a silver lining: The marketplace has endorsed smart growth and the economic virtues of dense urban development. “One thing that has come out of the current crisis is a reinforcement of ULI’s core message and mission that we need to be building walkable, urban, transit-oriented places, and in fact those are the places that have suffered less in this downturn,” she said.

Lastly, she points out that business improvement districts are growing in popularity as tremendous vehicles for change, not only in the East Bay, but also across the Bay Area. BIDs are absolutely the future of urban revitalization because they are a way for business and property owners to see concretely the improvements associated with their self-taxing process, she said.

San Francisco has been part of the rotation of American cities that host the annual ULI conference every seven or eight years, White said.

Attendance has routinely broken records, and even with the struggling economy, White anticipated 5,000 attendees this year, on par with years past.

The Registry will be covering the conference as an important news event not only for its economic impact on our industry, but also as a place for those in real estate to gain perspective and know-how on where our industry is headed and how we can best get there.

As always, thank you for your interest.

Vladimir Bosanac

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Editorial Boards Board members of The Registry serve without expectation of recompense or reward. They advise the magazine’s executive team on matters of relevance to the region’s commercial and residential real estate community. The board’s make up reflects the wide readership of the magazine including attorneys, architects, interior designers, residential and commercial real estate brokers, investors, lenders, general contractors and subcontractors, engineers and other professionals.

NORTH

Stephen Austin, RPA

Bruce Dorfman

Regional Property Manager Boston Properties

Principal Thompson | Dorfman Partners, LLC

Jeanne Myerson

Anton Qiu

President and Chief Executive Officer The Swig Company

Principal TRI Commercial

Daniel Huntsman, LEED AP President and Founding Principal Huntsman Architectural Group

Phil Williams, P.E., LEED AP

Jesshill E. Love III

Daniel Myers

Partner Ropers, Majeski, Kohn & Bentley

Partner, Real Estate Practice Group Leader Wendel, Rosen, Black & Dean LLP

Paul Zeger

Marc Cunningham

Vice President Webcor Builders

Principal, President & CEO Pacific Marketing Associates

President AllWest

Erik W. Doyle

Geoffrey C. Etnire

Michael W. Field

President Cornish & Carey Commercial

Co-Chair, Real Estate Group Hoge, Fenton, Jones & Appel, Inc.

Director, Commercial Real Estate The Sobrato Organization

SOUTH

Jennifer Dizon, CPA Audit and Advisory Partner Hood & Strong, LLP

Norman C. Hulberg, MAI President Hulberg & Associates, Inc.

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Terry de la Cuesta, IIDA, LEED AP Associate RMW Architecture & Interiors

Robert Kraiss, CFM

Jody Quinton

Patricia Sausedo

Jeffrey A. Weidell

Director of Corporate Facilities and Real Estate Adaptec, Inc.

Regional Manager DPR Construction, Inc.

Vice President of Public Policy and Communications San Jose Silicon Valley Chamber of Commerce

Executive Vice President NorthMarq Capital

Contributors Rob La Eace

Patrick Valentino

A Well-Done Hamburger, pg. 26

Straining Stress Out of Distressed-Debt Acquisition, pg. 14

Responding to emergencies as a firefighter in a variety of uncertain situations and diverse neighborhoods taught Rob La Eace a lot about how people should be treated, not only during a crisis, but also in everyday problems. Today, these same skills are an asset to those who work with this San Francisco native in his career as a broker associate with McGuire Real Estate. The tools he puts to work as a firefighter are what makes the difference to the clients Rob works with as an agent. While it may help that Rob is the type of guy with a warm smile and a friendly attitude, his professionalism, organization and drive to succeed are what make him stand out in his career. Working in his fifth year in the industry, Rob is in touch with his clients’ needs and with the city–putting a local’s perspective to work.

Patrick Valentino is a partner with San Francisco’s Corporate Counsel Group LLP. Since completing Northwestern Law School in 1992, Valentino has focused his practice on the acquisition of debt secured by commercial real estate. His first acquisition took place in 1993 during the days of the Resolution Trust Corp. More recent transactions include distressed acquisitions secured by hotel, office, multifamily, industrial, condo and retail. Valentino’s clients include private real estate companies who acquire both performing and distressed assets. Prior to becoming a lawyer, Valentino was an investment banking professional with Merrill Lynch Capital Markets in New York. n

Media Partners The Registry would like to acknowledge its partnership with the following organizations:

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theregistrysf.com 5

News

Desk

M onthl y S u mmar y

By Heather Fox

Planning News from around the Bay San Francisco

San Jose

750 2nd Street

Southeast Corner of East Mission and North 10th Streets

The San Francisco Planning Commission has approved with conditions the construction of an eight-story residential building with up to 14 dwelling units, 500 square feet of ground-floor retail and 14 off-street parking spaces.

178 Townsend Street The San Francisco Planning Commission has approved with conditions the renovation of an existing 62-foot building and the construction of a vertical addition with up to 94 dwelling units, ground-floor retail, daycare space and up to 45 off-street parking spaces.

942 Mission Street The San Francisco Planning Commission was to take up a proposal to demolish an existing two-story office and commercial building to make way for the construction of a 172-room hotel measuring 152 feet in height with 15 stories. The project would have 3,240 square feet of ground-floor retail and 4,025 square feet of ground-floor circulation area and building-service space. No off-street parking or loading is proposed.

The San Jose Planning Commission has approved zoning to allow up to 60 singlefamily attached and detached homes on 3.2 acres.

East Side of Sunol Street, 120 Feet North of West San Carlos Street The San Jose Planning Commission has approved the pre-zoning of 1.32 acres in unincorporated Santa Clara County for up to 117multi-family studio units above a podium garage and up to 2,600 square feet of commercial space. The proposed rezoning will not go into effect until the City Council agrees to annex the property.

Between McEvoy Street and Meridian Avenue, South of Park Avenue The San Jose Planning Commission has agreed to pre-zone 42 acres in unincorporated Santa Clara County for single-family and attached housing, commercial, industrial and light-industrial uses. The action won’t take effect until the City Council agrees to annex the property.

201 Folsom Street (314 Main Street)

177 Park Avenue

The San Francisco Planning Commission has extended by three years the approval of a mixed-use project within the Folsom and Main Residential/Commercial Special Use District. The project includes two residential towers of 350 feet and 400 feet above an 80-foot podium, with up to 725 dwelling units, 750 off-street parking spaces, 38,000 square feet of commercial space and 272 replacement off-street parking spaces for the adjacent U.S. Postal Service facility. No changes are proposed for the existing project as originally approved.

The San Jose Planning Commission has approved the expansion of Morton’s Steakhouse by more than 1,800 square feet and the extension of permissible late-night hours until 2 a.m.

2130 Fulton Street The San Francisco Planning Commission will continue discussion Nov. 5 on a proposal to build a three-story, 53-foot building for the University of San Francisco’s Center for Science and Innovation. The approximately 80,000-square-foot site is on the university’s main campus. The proposal includes removal of Harney Green and Harney Plaza, site excavation and construction of a building, which has a partial fourth floor and basement. The project would connect on all floors to the south end of the existing Harney Science Building and a below-grade, two-level structure, which is also a component of the proposed project. The roof of the building would serve as a new plaza and pedestrian area. Together, the new structures would have approximately 60,000 square feet of classrooms, laboratories, instrumentation rooms and building mechanical/support spaces.

Palo Alto 265 Lytton Avenue The Architectural Review Board has approved the design for a three-story, 38,000-square-foot, mixed-use building including 5,197 square feet of ground floor retail, offices and four housing units. One level of below-grade parking is planned, and the historic portion of the Tinney Building is to be incorporated into the design.

The Historic Resources Board has found that the project complies with the Secretary of the Interior’s Standards for Rehabilitation.

4261 El Camino Real The City Council has approved the rezoning of a portion of the Dinah’s Hotel property (about 13,200 square feet) from multi-family residential to commercial service.

The Dinah’s ownership concurrently dedicated an easement through a portion of the property to allow pedestrian and bicycle access. n

Sent to us The Swig Company and Capmark Acquire in Southern California A joint venture between an affiliate of The Swig Company, LLC, headquartered in San Francisco, and an institutional real estate investment fund managed by Capmark Investments LP has acquired the 250-unit Arbors at Warner Center multifamily residential community located in the Warner Center area of Woodland Hills, Calif.

The property was purchased for approximately $33 million dollars (approximately $132,000 per unit). Mitch Thurston and Andy Ahlers of Capmark Finance Inc.’s San Francisco office originated a new first mortgage for the acquisition through Freddie Mac’s CME multifamily loan program.

Blach Construction Wins Millbrae $30 Million School Project Millbrae School District has selected Blach to provide planning and program management services for the renovation of multiple projects. The $30 million preconstruction program, part of the Measure X bond passed by voters in 2008, will include upgrades to heating, ventilation and air conditioning (HVAC) systems, technology, roofing and accessibility.

Oakland Nonprofit Wants Legal Firepower The Unity Council, a nonprofit community development organization focused on Oakland’s Fruitvale district, has received a $250,000 grant from the National Foreclosure Mitigation Counseling Program. The agency now seeks to contract with attorneys or law firms to provide legal counsel on a variety of issues related to foreclosure for up to $500 a client. For information, contact Homeownership Center Director Sheri Powers at spowers@unitycouncil.org.

San Jose Gets Federal Solar Grant The U.S. Department of Energy has awarded a Solar America Cities grant to the city of San Jose for seven solar projects, the largest number awarded to any city in the nation, according to the city. The projects will make it easier and more cost-effective

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for residents to install solar energy devices on their homes, to train disadvantaged youth for jobs in the growing solar sector and to help residents learn about solar options. The final grant amount is subject to negotiations with the DOE; at a minimum, San Jose is expected to receive $900,000.

Petaluma Townhomes Sell Park West Townhouses, a 71-unit community in Petaluma, has sold to an undisclosed buyer, according to San Francisco brokerage Arroyo & Coates Inc. The property was completed in 1972. Jamie Clifford and David Silver of Arroyo & Coates represented the seller.

Parking Management Company Lands Work for Harsch Investment Properties San Francisco’s City Park Inc. has snagged contracts to manage two properties with more than 1,550 parking spaces in San Francisco’s Union Square district. The portfolio includes the historic 450 Sutter building and its 450-space valet parking garage and the mixed-use Mason O’Farrell garage, one of the largest free-standing parking facilities in San Francisco. The 1,100-space garage has 11 floors with retail operations on the ground floor. City Park manages more than 75 locations throughout San Francisco. Harsch is a Portland, Ore., company with regional offices in San Francisco and Pleasanton.

Redwood City Investment Manager Makes a Move Into Washington JB Matteson, Inc. acquired the London Flats Apartments, a 146-unit apartment development located in Vancouver, Wash., a suburb of Portland, Ore. The purchase price was approximately $12 million. JB Matteson acquired the property through a bankruptcy trustee on behalf of a group of private investors. Hendricks & Partners, a Phoenix, Ariz. apartment services firm, was involved in the sale as listing broker.

Freddie Mac provided an acquisition loan for $8.2 million.

hot lot

Sent to us

continued

CM Commercial Adopts New Name and Website CM Commercial Real Estate Inc. has changed its name to CM Realty Inc. and updated its Web site. Founded in 1998, CM is a boutique commercial real estate advisor with offices in Walnut Creek and San Francisco. It focuses on tenant representation, investment sales and property and asset management.

San Francisco Retail Condos Sell for Big Number Two retail condominiums at the Ritz-Carlton Residences at 690 Market Street in San Francisco have sold for $7.4 million or $1,419 a square foot, according to brokerage CB Richard Ellis. The sale marks the highest sales price per square foot achieved among commercial property in San Francisco in 2009, CBRE said, based on data from real estate information services company CoStar. The seller was represented by CBRE brokers Don LeBuhn, Trevor Thorpe and Kevin Kovar.

Pacific Plaza Earns LEED Silver Certification for an Existing Building Walnut Creek’s Pacific Plaza has been awarded the Leadership in Energy and Environmental Design Silver certification for an Existing Building: Operations & Maintenance from the U.S. Green Building Council. The property is owned by the California State Teachers’ Retirement System and managed by CB Richard Ellis.

San Jose Redevelopment Agency Puts Projects on Hold, Eliminates Staff The city of San Jose will take up discussion on the future of its redevelopment agency in November following the September layoff of a quarter of its staff and a halt to all agency capital projects. The San Jose RDA has been a key source of funding for public improvements and property development in the city’s downtown and North First Street industrial corridor. The agency hopes to adopt a revised five-year budget in December.

PEOPLE on the move Jones Lang Pushes Global Expansion Jones Lang LaSalle has appointed Samit Chopra managing director of its International Desk, responsible for expanding JLL’s global integrated real-estate services in the Americas, Europe, Middle East, Africa and Asia Pacific. The appointment is part of JLL’s global expansion plan. Chopra will be based in Palo Alto.

Regional Brokerage Adds Veteran Agent Patrick Conkin has joined NAI BT Commercial as a senior vice president with its Multi-Family Group. He will be based in the firm’s Palo Alto office. Conkin has more than 22 years of experience as a commercial real estate broker specializing in investment property sales in Santa Clara County.

Wendel Rosen Adds to Real Estate Practice Wendel, Rosen, Black & Dean LLP welcomes Robert Gonella as a partner to the firm’s Real Estate Practice. A 30-year veteran, Gonella joins the firm from Target Corporation, where he was a senior corporate counsel in the areas of real estate and general business.

Pacific Property Adds Acquisition Talent Focused on Southern California The private, Palo Alto-based multifamily investor Pacific Property Company brought Lonnie Nadal, a 25-year acquisitions veteran, as senior vice president, acquisitions with responsibility for sourcing new investment opportunities throughout Southern California.

Buchalter Nemer Adds New Attorney in San Francisco Glenn Zwang joins the San Francisco office of Buchalter Nemer focusing on business and real estate clients. Zwang has successfully prosecuted and defended industry matters involving commercial leasing, construction, development and commercial lending.

Webcor Builders Hires Hospital Construction Expert Lofton Moore has joined San Mateo-based Webcor Builders as a project director with special emphasis on healthcare construction. Moore has 31 years of experience in the building industry. He will pursue healthcare projects throughout California. n

residential market report

Oh-Oh Condo Foreclosures and the tough economy are short-changing condominium homeowner associations, undermining property values and increasing the burden of remaining Common owners.

Interest

Developments De

By Jessica Saunders

A

___________________________________

surge in condo development during the recent real estate boom homeowner associations, according to a 2007 survey by accountants Levy, and now the wave of foreclosures is producing a toxic mix Erlanger & Co. of San Francisco. About 90 percent of new developments for buyers who have continued to make their payments: Un- in the state are common-interest, too, says Tom Pool, spokesman for the derfunded and struggling homeowners associations that can’t properly California Department of Real Estate.

One reason for the growth is that services like street and sidewalk mainmaintain common areas and amenities such as pools, tennis courtsCommon and Interest Developments Demographics tenance for a common-interest development are the responsibility of the decommunity centers.

There are more __associations _than ____44,900 ___rather ___Common _than ___local ___Interest ______Developments _Since _________ government.

Chuck Morrone, a San Jose attorney who handles fee-delinquency cases velopments’ homeowner _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Approximately 11 million Californians live in CIDs – about 33% for HOAs, says his caseload has more than doubled since the housing down- Proposition 13 took effect in 1978, reducing property-tax collections, cities developments turn began in 2006, from an average of 150 cases to around 400. Asked how and counties have favored creation ofScommon-interest a l i f o rbe-n i a tlai f to e ronfi aC f C a S t a t e o local services, Pool said.

There were about 44,900 _____ busy he was, Morrone replied, “Oh, God.” He had planned to semi-retire, cause they require fewer La ____________________ ___________________ ___________________ ______________*Size common-interest developments statewide in 2007, the survey found. giving up family law and doing only HOA work.

SM1 Associations operate as non-profit, mutual-benefit bas“We are seeing more short sales than regular sales. A lot of these proper6,754 There are more than 44,900 Common organizations, Interest Developments There are more than 44,900 Common Interest Developments in California SM2 in ties are underwater,” he said.

Approximately 11 million Californians live in CIDs – about 33% o Approximately 11 million Californians live in CIDs – about 33% of the state’s populatio 5,464 SM3 5,063 Both the 7,000-member Executive Council of Home Owners, which SM4 California Common Interest represents association board members, and the California Association of 3,601 3,411 asSM5 Follows: 3,086*Size Labels are Defined*Size DevelopmenTS (CIDS) Labe 2,833 2,750 by Size Community Managers report unpaid fees are an ongoing problem.

SM6 SM1 2 – 5 Units SM1 1,797 6,754 The issue has implications not only for condominium owners but the MD1 2 – SM2 6 – 10 Units 6,754 SM2 6– 5,464 658 11 larger community and is especially worrisome given the rising public policy SM3 – 15485 Units MD2 482 5,063 5,464 SM3 11 SM4 16 – 20 Units 5,063 LG1 16 emphasis on high-density housing like condominiums concentrated in urSM4 3,601 SM5 21 – 25 Units 3,411 21-253,086 26-50 51- 101- 151- 326- 501- 1,001+ 2-52,833 6-10 11-15 16-20 2,750 LG2 21 ban cores. The logic for such housing is threefold: people living closer to 3,601 SM5 3,411 – 50 Units 500 26 1,000 100 150 3,086 325 SM6 2,833 2,750 1,797 VL1 26 jobs and public transport rely less on cars and pollute less; greater density MD1 51 – 100 Units SM6 Units 1,797# of658 VL2 51 MD2 101 – 150 Units 482 485 MD1 can promote affordability because each home uses less expensive land; and LG1 325 Units MD2 10 658 151 482– 485 better public health premised on getting people to rely on their own two feet 2-5 6-10 11-15 16-20 21-25 26-50 51- 101- 151- 326- 501- 1,001+ LG2 326 – 500 Units LG1 15 100 150 325 500 1,000 to accomplish daily tasks like grocery shopping. The current crisis is reveal1,000 Units 326- 501 501-–1,001+ 16-20 21-25 26-50 51- 101- 151-VL1 11-15 2-5 6-10# of LG2 32 Units 1,001 + Units 500 1,000 100 Very 150 Large 325 VL2 ing potential faults with this formula as potential buyers may shy away from VL1 50 501-1001+ Units # of Units condos for fear they can’t rely on their neighbors to shoulder the collective VL2 1,0 Large burden, undermining the health of the whole.

Very Large 151-500 Units 501-1001+ Units Homeowner associations are required when a residential development 3% Very Large Large has a common interest, anything from a street with a gate to a pool, tennis 10% 501-1001+ Units 151-500 Units courts and a clubhouse. Already, about a third of California’s population, 3% MediumLarge 10% Small or 11 million people, live in common-interest developments governed by 151-500 51-100 Units Units21% 2-50 Un 3% 66%

Number of CIDs

Number of CIDs

Number of CIDs

State of California _____Interest __________Developments ________________Dem ____ Common

Medium 51-100 Units

There are more than 44,900 Common Interest Developments in California.

21%

Medium 51-100 Units

Approximately 11 million Californians live in CIDs–about 33% of the state’s population.

Small

10% 2-50 Units

66%

21%

The average size of a CID in California is 104 units.

Type of inCalifornia California Type of CIDs in California Type of CIDs CIDs in 66% of CIDs in the state have 50 units or less. These fit the definition of small developments. Timeshare Developments

185 Timeshare

Developments The average age of a CID is 17 years, and 66% 611 Cooperatives are 16 years of age or older.Planned Unit Cooperatives

Developments

Small 2-50 Units

66%

185

Type of CIDs in California

611

Timeshare Planned Unit 185 Developments The average annual revenue of a CID is $188,000.

CondominiumDevelopments 3,440 Conversions

Cooperatives Condominium

12,851

12,851

611

Condominium-style developments are the most 3,440 Condominiums Conversions Planned Unit prominent, and make up 55% of all CIDs in California.

Number of CIDs per Type Developments Condominiums

Planned Unit Developments follow condos in popularity, and constitute 34% of all CIDs in the state.

Condominium Conversions

Condominiums

21,183

12,851

3,440

Number of CIDs per Type

Condominium-style developments are the most prominent, and make up 55% of al CIDs in California.

Planned Unit Developments follow condos in popularity, and 21,183 constitute 34% of all CIDs in the state 21,183

Source: Levy, Erlanger & Company CPAs, San Francisco, CA

Number of CIDs per Type

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Statistics compiled from “2007 California Community Association Statistics,” Copyright September 2007 by Levy, Erlanger & Company CPAs, San Francisco, CA

ing their annual budgets on the previous 12 months’ expenses. When revenue falls, they have only two choices: cut expenditures or raise additional revenue through special assessments. Some associations have lost tens of thousands of dollars in annual fees, representing as much as a third of their total budgets, said George Gonzalez of Adept Property Management in Oakland. Adept manages more than two dozen Bay Area HOAs. “In a lot of cases it is very difficult to cut association expenses. Those expenses are continuing, and the owners that are paying have to carry a larger weight,” Gonzalez said. “And they will have to carry, in years to come, a larger weight in terms of keeping up the property.”

In new communities, the developer is responsible for paying assessments on the unsold units until the development sells out and the HOA takes over, Pool said. Assessments, which can range from $50 to $1,000 a month, are supposed to pay for regular monthly maintenance such as lawn care and pool cleaning as well as long-term property upkeep, Pool said.

The homeowners association for Tradewinds of San Jose ran a $25,000 budget deficit in 2008 and property manager Craig Gorewitz is nervously preparing to recalculate this year’s budget with about 50 of the 320 units in default. Monthly assessments at the Tradewinds range from $310 to $385 depending on unit size.

The Tradewinds HOA budget averages about $1 million annually, but the association’s delinquent accounts totaled about $172,000 in late September.

Tradewinds’ homeowners were asked to pay $200 special assessments for termite prevention earlier this year, Gorewitz said. The association needed $600 per unit but decided against asking for that much.

“We had to weigh what we could afford against what we needed,” he said.

To cope with the reduced revenue, Tradewinds has cut back hours at its sports club, reduced maintenance personnel and taken steps to reduce water and utility bills. It also has hired a collection agency to recoup the back dues.

The Tradewinds’ scenario is becoming a familiar one in California as layoffs and financial cutbacks hit homeowners. Association dues are often one of the first bills cut when a family suffers setbacks. Foreclosure may follow, which produces another set of difficulties for HOAs. Banks can prolong the foreclosure process, trying to avoid taking too many properties onto their books at the same time. If the property reverts to the lender, it often doesn’t pay HOA fees until the unit is resold, Gorewitz said.

Community associations can use payment plans, liens and even foreclosure to pursue delinquent fees, but such solutions can prove a costly, drawnout process. Winning in court doesn’t necessarily mean getting paid either.

“So we wait and wait for something to happen,” Gorewitz said.

Meanwhile, short-term conditions are contributing to longer-term problems. Condominiums are aging without proper maintenance, for one. At the same time, reserve funds intended to pay for long-term repairs for big-ticket items like roofs, plumbing, dry rot and paint also are being shorted. The average association is 50 percent below required reserves at any given time, according to a survey commissioned by Berding & Weil in Alamo.

“Money for this stuff is chronically not there. And when we have an economic situation like we have now, that is one of the first things to go—an association quits contributing to its reserves,” said Tyler Berding, a founding attorney at Berding & Weil, which specializes in homeowner association law.

State law requires homeowner associations to update reserve budgets every three years accounting for all maintenance projects needed in the next 30 years. A portion of the estimated costs should be deducted from annual assessments and placed in reserve, Berding said.

That, however, is clearly not happening. n

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residential

On Balance Regional home builders contest a new report that stipulates the Bay Area should limit development on so-called ‘green fields’ to 900 acres a year.

By Broderick Perkins

A

lawsuit is opening new fissures between a regional planning agency and area home-builders over what constitutes adequate public discourse regarding proper land use.

The suit, filed by attorneys with Pacific Legal Foundation on behalf of the Home Builders Association of Northern California, considers a biennial planning document just released by the Association of Bay Area Government illegal because it could impose significant land-use restrictions without complying with a key state environmental law.

But ABAG says the industry complaint is moot because it challenges the biennial projections report as a planned development document rather than as a planning projections and targets report.

For the first time, ABAG set forth a land-use performance target to restrict annual green-field development in the nine-county Bay Area.

The target is stated in ABAG’s “Projections and Priorities 2009.” The report stipulates that there should be no more than 900 acres of green-field development a year across the region. Green-field development refers to building on land not built on before.

The suit alleges that because federal and state law require ABAG’s projections to be incorporated into land-development and planning efforts included in the Regional Transportation Plan produced by the Metropolitan Transportation Commission that ABAG’s planning document must also produce a California Environmental Quality Act study. CEQA requirements kick in when a proposed public or private development directly or potentially impacts the environment. Along with an environmental impact review of the land in question, CEQA also triggers a

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period of public comments and hearings.

“As much as anything, this litigation is about public participation and the lack of procedure and an unwillingness of the staff to follow procedural safeguards that have been part of California law for 30 years,” said Paul Campos, HBANC senior vice president and general counsel.

“It’s very telling and troubling,” he said.

Perhaps, but Chris Calfee, an attorney with the California Natural Resources Agency charged with enforcing CEQA, said a CEQA study is generally required when a lead agency has the authority to act on a specific project.

“Usually that’s a planning commission or the city council,” said Calfee, who has not seen the suit.

The MTC, the transportation planning, coordinating and financing agency for the nine-county San Francisco Bay Area, says it has not used data from ABAG’s 2009 report and likely won’t. That’s because MTC’s latest Transportation 2035 Plan for the San Francisco Bay Area, which does include a CEQA report, was finalized in April this year. The 2035 plan did incorporate ABAG’s 2007 land-use projections, but there were no ABAG land use targets in its 2007 report. MTC’s next transportation plan is four years away.

“We will probably use an updated projections series when we adopt out next plan four years from now,” said Doug Kimsey, MTC’s planning director.

“I’m not sure how Projections 2009 plays into this lawsuit with regard to us using it for the regional transportation plan because we didn’t use

Projections 2009 for the land use part of our Transportation 2035 regional transportation plan,” said Kimsey, who also has not seen the suit.

The home builders want to force ABAG to withdraw the 2009 report until ABAG completes a CEQA study along with the CEQA-required round of public hearings. They also want ABAG to pay the suit’s legal costs. ABAG says that’s not going to happen.

“It is a planning document and categorically exempt from CEQA,” said Kenneth Moy, ABAG corporate counsel.

“We don’t think their position has any merit. There is no legal requirement for any jurisdiction to comply with performance targets or land use targets stipulated in ‘Projections and Priorities 2009,’” Moy said. The document is a 25-year projection of population growth, transit trends and housing and job needs.

ABAG, an association of elected officials from member cities and counties who examine regional issues such as housing, transportation, economic development, education and environment, describes itself as “the official comprehensive planning agency” of the Bay Area and “an advisory agency” with “limited statutory authority.” Every other year since 1970, the association’s projections reports provide long-term forecasts about those regional issues. “Model results are relied on by transportation and air-quality agencies, local government and private industry,” according to ABAG’s documents.

Local jurisdictions say ABAG’s models aren’t gospel.

“ABAG has a big influence, but at the end of the day, ABAG’s projections don’t result in land-use decisions when it comes to land use, zoning and the general plan,” said Rob Eastwood, a program manager specializing in CEQA, green building and habitat conservation planning in Santa Clara County’s Planning Office.

It also wouldn’t matter if it did. Santa Clara County has pretty much closed the door on greenbelt building. The county is done accepting any new rural development,” Eastwood said. “We get spots of rural development that entail building some infrastructure, but an agreement between the county and cities is that all development must be in urban areas.”

Pacific Legal Foundation is working pro bono for the building association, which it has represented in the past on environmental issues including the Clean Water Act and the Endangered Species Act. The group also defends private property rights and free enterprise.

“Yes, there is an economic incentive [to be represented pro bono].

We don’t charge attorney’s fees. But this is an experience issue. We do a lot of environmental litigation and are in a good position to represent them. We have represented them in the past,” said Damien M. Schiff, the foundation attorney who filed the suit.

Schiff also says the CEQA requirement, not the 900-acre-per-year target, is the root of the suit.

“We are not challenging the merits of the limitation. It could be 5,000 acres or 10,000 acres. If they want to dictate [land use] then state law requires you do an environmental impact study,” Schiff said.

Restricting the entire Bay Area to 900 acres of greenbelt building per year would, however, severely restrict development, housing or otherwise. San Francisco’s Golden Gate Park is a little more than 1,000 acres.

San Jose’s Silver Creek Valley Country Club sits on about 1,500 acres and has 1,538 homes, a golf course, country club facilities and other open space. The City of Concord wants to develop the 5,100-acre inland portion of the Concord Naval Weapons Station. The remaining tidal portion of the area contains about 7,600 acres.

According to the Projections 2009 report, from 2000 to 2010, an average of 4,000 acres of greenbelt is developed every year.

When it comes to building homes, 900 acres would be “less than one subdivision. Nine hundred acres of development of any kind is an absurd policy statement and infeasible,” Campos said.

ABAG insists the targeted greenbelt development provision isn’t a legally binding policy statement for individual jurisdictions.” These targets are not mandates; rather, they will provide a measuring stick to see how well we are achieving regional transportation, equity and environmental objectives,” according to a synopsis of the report.

This year, rather than just projections, ABAG decided to include the greenbelt land-use target, as well other targets for reduced driving times, traffic congestion, the share of income spent on housing and transportation and others. They did so because times are changing, they said. Rapid population growth in general and among the aging population, higher energy costs and climate change dictate the need for regional performance targets, or actual numerical outcomes, to show how policy choices impact the quality of life. ABAG plugs the target numbers into models to get a better grasp of not only the general assumptions of projections but also something closer to reality—specific goals.

“The results suggest that accomplishing the targeted outcomes and ensuring a better, or at least the same, quality of life into the future will require a significant departure from previous planning strategies and policies,” the report says.

But for each target, the report also includes a more likely projection.

“The regional target is to limit green-field development to 900 acres per year, or to 22,500 total acres over the 25-year planning period. Between 2010 and 2035, it is forecasted that approximately 1,950 acres will be developed annually,” the report says.

Carey Knecht, policy director of the Greenbelt Alliance, said her group believes 900 acres is a generous target. “We thought 900 acres was high when we revealed we can accommodate all Bay Area Growth without any green-field development.”

“Infill builders have shown they can build without building on the greenbelt. We have tens of thousands of vacant lots,” she said.

According to the alliance’s “Grow Smart Bay Area Infill Research” some 25,000 sites are available throughout the Bay Area for infill development. Across 17,000 acres, these properties can provide the region with an additional 304,000 homes and 637,000 jobs, according to the alliance’s study.

The Greenbelt study also has been challenged by the home builders. n

“As much as anything, this litigation is about public participation and the lack of procedure and an unwillingness of the staff to follow procedural safeguards that have been part of California law for 30 years.”

Paul Campos, senior vice president and general counsel, Home Builders Association of Northern California

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FINANCIAL M A R K E T RE P O RT

RECOILING FROM

REAL ESTATE

I

nstitutional investors, including California’s two largest public pension funds, have dramatically slowed their commercial real estate investment.

The move represents an about-face from their attitudes only a couple of years ago when they acquired commercial property assets at high levels. These players are now feeling the effects of those earlier decisions with commercial values down steeply and as investor equity shrinks at a furious clip.

At the same time, the California State Teachers’ Retirement System is evaluating the possibility of increasing its real estate exposure over the next several years. The system cites a desire to further diversify its holdings and to capitalize on the apparent opportunity to buy at a market low. CalSTRS’ first step could come as early as December.

CalSTRS, in contrast to its larger counterpart, the California Public Employees’ Retirement System, decided early in 2009 to recognize its commercial losses in a single swoop to set the stage for future decisions. At the end of its second quarter, the teachers’ fund recorded a yearover-year 43 percent drop in the value of its real estate assets to $20.8 billion.

What the pension funds’ attitudes mean for the commercial real estate industry and market will unfold over the next several years.

During the recent run-up in property values, real estate investment funds proliferated as money managers sought to cash in on institutional investors’ burgeoning love affair with the sector. But with investor losses expanding by the day, there is wide expectation that the number of funds will diminish. A corollary to that expectation is that some fund managers will shrink substantially and in some cases simply go away.

“There is a statistic floating around out there that 30 percent of the fund managers here at the beginning of 2008 won’t be here at the end of the market correction, and that

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is probably right,” said Micolyn Yalonis, a San Francisco principal with The Townsend Group. Townsend is a consultant to public pension funds, corporations, foundations, endowments and other institutional investors in real estate, including CalSTRS. “Those who survive will have a new look to them on the other end of this path in terms of their structure and focus.

People started doing a lot of things that were not their core business. Some were successful, and some were not.”

Right now, about 120 real estate fund managers control all of the pension fund capital that is invested in the United States.

This year’s pull back from real estate is evident in the numbers. In the first half of 2009, CalSTRS invested $62.4 million in two real estate investments. That compares to $3.74 billion in real estate for the last quarter of 2006, $7.8 billion for all of 2007 and $3.8 billion during 2008.

At CalPERS, the pension fund awarded new commitment dollars of $1.6 billion to seven different investment entities last year. So far in 2009, it has made only one new real estate allocation, investing $453 million to buy a shopping center portfolio.

Neither system is alone in its suddenly conservative approach, and many of their counterparts are doing the same thing. According to an annual survey by Institutional Real Estate Investors and Kingsley Associates, institutional property buyers last year invested $60 billion in real estate. The projected investment for 2009 is $29 billion. The survey queried public, corporate and union pension funds, as well as foundations and endowments.

Kinsley, which is based in San Francisco, is a leading

illustration by lisa gloria

Institutional investors are pulling back from commercial real estate after sinking billions during the boom. By Jon Peterson

CalSTRS, acting on the advice of the Townsend Group, has written down the value of its investment to zero because the board believes the impairment permanent. Meanwhile, CalPERS has not set a current value on its investment. The approach is not exceptional for CalPERS. The system did not place a value on many of its investments in single-family homes when this sector began appreciating in the 1990s. It maintained the neutral stance through 2007, only placing values on the assets when the single-family market soured in 2008.

There are several serious issues with the Manhattan purchase. BlackRock and Tishman have had a much harder time than anticipated converting the rent-controlled units to market rents. They also are burdened with $4.4 billion in debt.

Another difference between the two funds has been their approach to poorly performing assets. CalPERS has given multiple properties back to lenders; CalSTRS has not done this once. CalPERS and its real estate manager Hines returned three Emeryville office buildings in the Watergate complex to Pacific National Bank in mid-July. Hines and CalPERS still hold a fourth building in the complex that was not in default. Hines and CalPERS acquired the four buildings and a restaurant in late 2006 for $335 million. They defaulted on a $152 million loan, and CalPERS walked away from a $100 million equity investment.

Over the summer, CalPERS also returned a Palm Beach Gardens, Fla., shopping center to the lender. The pension fund paid more than $200 million to acquire the property in 2007 in a venture the pension fund has with Illinois-based Miller Capital Advisory. Miller Capital is a real estate manager that invests only in retail properties. Some have speculated that other assets in this portfolio will be returned to lenders as well.

CalPERS is also looking at the loss of another $100 million equity investment in association with a troubled residential portfolio in East Palo Alto. On Sept. 25, Wells Fargo & Co., which inherited a $243 million loan against the portfolio loan when it bought Wachovia Bank N.A., filed notices of loan default. If the foreclosure is completed, as is widely expected, CalPERS’ equity will be completely wiped out. n

provider of research and consulting services. Institutional Real Estate Inc. is a publisher and consulting company based in San Ramon. It serves the commercial real estate investment marketplace.

Still, others, like CalSTRS, are sniffing around for opportunity. At its August board meeting, the pension fund approved a move to increase its targeted allocation to real estate from 12 percent to 15 percent over the next several years. The increased allocation is premised on finding good opportunities, and the board intends to evaluate the strategy every six months, in June and December each year.

According to board minutes, the board believes that “[m]oving the target better positions the portfolio for future growth.”

Over the next year, CalSTRS intends to focus on the basics, managing its existing properties to maximize occupancy and revenues. It also wants to lower portfolio leverage and obtain better terms from existing managers to control costs.

CalSTRS and CalPERS have taken strikingly different approaches to how they are handling their current real estate holdings and losses. The implications of their decisions could be lasting. Beginning in the late 1980s up until 2007, fund managers competed heavily for CalPERS’ business on the premise that a CalPERS allocation signified an arrival or coming of age. In addition, other funds watched CalPERS’ activities for signals on how and where they should consider investing as well. But CalPERS’ struggles in the last year, including giving properties back to lenders and incurring hundreds of millions of dollars in equity losses, has undermined its historic prestige. On the other hand, CalSTRS, which has operated in CalPERS’ shadow for many years, has gained respect for its handling of the crisis.

One example of the contrast between the two systems’ managements involves their investments in the enormous Stuyvestant Town and Peter Cooper Village apartment complex in Manhattan. CalSTRS invested $100 million when BlackRock Realty and Tishman Speyer Properties bought the 11,232 units in 2006 for $5.4 billion. CalPERS invested $500 million.

“There is a statistic floating around out there that 30 percent of the [real estate] fund managers here at the beginning of 2008 won’t be here at the end of the market correction, and that is probably right.”

Micolyn Yalonis, principal, The Townsend Group

Institutional Investment in Real Estate New Capital Alloocation to Real Estate ($B)

80 70 60 50

51 44

40 30

37 31

20

34 28

New Capital Alloocation to Real Estate ($B)

80

80

70 60

71

50

60

40 59 30

37 46 31

28

20 10

30

29

20

0 2000

10

2001

2002

2003

10

0

0 2000

2001

2002

2003

2004

2005

2006

Actual Capital Flows

2007

2008

70

71

Public pension funds, including 60 60 59 70 CalPERS and CalSTRS, and other 50 51 institutional investors such as 60 46 44 foundations, endowments and 40 50 34 corporate pension funds are scaling 30 29 40 back their real estate investment.

20 80

2009

10

Investors committed $42B in 2008, and look to commit less new capital in 2009.

0 2004

2005

2006

Actual Capital Flows

2007

2008

2009

Expected Capital Flows

Sources: Institutional Real Estate Investors and Kingsley Associates

Expected Capital Flows

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FINANCIAL M A R K E T RE P O RT

straining

stress Distressed-Debt out of

Acquisition

Everyone seeks advantage in today’s real estate market. some will find it, some not.

T

he biggest buzzword in commercial real estate is distress.

For many investors, that means buying debt on an asset with a loan-to-own mentality. But when you buy debt secured by property, before you get the bricks and sticks, you are a lender. You may be lender for a day, a month, a year or even longer. When you buy a nonperforming loan, you also are buying the problems from which the selling lender has decided to walk away. Your underwriting has to include the challenge and cost of solving those problems, so figuring out what they are and how expensive they are likely to be should be on your list, if not atop it.

Recently, our firm helped buy a non-performing loan secured by a mixed-use project in an urban core. The collateral consisted of residential apartment units, an underground parking garage and ground floor retail in a three-building structure in a downtown redevelopment district. The borrower had spent nearly $1 million renovating and restoring the façade of the building, making it eligible for the National Register of Historic

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Places and historic tax credits. Although the project’s occupancy was consistently north of 90 percent, the borrower was in maturity default and was not making monthly loan payments. The loan seller was a large regional bank, experienced in selling its loans. As we learned through due diligence, the borrower was slow and uncooperative. The loan purchase price was heavily negotiated and ultimately settled at 65 percent of the unpaid principal balance.

Our client, a California-based private real estate group with experience purchasing real-estate secured debt, considered two possible outcomes: Own the property or work out the loan to be a performing asset.

We recommended they consider all costs relating to the lifecycle of the transaction in the underwriting process, including the cost of buying the loan itself, the cost of the postclosing workout and the cost to actually foreclose on the property. Legal fees and costs for a transaction like this may range from a low of $35,000 to more than $135,000, based on an average hourly rate of $295.

By Patrick C. Valentino

Negotiating the Purchase of a Pile of Paper When you buy a loan, you are really buying a pile of paper called the loan file. If the originating lender did things right, the loan documents in that file give you certain rights, including the right to collect the payments due under the loan and the right to foreclose if the borrower goes into default. Like most seller-generated documents, the loan-sale agreement was drafted by the seller’s counsel with very limited representations and warranties, essentially seeking an as-is sale.

We negotiated key seller representations including seller’s claims to the unpaid principal balance, that the loan was not cross-collateralized with another of the borrower’s assets, that the seller was not aware of any litigation related to the property and, perhaps most importantly, that the seller was giving us all documents and materials relating to the loan and the lender-borrower relationship.

Getting that last representation can be extremely difficult, but it is valuable. Most

illustration by lisa gloria

sellers avoid representing that they have turned over everything relating to a loan because as one large East Coast bank told us, “How can you expect us to know what we have? We do not even know who worked on the origination of the loan.” Regardless, pushing to get every last thing a seller has can yield critical details. On another transaction we handled, an email from a borrower to the selling lender read: “[The loan officer] said we would get the last loan advance, and if we do not, we cannot finish out our map.

If we cannot finish our map, the project is dead. Please advise ASAP.” That kind of correspondence can mean a lender liability suit waiting at the other end of closing. What is even more troubling is when the borrower dealt with a bank officer who is now long gone. Loan sellers may vouch for the actions of certain principals, but if those principals are no longer with their company, the representation may be worthless.

The Value of Due Diligence In all of life, it seems the best time to solve a problem is before it happens. That is also true when you buy a loan. In the case of the loan backed by the mixed-use historic project, we developed two key documents to assist our client in the process. First was a tailored document request that we sent to the seller as we began due diligence. The seller did initially send us a due diligence package but, as with almost all transactions, it was incomplete. The purpose of the request list was to prompt the seller in writing for all documents including all loan documents, any inter-creditor agreements, the servicing file, correspondence with the borrower, pay history and standard property due-diligence items. We also requested the lender’s origination checklist to tell us what documents they created at origination. As a result, we found an inter-creditor agreement with a junior lender and unresolved issues with historic tax credits. The inter-creditor agreement contained critical notice provisions and rights for the junior lender before we initiated foreclosure. The historic taxcredit issue was far more complex and included problems with borrower’s tax-credit investors. Understanding it all was critical to underwriting the deal. The selling lender had very little in the way of property due dili-

gence, as is common, but you should request third-party reports anyway and inspect the property itself, if you can get access.

The second document we produced was a memorandum summarizing for our client all important legal due diligence items. In it, we highlighted issues that affected whether they should buy the loan and what problems existed or could arise. This document was the basis for an all-hands meeting to understand the loan and property-level problems as completely as possible. We also ordered a title report at the outset of due diligence and requested updates before committing to the purchase. On a recent broken-condo transaction, in reviewing the updated title report, we found liens by the master association for the development, junior liens that were placed on the property in violation of the senior lien and mechanic’s liens. We updated the title report again at the end of due diligence to find delinquent taxes and a judgment lien on the same condo deal.

These items materially changed the value of the property.

Before we could get a receiver appointed, we needed borrower’s cooperation to collect rents, so we entered into a pre-negotiation letter with the borrower to secure the borrower’s written understanding that the loan was in default, that any conversations we had with her were not an amendment or forbearance to the loan documents, that we reserved all of the original lender’s rights and that we were entering into forbearance discussions simultaneously with foreclosure proceedings. To be effective, the pre-negotiation letter must be sent to the borrower prior to any discussion between borrower and lender.

This transaction took place in a state that permitted only judicial foreclosure, which can take a year or more. To move the transaction along faster, we also negotiated with the borrower for a deed-in-lieu-of-foreclosure agreement. When you take a property back by way of a deed-in-lieu-of-foreclosure, you take it subject to the liens and liabilities affecting the property. Had this transaction taken place in California, we would have filed a non-judicial foreclosure and let it run its course. After filing our judicial foreclosure proceeding, we When you buy debt, you also need to sought a court-appointed receiver to collect rents and manage the property. know about the borrowIn the end, it took er—not only the borrower nine months to get the entity but also the people property back and more behind that entity. ReviewYou will be a than $100,000 in legal ing lender-borrower correlender first fees. Compare that with spondence gives a taste of and that another transaction that how the borrower responds means you we initiated at the same to lender communication, need to think time involving a deespecially if the corresponfaulted loan on a hotel. and act like dence relates to a workout.

We closed on that deedIn the mixed-use historic a lender until in-lieu agreement in 30 deal, we learned that the you have days. The transaction borrower’s sponsor was the keys. was a bit more complex disorganized and difficult. but included a sophistiLearning about the borcated borrower, which rower helped us see that sped the process along. working out the loan was not a good option.

The acquisition of distressed debt has a certain cadence to it. As a purchaser, you must think through the entire loan transaction from beginning to end before you comConsequently, after we acquired the mit to buying the loan. But, no matter what, loan, we decided to take over the property. you will be a lender first and that means you We sent another notice of default, updatneed to think and act like a lender until you ing the total amount due under the loan. have the keys. n We believed the borrower’s sponsor would drag its feet through the process, so we im- Patrick C. Valentino can be reached at mediately started foreclosure proceedings. 415.567.8025 or Patrick@CorpCounselGroup.com.

Who is the Borrower?

The Workout and Getting to the Property

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FINANCIAL M A R K E T RE P O RT

Lease concern A

proposed change affecting the business arrangements engendered by corway tenants and landlords ac- porate fiascos earlier this decade where offcount for their leases would balance-sheet items turned out to be ticking overhaul financial accounting financial time bombs.

“It will change tenant behavior,” said Minrules on the subject for the first dy Berman, managing director of Jones Lang time in more than 30 years.

The modification would affect public and LaSalle’s Corporate Capital Markets practice. private companies and is designed to pull “We think it will change the desired terms leases of all types, including real estate leas- that companies negotiate into their leases. es, onto balance sheets. Under current rules, If you are trying to minimize the quantitaleases may be accounted for as off-balance tive impact of a lease, you are going to want to have a shorter lease term or maybe have sheet items.

Most affected would be companies, such more termination or cancellation options.”

It also would set up conflicting demands as retail chains, that have many property leases. In those cases, the new rule would for some tenants, such as biotechnology vastly expand their liabilities and could in- firms, that require expensive tenant improvecrease their borrowing costs, accountants ments and have traditionally signed longerterm leases to amortize said. In addition, the those expenses over way the proposed rule “It will change a long time to push is written, company tenant behavior.” annual costs down. earnings will also be Landlords would repushed down. RetailMindy Berman, managing director of sist signing short-term ers, with their many Jones Lang LaSalle’s leases with such tenleases and razor thin Corporate Capital Markets practice ants for fear they won’t margins, will be among be fully compensated those most hurt.

The purpose of accounting rules is to cre- for the cost of the expensive improvements, ate financial transparency so that investors, she said.

Still, market realities such as the supply creditors, auditors and others who use the information can evaluate firms across busi- of space relative to demand will drive lease ness sectors, said Jennifer Dizon, a partner terms in the preponderance of cases, Berwith San Jose-based Hood & Strong LLP, man said; the accounting change would affect decisions “at their margins.” certified public accountants.

It is not clear if the change would strongly The proposed change is under consideration not only by the Financial Accounting affect the lease-versus-buy calculus, she said.

Standards Board, the U.S. accounting rule- Some tenants might decide that if a lease will setting body, but also by the International appear on their balance sheets anyway, they might as well own a property. That said, the Accounting Standards Board.

The change has been prompted in part by overwhelming majority of companies prefer increased sensitivity about off-balance-sheet tenancy to ownership because it affords so

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By Sharon Simonson

much more flexibility.

The proposed change also would make tenants appear to carry heavier debt loads than current accounting and would change the key debt-to-equity ratio used by banks and other lenders to evaluate borrower creditworthiness, Dizon said.

“You will be suddenly putting a large chunk of debt on your books,” Dizon said.

“Ideally you want a low percentage of debt versus equity. Bankers and creditors look at those ratios to determine if they want to lend you money and at what rate.”

The new rule could go into effect as soon as 2011 or 2012, Dizon and Berman said.

Despite the magnitude of the proposed change, few in the industry are aware of it, according to a recent survey by Jones Lang, a global financial and professional services firm specializing in real estate, and CoreNet Global, a professional trade association for corporate real estate executives.

The Securities and Exchange Commission estimated in 2005 that U.S. public companies would be forced to put an estimated $1.3 trillion in operating lease costs on their balance sheets if the new rule were adopted, according to Jones Lang. About 70 percent of all operating leases are real estate related.

Yet, according to the JLL and CoreNet survey, close to a quarter of survey respondents were unaware of the proposed change; another 60 percent had heard of it but were unfamiliar with details.

Seventy-three percent of the survey respondents were corporate real estate executives for companies with annual revenue exceeding $1 billion; eighty-two percent oversee real estate portfolios of more than a million square feet. n

illustration by lisa gloria

of your

Accounting board wants leases ON company balance sheets; ACCOUNTANTS say the bookkeeping change WILL TRIM earnings and inflate debt.

“I think we’re in a trough, and we’re going to bounce around the bottom until the jobs picture improves.”

Brad Lagomarsino, vice president of investments and director of the National MultiHousing Group for Marcus & Millichap Real Estate Investment Services

F

Fundamentals are sagging, but available financing and strong investor interest are clinching deals.

or those investors wondering if they should put money into Bay Area apartments, a long-term perspective is probably best.

“We have some great employers with many high-paying jobs and a great quality of life,” says John McCulloch, principal at Apartment Realty Advisors.

But short-term challenges are likely to obscure those pluses for the rest of this year and next. Rents and vacancy rates have deteriorated, and the remainder of 2009 is likely to produce more of the same. Oakland will see the greatest increase in vacancy, rising 210 basis points to 7.4 percent by the end of this year, according to Marcus & Millichap Real Estate Investment Services. San Jose should see the largest decline in asking rents with a slide of 9.5 percent to $1,515, the average projected rent for apartments of all sizes.

The falling rents mirror a nationwide trend of tenants resisting premium rents, according to Novato-based apartment research firm Real Facts. Real Facts co-founder Sarah Bridge says this resistance can be traced directly to the recession: “Those still with jobs also may have had their pay reduced or face pay raises

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By Eugene Gilligan

that are small or nonexistent.”

At the same time, apartments, especially those in core Bay Area locations, are clearly holding value better than some other property types. Buoyed by available financing from Fannie Mae and Freddie Mac, including assumable loans, investors have bought a clutch of properties in the last several months. Prices are down but interest is strong, with multiple offers common.

Cap rates on well-located, quality assets in the core markets of San Jose, San Francisco and Oakland have risen 150 to 200 basis points in the past 24 months, to around 7 percent. While that value loss might fluster an owner, it’s much better than in tertiary markets such as Antioch and Fairfield, where cap rates on these same type of assets have risen 250 to 300 basis points in the same period, says Patrick Shiver, vice president of capital markets for Jones Lang LaSalle.

Brokers report that investors who sat on the sidelines during the hot transaction years from 2004 to 2007 are showing interest in re-entering the fray. In August, Sares Regis Group of Northern California and CIGNA Realty Investors

P hoto by chad ziemendorf

Multifamily

the jobs picture improves,” he says.

San Francisco does have its share of distress. Real estate research firm Real Capital Analytics reported in August that 120 apartment properties in the city with a collective value of $500 million fell into the distressed category, second only in value to the $595 million worth of office assets catalogued in the same report.

Nearly half of the troubled apartments were owned by the Lembi Group; all are in default or delinquent on their loans. The Lembis bought apartments enthusiastically from 2003 to 2007, spending approximately $1.2 billion on more than 200 properties. “They were really a market driver,” Shiver says.

While the Great Recession poses near-term challenges to Bay Area apartment building owners, industry executives say the long-term prognosis is promising. The credit crunch has made financing for apartment development extremely challenging, and land constraints and a typically lengthy permitting process erect further hurdles.

In San Jose, building activity has fallen significantly from 2008 to this year.

While 861 apartment units came to market in 2008, only 200 will be delivered this year, according to Marcus & Millichap. The development scenario in San Francisco is similarly restrained, with 450 units delivered, less than 0.5 percent of market-rate inventory. In Oakland, 1,200 units will deliver, expanding the stock by 0.8 percent.

This low level of development, plus high single-family home prices mitigates the effect of job losses. “I don’t see a lot of change in the market for this year and in 2010,” Shiver says. The apartment market will strengthen when job growth resumes, probably in 2011, he says. Then, increased demand and a low level of new supply should bode well for owners. n

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SAN FRANCISCO’S

2009

bought San Jose’s Bella Villagio Apartments, a 231-unit luxury complex for an undisclosed price. And last month, Dallas’s Behringer Harvard closed on a 390unit Dublin complex for nearly $80 million.

Palo Alto’s Spieker Companies has nabbed three complexes: Sunnyvale’s Casa Alberta and Daisy Ridge, totaling 391 units, and Mountain View’s Aviana, which has 88 units. A year-and-a-half ago, Aviana drew offers close to $20 million, but never sold. Spieker paid less than $16 million, according to a local broker.

From 2006 to 2008, owners sold to lock in profits, says Tod Spieker, a senior vice president with brokerage Cornish & Carey Commercial in Palo Alto. Now they’re selling for different reasons: “They want to recapitalize or deleverage or re-deploy capital.”

The 31-year-old Spieker, who is the son of Tod Spieker of Spieker Companies, is co-managing partner with Jamie D’Alessandro, a partner with brokerage NAI BT Commercial, of a limited partnership that acquired Mountain View’s 88-unit Regal Palms complex in September. The property had been poised to sell for close to $20 million a year and a half ago. His partnership acquired it for less than $16 million, Spieker says.

Small investors also have begun to vie for the duplexes and four-plexes that are entry point for people interested in owning property. Some small Bay Area apartment properties are fetching premium prices and multiple offers, says Michael Shields, managing director of brokerage Sperry Van Ness Silicon Valley.

While prices on some Silicon Valley apartments have fallen 20 percent or more from two years ago to $100,000 a unit, four-plexes in Palo Alto are selling for as much as $400,000 a unit.

“These are first-time investors. They will buy one or two [properties] with an eye toward selling them five years from now for a profit and moving up to larger complexes,” Shields says.

New owners will have to weather some tougher times before they can expect the full benefits of their investments. Marcus & Millichap projects a 5.3 percent decrease in employment this year, or 51,600 positions, in San Francisco. San Jose should fare slightly better, with 43,600 jobs eliminated, or 4.8 percent of the workforce. Job formation, of lack of it, correlates closely with the health of the multifamily sector.

Anyone waiting for a flood of distressed assets may be disappointed, say Shields and Lagomarsino. Local banks, in the wake of the tech bust of 2001, tightened lending standards on multifamily properties, so many acquirers and developers have put a greater amount of equity into their deals. A good number of lenders also are working with owners to modify loan terms to enable them to hold on. That has kept properties that might have offered distressed buying opportunities out of the market, says JLL’s Shiver.

“Banks don’t want to own real estate,” he says. “Also, many think market fundamentals may improve in a year.”

AvalonBay Communities, with 30 apartment complexes comprised of 9,352 units in the Bay Area, has been able to keep its occupancy rate fairly steady this year at 96 percent with a liberal move-in policy, says Deborah Coombs, senior vice president of property operations. The policy allows renters to break a lease after30 days or less in the apartment for any reason. Last year, 2 percent of renters exercised this option, which has been in practice for many years, Coombs says. So far this year, the number is 1.6 percent.

San Francisco’s Marina district illustrates market conditions well, says Brad Lagomarsino, vice president of investments and director of the National MultiHousing Group for Marcus & Millichap. He has seen rents at some apartment buildings in the area fall from a peak of $1,800 a month a year and a half ago to $1,450 a month today, nearly 20 percent lower.

San Francisco’s apartment vacancy might improve a bit in the near term, he adds. With rents falling approximately 20 percent from the highs realized in late 2007 and early 2008, tenants will relocate to capitalize on the reductions. He believes rents have bottomed out.

“I think we’re in a trough, and we’re going to bounce around the bottom until

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10/15/2009 11:35:56 AM

design

Zero energy efficiency and carbon emissions in commercial buildings are within reach.

By Ron Nyrenk

“We didn’t do anything that was exotic or extraordinary, but we did all of the ordinary things very well.”

Scott Shell, principal, EHDD Architecture

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Much Less is Much More

D avid Wakel y

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ommercial buildings consume 18 percent of the nation’s energy.

In an era of increasing concern about climate change and energy prices, the ideal would be to have only net-zero energy commercial buildings—ones that, through efficiency measures and renewable energy generation, consume no more power than they generate.

But, how realistic is that goal?

The U.S. Department of Energy’s Net-Zero Energy Commercial Building Initiative aims to achieve market-ready, net-zero-energy commercial buildings by 2025, but some property owners aren’t waiting that long.

Quietly tucked beside a Goodwill store in central San Jose, the IDeAs Design Facility is one of a small but growing number of buildings showing how close the zero-energy goal is today.

Integrated Design Associates, or IDeAs, is an electrical engineering and lighting-design firm that performs work for institutional and commercial property owners and tenants. In 2005, one of the firm’s principals, David Kaneda, and his wife, Stephania, bought a 1960s bank building in San Jose at 1084 Foxworthy Ave. A concrete bunker of a building, it had virtually no windows. Kaneda intended to renovate it to serve as company headquarters.

Because the firm specializes in energy-efficient solutions, he thought achieving a LEED Platinum rating made sense. Then he hired San Francisco’s EHDD Architecture, whose principal Scott Shell challenged him to aim higher: Make the building a poster child for zero-energy. It would have all the usual trappings of a modern office—computers, printers, a refrigerator—but with a net annual electricity use of zero and zero carbon emissions.

Shell considered the building a good candidate. As a one-story building, the ratio of roof area to internal square footage was highly favorable for a photovoltaic system. High ceilings meant that adding skylights could supply diffuse daylight for most of the interior. And EHDD had recently completed a K-12 campus for Chartwell School in Seaside, also designed to achieve net-zero electrical usage.

Though Kaneda had worked with Shell before, he was taken aback by the idea at first. He talked it over with his wife. “She told me, ‘if you really want to showcase the things that you are good at, it’s more about energy than it is about recycled materials and sustainably harvested wood,’” Kaneda says.

So they gave the thumbs-up. Today, the 7,000-square-foot building has a rooftop 28 kilowatt photovoltaic system designed to supply all of the building’s projected energy needs, which the design team worked to shave to the bone, including light fixtures with occupancy sensors, operable windows, a radiant floor system and ground-source heat pump for heating and cooling as well as highly energy-efficient office equipment.

Because certain equipment such as copiers and printers draws energy even in standby mode, when the security system is armed at the end of the

day it shuts off power to these devices. The architects added extensive glazing to the south side of the building, shaded by an overhang. For the east window, electro-chromic glass darkens automatically when hit directly by morning sunlight. So far, the company’s employees haven’t needed task lighting, even though the overhead lights are off almost all day long.

“We didn’t do anything that was exotic or extraordinary, but we did all of the ordinary things very well,” Shell says.

The energy-efficient upgrades did come at a price. The cost of the upgraded glazing, the radiant mechanical system and the concrete floor to house it and the net cost of the photovoltaic system came to nearly 9 percent of the building’s construction cost of $2.3 million. The installed cost of the photovoltaics was $233,063, but with rebates from the state, a 30 percent federal tax credit and accelerated depreciation, that dropped to $45,500, about 2 percent of construction costs. Given the energy savings, Kaneda estimates the payback time for the photovoltaic system at five-and-a-half years.

Although the main focus was energy, an array of other sustainable strategies also found a home. The concrete floor slab contains recycled fly ash, and most of the parking lot’s asphalt was replaced with drought-tolerant plants.

The firm is applying for a LEED rating, which Kaneda expects to be at least Gold or Silver.

Since the renovation was completed in 2007, the building has proven to be the showpiece for which Kaneda had hoped. “We give tours all the time— most of our clients have been through the building,” says Mark Fisher, one of the firm’s other principals.

The journey to zero has not been without hitches, however. The latest figures show that from August 2008 through July 2009, the building generated 87 percent of its electricity demand. The main problem, Kaneda says, has been that the building-integrated photovoltaic system was a relatively new product, and a manufacturer’s error resulted in half of the panels burning out. The manufacturer replaced them. Then the other half failed.

Those were fixed last November. “The numbers now are looking like we could, when we get to November, potentially be netting to zero,” Kaneda says.

He plans to fine-tune the interior temperatures, running it a little cooler this winter than last year’s 74 degrees and a tad warmer during summer weekends.

A monitoring system has been almost entirely installed for each circuit, so the most energy-hungry elements can be singled out.

IDeAs and EHDD have a number of other zero-electricity projects completed or in the works, including school buildings and individual homes. They aren’t the only ones aiming for zero-energy offices: In 2007, Malaysia’s government completed a 43,000-square-foot office structure outside of Kuala Lumpur to house the Malaysia Energy Center, and this August, the Magnify Credit Union opened a 4,151-square-foot branch in Lakeland, Florida; both buildings were designed to achieve zero-energy.

Kaneda and Shell both see the trend spreading in the not-too-distant future. Calculations for some of his firm’s current projects suggest that in the Bay Area’s temperate climate, the roof area even on two-story office buildings is sufficiently large to make net-zero possible, Shell says. “Beyond that, it’s going to get a lot harder, but as the market scales up, and photovoltaics are produced at a much higher rate, a lot of things are going to be working in our favor,” he says.

Both Kaneda and Shell point out that in 2006, the State of California set goals to reduce the state’s carbon emissions to 1990 levels by 2020, and to 80 percent of that by 2050, using market-based incentives. “If the state intends to meet the goals they’ve legislated, we need to do things radically better very soon,” Kaneda says. “Five years or 10 years from now, zero-energy buildings may just be the norm.” n

Finding a New Look With the holidays nigh, landlords and contractors tied to retail’s fortunes are casting about for a new set of clothes.

By Michael Fitzhugh

A

year ago, San Francisco’s Fisher Development Inc., a specialty retail contracting firm, focused on fitting out glittering stores for the likes of Victoria’s Secret, Hugo Boss and the Gap. “When times were good we could just do retail because there was so much of it,” says Alex Fisher, the company’s business development director.

Today, the glitter is gone. Retail projects have evaporated, and FDI is trying on a whole new suit, doing seismic retrofit, education and sustainable pre-fab work. “To survive, we have had to get out of our mold,” Fisher says.

Fisher is not the only one in commercial real estate discovering that the fall in retail spending necessitates change. Americans, whose national pastime has been shopping, are losing their desire to spend. Consumer debt, excluding real estate mortgages, has been falling since the end of last year.

For retailers, the change is creating a new reality. For some, it means complete retrenchment or closure. For others, repositioning may do. For a lucky few, consumer thrift is driving expansion. But from 30,000 feet, the message is simple: American retail must change. The message is much the same for the commercial real estate industry, not only for contractors like Fisher but for retail landlords, too.

Now with the holidays upon us, there is a collective breath-holding as merchants enter the most critical time of their year. Landlords, already stressed, are praying for fourth-quarter sales strong enough to keep the rent checks coming into the New Year. For many, a crucial inflexion point will come in January.

Nationally, the value of distressed retail properties (those in foreclosure, bankruptcy, default, owned by a bank, receiving lender forbearance, etc.) is ballooning, reaching $35 billion as of Oct. 1, according to commercial real estate data firm Real Capital Analytics. Hawaii and Las Vegas, the nation’s worst off, contributed nearly $2 billion each, more than 11 percent combined, to the sum alone.

In comparison, San Francisco distress fell in August and September to $272 million from $283 million two months earlier; San Jose has only nine distressed properties, accounting for $123 million. Oakland and the East Bay are struggling more, with 30 troubled properties accounting for nearly $500 million in value.

Neighborhood and community shopping centers in San Francisco, San Jose and Oakland-East Bay also have

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some of the country’s lowest retail vacancy rates, according to commercial real estate researcher Reis Inc. San Francisco and San Jose are less than 5 percent vacant; Oakland is at 6.1 percent.

But, effective rents are falling in all three metros, and at the end of the third quarter, they were down more than 6 percent in San Jose, among the worst declines nationally.

Amidst the pandemonium, some retailers are still growing: Game Stop, Panda Express, Ross Stores, European Wax and Massage Envy, to name a few. For retailers with the capital and stomach, today may be the most attractive time in a long time to lock in rental rates. Fortunes are made in times like these.

But it is also clear from brokers that appearances can be deceiving. Landlords are propping up tenants, giving free rent for months on end simply to have a partner to help shoulder electricity and common-area costs. Some retailers are zombies. In the words of Michael Seigel, a senior retail specialist for brokerage Terranomics and a former merchant himself, “You have a lot of retailers who are dead, but they don’t know it yet.”

“There are retailers who will stay in business because they have a lot of inventory and landlords who won’t pull the plug even if they are in arrears in rent. Their hope is for a good fourth quarter, but outside of the value retailers, that is probably really stretching it,” Seigel says.

Don Tepman, a founder of San Francisco retail brokerage Trade Commercial Group, says landlords are getting creative. “I have a client who just gave a tenant a $75,000 loan to help finance their new business because they could not get financing anywhere else,” he says. Other landlords are considering opening their own stores to fill their centers’ vacancy. The goal is not to become a merchant but to retain synergies for other tenants and to look better in the eyes of lenders when loans mature, Tepman says.

The Bay Area also hosts a clutch of national retailers including the Gap, Williams Sonoma, Ross Stores, Safeway and Bebe. Few would say the collection represents a driving regional industry. But for workers in the sector and the landlords that house their headquarters and stores, the retailers’ prosperity matters much.

As a group, their fortunes have varied widely. In September, San Francisco’s The Gap Inc. posted a 1 percent drop in same store sales and has seen year-over-year sales slide 6 percent to $8.82 billion. Pleasanton’s Safeway Inc. told investors during its second quarter earnings report to expect a loss for the year. Brisbane’s Bebe Stores Inc. also has had a rough year. The company reported a nearly 25 percent plunge in sales to $120 million in the quarter ended Oct. 3. Same store sales dropped nearly 26 percent. The chain plans to close stores and reinvent others to appeal to “economy-conscious consumers,” said Manny Mashouf, Bebe’s chief executive.

Home-goods seller Williams-Sonoma also has had trouble. The company expanded widely during the housing boom. Now it plans to close 16 stores by year-end and to vacate 80,000 square feet of San Francisco office space.

Having a big number of storefronts nationwide has proven burdensome, said Morningstar analyst R. J. Hottovy. The company reported substantial losses in the quarters ended Nov. 2, 2008, and May 3, 2009, and was barely profitable in the quarter ended Aug. 2.

Conversely, discounter Ross Stores Inc., the second largest off-price apparel and home goods retailer in the nation, is expanding. In August, the Pleasanton company raised sales and earnings forecast for the year. Further, it is optimistic about the holidays, projecting sales growth up to 6 percent compared to the same quarter last year.

The correlation may be obvious, but as unemployment grows and many Americans focus on finding deals, it is the discounters and not the mainstream retailers that will help them find that new look. n

P hoto by sidne y erthal

retail

Hospitality

Inhospitable Times The San Francisco hospitality industry braces for a cool holiday season.

By Michael Fitzhugh

“I think that this year is a pivotal year because I feel we’re just about to turn the corner.”

Lisa Kershner, vice president of hotel operations for Kimpton Hotel & Restaurant Group in Northern California and general manager of San Francisco’s Hotel Monaco

S

an Francisco hoteliers, already hurt by one of the worst recessions on record and too much debt in many cases, are getting a lump of coal for the holidays. Falling occupancy and room rates lie ahead.

In a city where tourism is the largest industry and visitor counts have grown every year since 2002, even minor fluctuations can have a broad impact. More than 16 million visitors came to San Francisco in 2008, spending $8.5 million, according to the most recent figures available. Hoteliers, retailers and restaurateurs all depend on the influx, as visitors spent an average of $23.3 million dollars each day in 2008 on food, lodging and retail goods.

Hospitality and tourism industry advisor PKF Consulting Corp. predicts fourth quarter average occupancy will drop 9 percent from last quarter to 62 percent, compared to 68.5 percent during the same quarter last year. Average room rates will fall by nearly $20 to $138 a night during the quarter. That compares to $157 a night last holiday season. San Francisco boasts 33,372 hotel rooms in 215 hotels, according to PKF. “There is no question in my mind that it is going to be a more difficult season,” said Thomas Callahan, chief executive officer and co-president of PFK’s West coast office. “There will be fewer people coming, and the people who do will be much more value-conscious.

Fortunately for downtown hoteliers, the holidays account for much less of their revenue than other months, Callahan said. Convention and business travelers generate the majority of hotels’ annual sales; holiday visitors during November, December and January do not make up for their falloff, making the three months the slowest of the year.

That said, holiday cheer is definitely in short supply. For starters, the recession and price-cutting across many industries have made consumers resistant to paying full price for anything, hotel rooms included.

“People have literally been conditioned like Pavlov’s dogs not to respond unless they see a big sign that says ‘50 percent off,’” said Stefan Mühle, general manager of The Orchard and The Orchard Garden hotels, both near Union Square. “In the hotel industry people either want a really good deal when they book far in advance, getting a prepay-and-save deal, or a really good last-minute deal.”

Mühle often sees a major lull in bookings during the three weeks before any large convention or holiday, as people who think they have missed the early-bird specials wait until the week before an event to book, trying to pick up last-minute bargains. The erratic market is making it tough for hoteliers to reliably predict more than a couple weeks ahead, Mühle said.

Still, the fourth quarter is not wholly unclear. October’s big conventions, Oracle Openworld and the American Academy of Ophthalmology meeting, will give hoteliers an opportunity not just to fill rooms—the conventions require as many as 15,500 and 12,500 rooms, respectively, according to the San Francisco Convention and Visitors Bureau—but also to raise rates in response to high demand.

The first two weeks of December could be relatively strong, too, said Mühle, as people come to San Francisco to do holiday shopping and a few small conferences take place.

Mühle expects that his hotels might get to 80 percent occupancy, and he may be able to charge nightly room rates of $120 to $140 for those weeks.

The second half of December is usually when bookings get tougher, Mühle said, though he still holds out hope. Because Christmas falls on a Friday, he expects to experience “a little bit of a sling-shot effect” where shoppers come into the city to catch after-Christmas sales and handle returns on gifts. New Year’s could be strong too, since New Year’s Eve falls on a Thursday, potentially drawing revelers in for a fourday weekend.

“A lot of it depends on the economic forecasts in November. Are people going to be in a good mood or bad mood?” he said.

Callahan agrees. Peoples’ feelings about their current employment and income situation account for more than threequarters of their vacation planning decisions, he said.

Industry advisor PricewaterhouseCoopers LLP sees a grim picture for the second half of the year. Despite a brightening economic picture, it says an imbalance between supply and demand will continue to keep average daily rates suppressed well into 2010. What hotels charge and how they structure their rates will be increasingly critical.

“I felt that last [holiday season] we had just felt the effects of the recession,” said Lisa Kershner, vice president of hotel operations for Kimpton Hotel & Restaurant Group LLC in Northern California and general manager of San Francisco’s Hotel Monaco. “It wasn’t a wonderful year or shopping season for us. But I think that this year is a pivotal year because I feel we’re just about to turn the corner.” n

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green

A Penny Saved—Sometimes Companies favor furniture re-use, but it’s not always less expensive or greenest.

By Sasha Vasilyuk

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niture budget on reusing old furniture and buying refurbished cubicles. SFO hopes to achieve LEED Gold at the new office building.

“It was economical, and it’s a good practice to use,” says SFO spokesperson Mike McCarron. “There’s no point in buying new furniture when you can use the old one.”

The airport is lucky in that its old furniture is only about five years old, he adds.

To get LEED credit, reused furniture must comprise at least 30 percent of a company’s total furniture budget. If the reused furniture makes up more than 60 percent of the total budget, the company can receive an additional point for innovation. But for many companies, just getting to the 30 percent mark can be a challenge.

“It’s really hard to hit 30 percent because the bulk of the furniture is typically new since workstations are really hard to reuse, and that’s the biggest expense on the furniture budget,” says Huntsman Architectural Group’s Robin Bass, an accredited LEED professional. “It’s a difficult credit to get.”

Office expansion also can prevent companies from hitting the 30-percent threshold. When San Francisco’s Beverly Prior Architects moved from Rincon Hill to Sutter Street, the 30-person firm was able to reuse or donate 98 percent of its existing furniture. Despite the impressive numbers, the firm did not get a LEED point for furniture reuse. In hopes of business expansion they had to buy a lot of new furniture, thus buoying the total budget.

“We went to great efforts, but based on the way LEED credit is set up, we didn’t chip the 30 percent,” says Karen Chan, architect with Beverly Prior. “It’s still doing the right thing though.”

Although it does not earn any LEED points, donating or selling old furniture helps companies, too, sustainability experts say. To help find takers, many turn to Sausalito-based iReuse.com, a sustainability consulting firm and furniture marketplace that links organizations with excess furniture and non-profits that need it.

Other spin-off businesses are benefitting from companies’ sustainability practices as well. Carter Coleman, sales manager at iReuse, says there are a lot more people in the furniture liquidation business than when his company started four years ago. Six-

“More and more we see that clients aren’t willing to walk away from their existing furniture.”

Lori Sherwood, Unisource Solutions

Above: Lori Sherwood Left: Unisource warehouse

photo S by C had Z iemendorf

T

he sour economy and a desire to be seen as green are persuading more and more local companies to think twice before disposing of their old furniture. The practice may be undermining new furniture sales, though it’s hard to tease out the economic effects in the midst of the downturn, and even with best intentions, reusing old stuff does not guarantee formal green certification.

“More and more we see that clients aren’t willing to walk away from their existing furniture,” says Lori Sherwood, principal at Unisource Solutions, a Hayward-based commercial office furniture distributor that also performs LEED valuation audits.

Companies are seeking recognition for their efforts through certification under the U.S. Green Building Council’s Leadership in Environment and Energy Design. Under the 2009 LEED program for interiors, companies must earn at least 40 points by implementing green policies and using sustainable materials. Reusing old furniture is one way to reach the goal.

“Getting LEED points is the primary driver, as we’re seeing much more of an interest from corporate America to have a policy about sustainability,” Sherwood says.

One of the biggest furniture reuse projects is currently going on at the San Francisco International Airport. As part of its Terminal 2 overhaul, SFO is moving administrative offices to a different building and plans to spend 60 percent of its $1.1 million fur-

year-old Golden Gate Co., which helps commercial office organizations with moving and furniture disposal and acquisition, is keeping busy as a result.

“I don’t know if it’s about LEED, but it’s definitely about costs,” says the moving company’s founder Rachel Walls. “I see companies buying used furniture more than before.”

The reuse trend may be cutting into new furniture sales. Current projections for the U.S. market predict a 31 percent decline in this year’s sales, down from $13 billion in 2008, according to the Business and Institutional Furniture Manufacturer’s Association, the trade association for the commercial furniture industry. That said, most distributors attribute the sales dip to the recession, not furniture reuse.

And they say new furniture can earn LEED points too.

“The LEED certification can be achieved through using used furniture or new furniture where you’re documenting what materials were used and where it came from,” says John Schwartz, president of Sam Clar Office Furniture based in Concord. “Because the companies put so much energy and money into a project, they often like to have the control that new furniture can offer in terms of where it comes from.”

Reusing furniture also has its challenges. Labor and moving costs, refurbishing, storage and everyone’s time can add up to a point that buying new furniture just makes more sense, says Anne Wagner, senior architecture and design account manager with Unisource Solutions.

“If it’s a big enough project, you can strike a good deal with buying new furniture,” she says. “So unless they’re trying to go for LEED points, sometimes it’s sort of a dilemma—like geez, is this really worth it?”

Designers also note that not all furniture lends itself to easy reuse. For commercial offices, outdated grey cubicles made infamous in the film “Office Space” are the hardest to reuse.

“It’s a challenge to convince companies to reuse workstations,” says Wagner. “Five, 10 years ago they had a really high panel surround and a very closed-in environment. Those high panels are not how people want to work now, and it’s not a LEED-oriented approach because you want low panels to bring the daylight in.”

The reuse trend can prove short-lived as furniture manufacturers are starting to adjust to greener building practices.

“It’s not easy to recycle furniture right now, but it’s going to change,” says Wagner. “There’s an emerging industry of manufacturers who are making products that are 99 percent recyclable at the end of their use. I think right now it’s just a statement— how the recycling process actually occurs remains to be seen.” n

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A Well-Done Hamburger In the home-lending environment, so much and so little has changed.

By Rob La Eace

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“I

’ll gladly pay you Tuesday for a hamburger today.” So goes the quote by Wimpy of the famous Popeye cartoons. The subtext, of course, is that Tuesday’s payment never came.

Borrowers can be forgiven if they behaved like Wimpy when lenders allowed it. One financial catastrophe later, lenders (except perhaps the federal government) seem to understand their behavior must change. Wimpy must pay before the hamburger leaves the stand or sign a binding agreement with consequences.

But, while such requirements may be prudent for the long-run, they can be foul fare in the short-term.

What a treacherous dichotomy that the very lending machines partially to blame for our problems today have now restricted lending to the point where they are slowing our recovery. Would you believe they now only like to lend to qualified persons? Sarcasm aside, the bottom line is that the housing market cannot recover if people cannot buy homes because they can’t get loans. As painful as it may be, however, it may be the only stew that can sustain us for the long haul.

So what has changed? The biggest difference, according to a seasoned home mortgage consultant with San Francisco-based Wells Fargo Bank, is that underwriting has become far more personal. Wells Fargo, even during boom times maintained a scrupulous review process—evidenced by its solvency and ability to avoid much of the trouble experienced by other banks. Nonetheless, Wells has tightened the reins, so to speak, and each borrower is examined much more closely now. In the past, underwriting was more a list of standards that you either met or did not. Today it is more intricate and borrower-based. Oftentimes, folks don’t have enough credit history to satisfy the new requirements. A loan he did a few years back for $1.5 million with a 5 percent down payment would be “out of the question today,” the consultant says.

Allowable debt-to-income ratios are way down. In the past, on a 30-year, fixed-rate mortgage, the bank would allow up to 55 percent with excellent compensating factors. Now they seldom go above 45 percent and some are even capped at 38 percent. Approvals are much more case-by-case.

Things have also changed in the last two years for Ken Schwing of Princeton Capital, a mortgage bank and brokerage. In 2007, Schwing was doing virtually no Federal Housing Administration loans. Bay Area home prices were simply too far above the thenlow FHA limits. Today, 25 percent to 30 percent of

Ken’s business is FHA loans. FHA loans, once fairly unknown in the Bay Area, are gaining in popularity.

At a time when most lenders require 15 percent to 20 percent down payments, one can obtain an FHA loan with as little as 3.5 percent down. Schwing does note that guidelines for FHA loans are becoming stricter. He cites the elimination of the spot approval process as an example. FHA loans were originally geared towards single-family home buyers, so condominium projects must be on an approved FHA list for a buyer to qualify. If a building were not on the list in the past, a spot approval could be performed in a timely manner to add a building and move the deal forward. The new process can be much slower, potentially derailing sales.

The FHA’s easier credit terms are clearly providing critical support to the housing market, including our market. In 2008 the federal government temporarily raised FHA loan limits in high-value Bay Area counties to a maximum of $729,750. The American Recovery and Reinvestment Act of 2009 extended the limits to the end of the year. When one understands that the FHA currently insures close to 25 percent of all mortgages compared to about 3 percent in 2006, according to the Los Angeles Times, it is easy to appreciate the significant role it is playing in our recovery. It is today the world’s largest mortgage insurer. The efficacy of this lending tool will be greatly reduced in the Bay Area should the temporary $729,750 limit not be extended past the Dec. 31 deadline.

But there is also growing concern. The FHA, amongst others, insures loans to borrowers with lower income and weaker credit scores. Recent reports show that the agency is close to falling below its required reserves. This has led to cries from many to increase down-payment amounts and lower mortgage limits, lest we have a repeat of Fannie and Freddie.

If we keep passing out money to people with no ability to repay, ultimately we will bankrupt ourselves.

So there we have our dilemma in black and white: The tougher the terms, the fewer people who qualify for home loans. The fewer who qualify for home loans, the less demand for housing and the more at risk we are of further home-value declines. There is even a school of thought that without housing recovery there can be no economic recovery. And you can take that to the bank. n Rob La Eace can be reached at 415-290-7228 or rob@roblaeace.com.

The first annual Commercial Interiors Contractors Awards (CICA) acknowledges the achievements of general contractors who specialize in commercial interiors throughout the Bay Area. In addition to acknowledging local interior contracting professionals, the CICAs will also support the recently established CICA Foundation.

About CICA Foundation The CICA Foundation aims to provide facility improvement assistance to local community organizations through channeling the skills and resources of local interior contractors.

Community-based organizations in the Bay Area, such as assisted living centers, homeless shelters and children’s facilities will have an opportunity to receive a grant for facilities interior improvements and renovations, which the foundation will administer through its board of directors.

CICA would like to thank all of its steering committee members and the judges who volunteered their time and energy in making this first year a huge success.

Silver Sponsors

Michael Ma

Bronze Sponsors

Friends

Media Sponsor

cica-sf.com

1st Annual Commercial Interiors Contractors Awards

Category

Academics

Winner: Turner Construction Project Name: LycĂŠe Francais Address: 1201 Ortega Street, San Francisco Architect & Designer: Hilliard Architects

Category

Building/Corporate Lobby

Winner: Pankow Special Projects, L.P. Project Name: Golden Gateway Center Lobby Renovation Address: Various locations in San Francisco Architect & Designer: Melander Architects/Orlando Diaz-Azcuy Design

Category

Building/Corporate Office Interiors Winner: DPR Construction Project Name: Barclays Global Investors Address: 400 Howard Street, San Francisco Architect & Designer: Studios Architecture

28 theregistrysf.com

no v ember 2 0 0 9

1st Annual Commercial Interiors Contractors Awards

Category

Biotech

Winner: Turner Construction Project Name: Sirna-Merck Address: M ission Bay Life Sciences Building, UCSF, 1700 Owens Street, San Francisco Architect & Designer: WHL Architects (not pictured)

Winner: Hathaway Dinwiddie Project Name: Hyatt Regency Address: 5 Embarcadero Center, San Francisco Architect & Designer: Gensler

Category

Category

Hospitality Interiors

LEED Corporate Interiors

Winner: Skyline Construction Project Name: Google San Francisco Address: 345 Spear Street, San Francisco Architect & Designer: Szto Associates

Category

Public Space Winner: Pankow Special Projects, L.P. Project Name: Berkeley YMCA Renovation Project Address: 2001 Allston Way, Berkeley Architect & Designer: ELS Architecture & Urban Design

Category

Retail

Winner: Hathaway Dinwiddie Project Name: Serramonte Mall Food Court Address: Serramonte Mall, Daly City Architect & Designer: Callison

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theregistrysf.com 29

09 Calendar

january february march april may june july august september october november december

2

6

13

SPUR will host a Silver Spur luncheon at 10:30 a.m. at Moscone Center West, Howard St. between Forth and Fifth streets, San Francisco.

Tickets are $175. Go to spur.org/silverspur or contact events@spur.org for more information.

SPUR will host a lunchtime forum featuring Shuttling Workers at 12:30 p.m. at 654 Mission St., San Francisco. Members $0 and nonmembers $5. Feel free to bring a lunch. Visit spur.org for more information.

3

10

CREW East Bay will host a members only brown bag lunch Peer Advisory Group meeting from 12 p.m. – 1 p.m. at Miller Starr Regalia, 1331 N. California Blvd., Ste. 500, Walnut Creek.

Contact Kristina Lawson at kdl@msrlegal.com with questions or visit eastbaycrew.org for more information.

CREW Silicon Valley will host a luncheon program at SV Capital Club. Visit crewsv.org for more information.

SPUR will host a lunchtime forum featuring Planning for the San Francisco Bay at 12:30 p.m. at 654 Mission St., San Francisco. Members $0 and non-members $5. Feel free to bring a lunch.

Visit spur.org for more information.

3 ULI San Francisco will play host to the 3-day 2009 ULI Fall Meeting and Urban Land Expo at Moscone South Convention Center in San Francisco. This event is open to all. For more information, visit uli.org/Events/Meetings.aspx.

11

4 SPUR will host a lunchtime forum featuring a Post Election recap at 12:30 p.m. at 654 Mission St., San Francisco. Members $0 and non-members $5. Feel free to bring a lunch. Visit spur.org for more information.

BOMA San Francisco will host un-Oktoberfest from 5 p.m. – 8 p.m. at Schroeder’s, 240 Front St., San Francisco. Visit bomasf.org for more information.

5 ULI San Francisco will host the YLG: Networking Reception at the 2009 Fall Meeting from 8 p.m. – 10 p.m. at Mezzanine 444 Jessie St. (2 blocks from Moscone), San Francisco. Cocktails and appetizers will be served. This event is open to Young Leader Fall Meeting registrants and all local ULI San Francisco YLG Members. Tickets are $45 and include two drink coupons. Register online at ulisf.org or call 800.321.5011.

BOMA Oakland/East Bay will host an Indoor Air Quality seminar from 8:30 a.m. – 10:15 a.m. at 1537 Webster St., Oakland. Members $5 and nonmembers $25. At the door admission is $30. This event includes a continental breakfast and tour of the StopWaste.org building. Contact Robert at 510.893.8780 or Robert@bomaoeb.org for questions or visit bomaoeb.org for more information.

5 BOMA Silicon Valley will host the Commercial Real Estate Awards Dinner from 5:30 p.m. – 8:30 p.m. at Holiday Inn San Jose, Mediterranean Rm., 1740 N. First St., San Jose. Members and guests cost $55. Visit boma-sv.org for more information.

BOMA Silicon Valley will host a membership luncheon from 11:30 a.m. - 1:30 p.m. at Holiday Inn, Mediterranean Room, San Jose. Visit boma-sv.org for more information.

USGBC Northern California Chapter will host a Selecting and Procuring Green Materials Workshop from 9 a.m. – 12 p.m. at USGBC-NCC/AIA SF Offices, 130 Sutter St., Ste. 600, San Francisco. Members $145 and non-members $175.

Contact info@usgbc-ncc.org with questions.

30 theregistrysf.com

SPUR’s Young Urbanists will host Literature in the City at 654 Mission St., San Francisco.

Members $0 and non-members $20. To RSVP, write membership@spur.org.

no v ember 2 0 0 9

NAIOP San Francisco Bay Area Chapter will host the Tenth Annual Harold A. Ellis, Jr. Lifetime of Building Awards from 6 p.m. – 9 p.m. at Four Seasons, 757 Market St., San Francisco. The cost is $180 for non-members. Visit naiopsfba.org for more information.

12 SPUR will host a lunchtime forum featuring Social Justice and Rising Seas at 12:30 p.m. at 654 Mission St., San Francisco. Members $0 and non-members $5. Feel free to bring a lunch. Visit spur.org for more information.

NAIOP Silicon Valley Chapter will host a NAIOP Developers Panel Luncheon from 11:30 a.m. – 1:30 p.m. at Hyatt Regency Hotel, 5101 Great America Pkwy., Santa Clara. Visit naiopsiliconvalley.com for more information.

BOMA San Francisco will host a Member Benefit Review from 11:45 a.m. – 1 p.m. at BOMA Conference Room, 233 Sansome St., 8th floor, San Francisco. This is a free event and open to all. Lunch will be provided. Visit bomasf.org for more information.

12 BOMA Oakland/East Bay will host a TOBY (The Outstanding Building of the Year) luncheon.

Visit bomaoeb.org for more information.

IFMA Silicon Valley will host a Renaissance Faire from 4 p.m. – 8 p.m. at Holiday Inn, Mediterranean Center, 1740 North First St., San Jose. Members $0 and non-members $40.

Contact Joy Dunn at 408.226.0190 or admin@ifmasv.org with questions.

12-13 IFMA Silicon Valley will host a Leadership and Management FMP Class from 8 a.m. – 5 p.m. at SAP, 3475 Deer Creek Rd., Building 7, TNT Rm., Palo Alto. Members $250 and non-members $350. Contact Joy Dunn at 408.226.0190 or admin@ifmasv.org with questions.

13-14 BOMA Oakland/East Bay with STAND! Against Domestic Violence will host a Comm[Unity] Rebuilding Project. Contact Robert at 510.893.8780 or Robert@bomaoeb.org for questions or visit bomaoeb.org for more information.

16 USGBC Northern California Chapter will host a Biomimicry- Planning and Designing with Nature Workshop from 8 a.m. – 4 p.m. at USGBC-NCC/ AIA SF Offices, 130 Sutter St., Ste. 600, San Francisco. Members $295 and non-members $345.

Contact info@usgbc-ncc.org with questions.

17 SPUR will host a lunchtime forum featuring How U.S. Cities are Preparing for Climate Change at 12:30 p.m. at 654 Mission St., San Francisco.

Members $0 and non-members $5. Feel free to bring a lunch. Visit spur.org for more information.

SPUR will host an evening forum featuring Emerald Cities at 6 p.m. at 654 Mission St., San Francisco. Members $0 and non-members $5.

Visit spur.org for more information.

19 CREW East Bay will host a members only Alameda Redevelopment Tour and Vodka Tasting at Hanger One from 4 p.m.- 7 p.m.

Visit eastbaycrew.org for more information.

BOMA San Francisco will host a membership luncheon from 11:30 a.m. – 1:30 p.m. at The City Club Main Dining Room, 155 Sansome St., 11th floor, San Francisco. Members $55 and non-members $70. Visit bomasf.org for more information.

19 CoreNet Global Northern California Chapter will host the CRE Awards Dinner from 5:30 p.m. – 8 p.m. at Four Seasons, 757 Market St., San Francisco. Contact anantell@hp-assoc.com or call 415.371.1734 with questions.

USGBC Northern California Chapter will host a Sustainable Industries Economic Forum featuring Paul Hawken from 8 a.m. – 11:30 a.m. at St. Regis San Francisco, 125 Third St., San Francisco.

Individual tickets cost $75 and $50 for students.

Visit usgbc-ncc.org for more information.

ULI San Francisco will host a Breakfast Tour of StopWaste.org LEED Platinum in Downtown Oakland from 8 a.m. – 9:30 a.m. Meet in the lobby at 1537 Webster St., Oakland. Cost is $5.

Call 800.321.5011 or email Kelly.Johnson@uli.org with questions.

Real S C E N E

O F

T H E

Left: Keynote speaker Christopher Leinberger, The Brookings Institution, discussed the implications of recent federal and state land use policy and stressed the importance of compact development around transit.

S E E N

Below (l-r): Brian Tyler, San Jose State University & Iman Novin, BRIDGE Urban Infill Land Development (BUILD)

Above left: Technical Assistance Panelist Charlie Long, Charles A. Long Properties Above right: A packed room at ULI’s 2009 TOD MarketPlace.

ULI San Francisco TOD MarketPlace On September 24th, over 300 people attended ULI San Francisco’s fourth annual Transit-Oriented Development (TOD) MarketPlace in downtown San Jose. The day-long event was both a stand-alone conference on TOD and the culmination of weeks of intensive technical assistance efforts by ULI members to help Bay Area cities with transit-oriented development plans.

Left: Becky Zegar, STUDIOS Architecture

P hotos by K arl N ielsen

Above (l-r): Sean Brooks, City of Hayward chats with Jeri Richardson-Daines, DMB Redwood City Saltworks.

Above: Hadasa Lee Lev, City of San Jose (center, in blue) and fellow TOD MarketPlace attendees listen to Christopher Leinberger’s keynote address.

Right: Leslie Gould, Dyett & Bhatia

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theregistrysf.com 31

activity

Reports commercial leases

City

Lease Sq. Ft.

13951 Washington Ave

San Leandro

Corporation/Dan Bergen 142,200 K/P (Colliers International-Pleasanton)

41490-41494 Boyce Rd

Fremont

99,492

1951 Fairway Dr

San Leandro

3495 Breakwater Ct

Address

Tenant/Rep/Brokerage

Landlord/Rep/Brokerage

Notes

Gahrahmat Properties

Renewal

AMB/Joe Kelly, Rob Shannon (CB Richard Ellis)

Whse/Dist, Expansion

76,000 The Annex/Paul Mueller (Cornish & Carey Commercial)

Loma Verde Properties

Whse

Hayward

Recycling Corp/Greig Lagomarsino, 58,400 Anheuser-Busch SIOR & Rick Keely (Colliers International-Oakland)

WSA Breakwater, LLC/Greig Lagomarsino, SIOR, Mark Maguire & Kevin Hatcher (Colliers International Oakland)

New Lease, 84M

Bayside Technology Park, 46897 Bayside Pkwy

Fremont

47,214

Crossing Automation, Inc/Craig Petersen (NAI BT Commercial-San Jose)

Legacy Partners Commercial

R&D, 12M

6262 Patterson Pass Rd

Livermore

38,259

Wente Family Estates/Mark Triska, SIOR (Colliers International-Pleasanton)

WCV Commercial Properties/Michael Lloyd, SIOR & Mike Carrigg (Colliers International-Pleasanton)

Warehouse, Distribution Direct

2424 - 2450 Davis St

San Leandro

36,600 Trinity Formulas/Mike Barry (CB Richard Ellis)

Mendes Family Trust /Mike Conn & Mike Barry (CB Richard Ellis)

Manufacturing, Direct

201 C St

Hayward

32,562

Customer First Warehouse Services, Inc/Lee & Associates

Custom Freight Systems, Inc/Dan Bergen (Colliers International-Pleasanton)

Light Industrial Sublease

33340 Central Ave

Union City

31,179

Pregis/Conor Famulener (CB Richard Ellis)

Nearon Balch, LLC/Mark Maguire (Colliers InternationalOakland)

Whse/Dist, Direct

23840 Foley St

Hayward

22,300

Primizie Foods/Joe Yamin & Casey Ricksen (Colliers International-Oakland)

Balch Investment Group, LLC/Mark Maguire; Greig Lagomarsino, SIOR & Kevin Hatcher (Colliers InternationalOakland)

New Lease, 124M

41989 Fremont Blvd

Fremont

16,938

99 Cents Only Stores/Fernando Cuebas & Jim Shepherd (Cornish & Carey Commercial)

Lamorinda Development & Investment

Retail

Hayward Commerce Park, 26328-26330 Corporate Ave Hayward

14,000

UASD, Inc./Danny Yu (NAI BT Commercial-San Jose)

ProLogis/Bob Bisnette (ProLogis)

Whse, 38M

8001 Oakport St

Oakland

12,710

Western Truck Parts & Equipment/Kevin Hatcher & Mark Maguire (Colliers International-Oakland)

RSC Equipment Rental/Sean Sabarese & Greig Lagomarsino, SIOR (Colliers International-Oakland)

Sublease, 32M

2600 10th St

Berkeley

11,800

WLC Architects/Grubb & Ellis

Wareham Development/Aileen Dolby & Elena Cohen (Colliers International-Oakland)

New Lease, 120 M

5915 Hollis St

Emeryville

10,275

Advanta Dental/Benjamin Harrison (Colliers International-Oakland)

Hollis R&D Associates/Cornish & Carey Commercial

Renewal, 120M

Bay Bridge Commercial Center, 2401-2471 Peralta St

Oakland

9,628

Starline Janitorial Supply Company/Brian Collins (NAI BT Commercial-Oakland)

Peter Sullivan Associates

Industria, 62M

1999 Harrison St

Oakland

8,878

MCI Metro Access Transmission Services/CB Richard Ellis

Beacon Capital Partners/Ken Meyersieck & Trent Holsman (Colliers International-Oakland)

Renewal, 63M

40460 Encyclopedia Cir

Fremont

8,858

Mshift, Inc/Ben Knight (CB Richard Ellis)

Standard Industries LLC/Joe Kelly & Rob Shannon (CB Richard Ellis)

R&D/Flex, Direct

30502 Huntwood Ave

Hayward

8,100

American Blue Mills

WSB/Bob Ferraro (CB Richard Ellis)

Whse/Dist, Renewal

6001 Shellmound Street

Emeryville

6,432

Wilson, Ihrig & Associates/Matt Currie (CM Commercial Real Estate, Inc.)

TMG Partners/Aileen Dolby (Colliers International-Oakland)

62M

7300 Central Ave

Newark

6,286

Proficium/Chip Sutherland (CB Richard Ellis)

7300 Central Partners/Chip Sutherland (CB Richard Ellis)

Manufacturing, Direct

7305 Edgewater Dr

Oakland

6,240

Wine Commune

RREEF Alternative Investments/Kevin Hatcher, Mark Maguire Expansion & Greig Lagomarsino (Colliers International-Oakland)

20967 Cabot Blvd

Hayward

5,001

Uni-Tile & Marble/Mike Conn

Hayward Corporate Center LLC/Bob Ferraro (CB Richard Ellis)

Manufacturing, Renewal

Alameda County

RR Donnelley & Sons/Ben Rojas & Ken Morris (CB Richard Ellis)

Contra Costa County 1225 California Ave

Pittsburg

40,000 Pacific Cushion/Tyler Epting (Cornish & Carey Commercial)

RMR Enterprises

Industrial

2121 North California Blvd

Walnut Creek

33,203

CSEI

California Plaza at Walnut Creek/Breck Lutz, Patrick Reilly & Tom Fehr (Cornish & Carey Commercial)

Office

Empire Commerce Center, 671 Willow Pass Rd

Pittsburg

5,000

Josie Van Fleet/Eric Rehn, CCIM & Thomas Caple (NAI BT Commercial-Walnut Creek)

Empire Commerce Center, LLC/Eric Rehn, CCIM & Thomas Caple (NAI BT Commercial-Walnut Creek)

Industrial, 60M

801 Tamalpais Dr

Corte Madera

10,500

Home Consignment Center/Rusty Cohan (Cornish & Carey Commercial)

801 Tamalpais Dr LLC

Retail

161 Mitchell Blvd

San Rafael

7,500

Virtual Space Entertainment/Brian Eisberg (Orion Partners)

Yulupa Partners/Steven Leonard & Brian Foster (NAI BT Commercial-San Rafael)

Office, 60M

1099 D St, Suites 100 & 205

San Rafael

6,070

City of San Rafael Police Dept./Theo Banks & Nathan Ballard 1099 D Street, LLC/Theo Banks & Nathan Ballard (Keegan & Coppin Co., Inc.) (Keegan & Coppin Co., Inc.)

Office Space

160 King St

San Francisco

51,871

Brown & Toland Physician Svcs. Org./Frank Fudem (NAI BT Commercial-San Francisco)

American Assets/Jim Durfey (American Assets)

Office, Renewal, 84M

185 Berry St Wharfside Bldg

San Francisco

37,057

Cisco/Jones Lang LaSalle/Jim Dublin & Michelle Borchard

RREEF Alternative Investments & McCarthy Cook & Co/ Richard B. Hayes (McCarthy Cook & Co)

Expansion

55 2nd St

San Francisco

19,997

LookSmart/Cushman and Wakefield

KPMG/Phil Tippett (CB Richard Ellis)

Office, Sublease

Marin County

San Francisco County

32 theregistrysf.com

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commercial leases Address

City

Lease Sq. Ft.

Tenant/Rep/Brokerage

Landlord/Rep/Brokerage

Notes

555 Mission St

San Francisco

14,718

Novak Druce & Quigg LLP/Steve Barker (Studley-San Francisco)�

Tishman Speyer/Bryan Courson & Frank Fudem (NAI BT Commercial-San Francisco)

Office, 75M

Design Center II-West Bldg, 600 Townsend StWest Bldg

San Francisco

13,330

Conrad Imports/Scott Mason (NAI BT CommercialBurlingame)

Bay West Development

Office, Renewal, 54M

185 Berry St Wharfside Bldg

San Francisco

11,189

iCrossing/Cushman & Wakefield/J.D. Lumpkin

RREEF Alternative Investments & McCarthy Cook & Co./ Richard B. Hayes (McCarthy Cook & Co)

Renewal & Expansion

149 New Montgomery St

San Francisco

11,087

Wikimedia/Grubb & Ellis Co.-San Francisco

Monahan Parker et al/James Chesler (NAI BT CommercialSan Francisco)

Office, 60M

410 Townsend St

San Francisco

10,333

Playdom/Phil Tippett & Luke Ogelsby (CB Richard Ellis)

PMI Properties/Mike McCarthy, Mike Monroe & Brian McCarthy (Colliers International-San Francisco)

New Lease

410 Townsend St

San Francisco

9,874

Zendesk/Donnette Clarens, Elizabeth Hart & Jack Troedson (Cornish & Carey Commercial)

410 Townsend LLC

Office

410 Townsend St

San Francisco

9,797

Sony/Shap Roder & Scott Nykodym (CB Richard Ellis)

PMI Properties/Mike McCarthy, Mike Monroe & Brian McCarthy (Colliers International-San Francisco)

New Lease

410 Townsend St

San Francisco

9,438

Eventbrite/Travis James & Derek Johnson (Jones Lang LaSalle)

PMI Properties/Mike McCarthy, Mike Monroe & Brian McCarthy (Colliers International-San Francisco)

New Lease

Santa Mateo County Crocker Industrial Park, 435 Valley Dr

Brisbane

194,334 Williams Sonoma, Inc.

State Teachers Retirement Sys/Randy Keller & Marshall Hydorn (NAI BT Commercial-Burlingame)

Whse, Renewal, 36M

238-242 Lawrence Ave

S San Francisco

Aviation Ground Logistics Enterprises, I/ 40,420 Evergreen Matt Squires (NAI BT Commercial-Burlingame)

John C. Nickel Properties/Marshall Hydorn & Jason Cranston (NAI BT Commercial-Burlingame)

Whse, 48M

8000 Marina Blvd

Brisbane

25,028

Archon/Ben Paul & Mike Moran (NAI BT Commercial-Burlingame)

Office, Renewal, 12M

599 Seaport Blvd

Redwood City

Drilling/Ben Paul & William Syme 22,000 Potter (NAI BT Commercial-Burlingame)

Port Of Redwood City/Ben Paul & William Syme (NAI BT Commercial-Burlingame)

Whse, 36M

Oyster Pt. Business Park, 375 Oyster Point Blvd

S San Francisco

16,800

Publishers Circulation

Shorenstein Realty Investors Nine, LP/Randy Keller & Matt Squires (NAI BT Commercial-Burlingame)

Whse, 24M

Peninsula Corporate Ctr, 805 Veterans Blvd

Redwood City

15,417

Palo Alto Medical Foundation/Mike Connor & Ron Himes (NAI BT Commercial-Palo Alto)

Harvard Investment Co.

Office, Renewal, 60M

Oyster Pt. Business Park, 385 Oyster Point Blvd

S San Francisco

14,821

Cryscade Solar/Randy Keller & Matt Squires (NAI BT Commercial-Burlingame)

Shorenstein Realty Investors Nine, LP/Randy Keller & Matt Squires (NAI BT Commercial-Burlingame)

R&D, 36M

Bayshore Technology Park, 1400 Bridge Pkwy

Redwood Shores

11,620

Yottamark/Simon Clark (Grubb & Ellis Co-San Francisco)

Prudential Investment Mgmt./Randy Keller & Mike Moran (NAI BT Commercial-Burlingame)

Office, 36M

255 Shoreline Dr

Redwood City

5,893

Fourth Dimension Software/Andrew Peceimer (Coldwell Banker Commercial)

Ignite Associates/Joan Stein (CB Richard Ellis)

Office, Sublease

Santa Clara

38,256

Sarpa-Feldman Enterprises, Inc.

AMB Property Corporation/Jim Kovaleski & Kalil Jenab (NAI BT Commercial-San Jose)

Industrial, 35M

Montague Corporate Center, San Jose 2520 Junction Ave

34,282

International Rectifier

South Bay Development Company/Kalil Jenab & Aaron Fritz, CCIM (NAI BT Commercial-San Jose)

R&D, 64M

1401 - 1421 McCarthy Blvd

Fremont

31,165

Crossbow Technology/Marty Morici (Colliers International-San Jose)

Rreef/Paul Lyles, Chip Sutherland & Bob Steinbock (CB Richard Ellis)

R&D/Flex, Direct

North First Corporate Center, 2940-2960 First St, N

San Jose

24,630

Zebra Enterprise Solutions Corp

South Bay Development Company/Kalil Jenab & Aaron Fritz, CCIM (NAI BT Commercial-San Jose)

R&D, 67M

285 Hamilton Avenue

Palo Alto

19,562

Ning/David Hiebert (NAI BT Commercial-Palo Alto)

Thoits Bros Inc./Jack Troedson & Rod Scherba (Cornish & Carey-Palo Alto)

Office, 29M

620-630 Alder Dr

Milpitas

13,722

Pliant Technology/George Fox (Studley)

Rreef/Bob Steinbock, Chip Sutherland & Paul Lyles (CB Richard Ellis

R&D/Flex, Renewal

735 Emerson St

Palo Alto

11,250

Jive Software/Cresa Partners-San Jose

Harrington, Thomas E. Trustee/David Hiebert (NAI BT Commercial-Palo Alto)

Office, 35M

Embarcadero Corporate Center, 2465-2483 Bayshore Palo Alto Rd, E

10,540

Luminescent Technology

Embarcadero Capital Partners/Mike Courson & Mike Connor (NAI BT Commercial-Palo Alto)

Office, Renewal, 23M

Shopping.Com/Jeffrey Black (CB Richard Ellis-San Jose)

Santa Clara County 2170 Martin Ave

2540 N First St

San Jose

7,018

Siemens Enterprise Communications Inc/Aaron Fritz (NAI BT Commercial)

LBA Realty/Rob Shannon (CB Richard Ellis)

Office, Direct

Pearson Building, 1860 Embarcadero Rd

Palo Alto

6,285

Nelson Capital/Marcus Wood (NAI BT Commercial-Palo Alto)

Stanford Federal Credit Union

Office, Renewal, 51M

Benicia

13,930

AREVA NP Inc/Eric Rehn, CCIM (NAI BT CommercialWalnut Creek)

Walton CWCA Benicia Warehouse 21 LLC/Philip Garrett & Brooks Pedder (Colliers International-Fairfield)

Industrial, 36M

5550 Skylane Blvd

Santa Rosa

35,607

State Water Resources Control Board/Brian Hensley (Dept. of General Services-Real Estate Services Division)

Space Brigitte Grabisch/Shawn Johnson (Keegan & Coppin Co., Inc.) Office Renewal, 25 M

3414 Regional Parkwy

Santa Rosa

11,240

NAK Engineering, Inc./Vic Shellenberg (Keegan & Coppin Co., Inc.)

C & S Partners, LLC/Mike Flitner & Kevin Doran (Keegan & Coppin Co., Inc.)

Industrial Space, 24 M

3660 N. Laughlin Rd

Santa Rosa

10,661

Sirrus Technology/Jeffrey Wilmore & Dave Peterson (Keegan & Coppin Co., Inc.)

CORE Realty Holdings/Jeffrey Wilmore & Dave Peterson (Keegan & Coppin Co., Inc.)

Office-Flex Space

1250 Mendocino Ave

Santa Rosa

8,800

The Sewing Shop, LLC/Ron Reinking (Orion Partners Ltd.)

Bill Ronchelli/Dino D'Argenzio & Bill Faherty (Keegan & Coppin Co., Inc.)

Retail Space

Solano County Benicia Industrial Park, 5300-5363 Industrial Wy SonomaCounty

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theregistrysf.com 33

activity

Reports commercial sales

City

Property Size

Buyer

Seller

Price

Product Type

Brokers

San Ramon

30,185 sf

Elena Sartor

David Grieve, ACV OD

$6,906,900 reported

by Loopnet

Retail

Elizabeth Akers, First Street

595 Redwood Hwy Frontage Rd

Mill Valley

65 acres

Valley Locksmith and Safe595 Redwood Highway LLC, Plano

Ferrari of Maserati/SF

undisclosed amount

Retail

N/A

225 Miller Ave

Mill Valley

64 acres

Schow Family Trust

Royston Hanamoto Beck and Abbey

$2,580,000

Office

N/A

1300-1326 Grant Ave

San Francisco

15,800 sf, 13 units

FRE 473 LLCSteve Bramble

REF SF Properties LLC

undisclosed amount

Retail

N/A

2265 Larkin St 23

San Francisco

13,650 sf, 23 units

Mehan Properties LLCTina Mehan

REF SF Properties LLC

undisclosed amount

Multi-Family

N/A

2465 Chestnut St

San Francisco

11,646 sf, 12 units

Yelena Glezer

Lynn Living Trust

$4,150,000

Multi-Family

N/A

2201-2209 Irving St

San Francisco

11,500 sf, 10 units

Irving Street Properties Peninsula Financial Corp LLC

$3,820,000

Retail

N/A

1856 Pacific Ave

San Francisco

9,594 sf, 11 units

Roman Knop

Richard Corsetti Trust

$3,600,000

Multi-Family

N/A

466 14th St

San Francisco

7,800 sf, 12 units

Yat-Pang Au, Valencia Flats LLC

Trophy Properties VIII LLC

$3,600,000

Multi-Family

Stephen Pugh, Alain Pinel

925 Pierce St

San Francisco

7,560 sf, 13 units

Thomas Iveli

Trophy Properties VIII LLC

$2,025,000

Multi-Family

Stephen Pugh, Alain Pinel

5000 Shoreline Ct

South San Francisco

141,360 sf

Perry Goldman, Areus Inc.

Marilyn Franklin, CPRE-1 SSF LLC

undisclosed amount

Office

N/A

1840 Ogden Dr

Burlingame

14,700 sf

Joyce Chiang

Magomed Magomedov, Burlingame Hills Manor LLC

$7,180,000

Office

N/A

91 Westborough Blvd

South San Francisco

12,484 sf

Fred Lui

Elie Mehrdad

$3,200,000 reported

by Loopnet

Office

N/A

445 Broadway

Millbrae

4,256 sf

Jie Chen

Rasmi Zeidan

$1,700,000

Industrial

N/A

1348 Burlingame Ave

Burlingame

.17 acres

Chanmoon Park

Naghi Hatami-Fard, Hatami-Fard N & I Trust

$5,900,000

Retail

N/A

373 River Oaks Cir

San Jose

191,361 sf, 226 units

Morton Friedkin, FRG Fountains LLC

Avalonbay Communities Inc.

$42,250,000 reported

by Loopnet

Multi-Family

N/A

5935 Rossi Ln

Gilroy

53,277 sf

RFS Properties

Gregory Graves, Entegris Inc. $2,500,000

Industrial

N/A

748 The Alameda

San Jose

7,568 sf

John Nguyen

Thu Pham

Office

N/A

Address Contra Costa County 3111 Fostoria Wy Marin County

San Francisco County

San Mateo County

Santa Clara County

$2,500,000

For-Sale Transaction Data provided by:

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ECCM Associates Engineering, Construction & Contract Management Commercial & Residential

• Project & Construction Management • Building Condition Assessments • ADA Compliance Reviews

broad coverage of bay area real estate news.

relevant.

www.theregistrysf.com current.

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34 theregistrysf.com

no v ember 2 0 0 9

breaking news.

T HE

Re gi s tr y

by the

Numbers

Taking Banks’ Temperatures

San Mateo

United American Bank

San Francisco

Union Bank

San Francisco

Pacific National Bank

Richmond

Mechanics Bank

San Jose

Heritage Bank of Commerce

Fremont

Fremont Bank

San Jose

Bankers, to seek guidance on what is, and where to find, the best data on banks’ exposure to real estate. Below is a snapshot of the financial health of 11 banks, small and large, headquartered in our region or with significant operations here. All information is drawn from public record provided by banks to the federal government and is for the quarter ended June 30, the most current available. Kenny Tang, a senior vice president for East West Bank in Cupertino, recently told a gathering of commercial real estate professionals in San Jose that his bank will finance the sale of notes and real estate it owns. Asked about the thinking behind financing note sales, Tang said, “If we can replace a poor borrower with one with better qualifications, why not?” East West is “getting very aggressive” about ridding itself of nonperforming assets, he said. The bank still does commercial real estate loans, though only a few, under conservative terms. (No single tenant buildings, for instance.) Lots of would-be commercial real estate borrowers show up at its doors; only 5 percent qualify, he said. n

Bridge Bank

San Mateo

Borel Private Bank & Trust

San Francisco

Bank of the West

San Francisco

Bank of San Francisco

San Francisco

($ millions)

Bank of America California

Commercial mortgage-backed securities garner much attention, but banks play a more important part in commercial real estate finance. Banks hold roughly half of the outstanding $3.5 trillion in commercial real estate debt; CMBS accounts for about 20 percent. Most believe commercial real estate won’t recover until banks view the sector with favor again. Bob Schonefeld, chief executive of Mill Valley’s Bridger Commercial Funding, experts in commercial real estate finance, says Bay Area commercial properties are conspicuously absent from Web sites, including the FDIC’s, where bank notes and bank-owned real estate are posted for sale.

That does not mean our region won’t experience commercial real estate pain; it’s just not here yet, he says. “Banks would rather extend a loan than foreclose,” he says. “Some are calling it ‘pretend and extend;’ others say, ‘a rolling loan gathers no loss.’” (Humor, like sugar, helps the medicine go down.) For its commercial real estate finance report, The Registry called Kerry Curtis, senior vice president for research and program development for trade association Western Independent

Total assets

$23,600.0

$81.1

$62,300.0

$1,500.0

Total loans*

23,976.5

43.0

24,900.0

1,285.7

302.3

1,735.8

713.4

1,431.3

1,570.6

31,200.0

11.3

23,800.0

6.6

13,400.0

322.1

45.0

951.0

76.9

231.3

230.6

19,800.0

4.6

176.5

36.4

11,500.0

963.6

257.3

784.8

636.5

1,200.0

1,340.0

11,400.0

6.7

613.3

1.3

706.9

39.7

9.9

45.2

20.7

48.0

43.4

928.6

4.9

607.9

0.2

362.8

9.3

1.0

19.9

1.5

5.8

4.1

520.2

0.7

Loans secured by all other real estate

5.4

1.1

253.9

30.1

8.9

19.7

17.7

32.7

37.8

266.0

4.2

Mortgage-backed securities

0.0

0.0

90.2

0.3

0.0

5.6

1.5

9.5

1.5

142.4

0.0

837.2

0.8

1,490.0

21.7

33.4

43.7

41.9

46.5

56.7

970.4

6.0

28.8

0.0

186.4

1.5

5.6

10.8

6.5

5.4

6.9

78.3

0.0

0.0

0.0

84.4

7.2

2.3

5.9

3.1

0.0

26.6

33.0

9.6

At Dec. 31, 2008

41.4

0.8

742.8

14.6

17.3

13.9

25.0

28.9

24.0

724.7

4.6

At Jun. 30, 2009

68.1

1.1

1,030.0

17.3

17.4

17.6

31.4

21.8

33.9

1,070.0

6.7

Loans secured by 1-4 family residential property Loans secured by all other real estate

Interest income Loans secured by 1-4 family residential property

Past due & non-accruing real estate loans Real estate related charge-offs** REO***

$829.0 $2,300.0

$1,400.0

$2,770.0 $2,100.0 $73,600.0

$414.9

Allowance for loan and lease losses

* Total loans and real estate loans are quarterly averages ** Real estate charge-offs are for calendar year to date *** REO includes construction, land development, land, housing, commercial properties, foreclosures

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theregistrysf.com 35

FinalOffeR Sense on the Dollar

brad zampa

By Sharon Simonson

Commercial real estate financier Brad Zampa has acted as an intermediary in some of the most high-profile property acquisitions, developments and re-financings in the Bay Area in the last decade. As a principal and co-founder of C&C Capital, Zampa has arranged more than $3 billion in structured debt and equity placements on West Coast commercial real estate assets. Zampa’s professional relationships extend to all sources of commercial real estate debt and equity, including life insurers, commercial banks, pension and opportunity funds, investment banks, Fannie Mae and Freddie Mac. A year ago, Zampa formed C&C Asset Advisors in partnership with Erik Doyle, president of regional brokerage Cornish & Carey Commercial. The new company focuses on distressed real estate solutions and serving the emerging class of commercial property owners: special servicers of the commercial-mortgage-backed securities market, banks and other lending institutions. Zampa, who also holds a law degree, recently appeared as a panelist for the Information Management Network’s Forum on Distressed Commercial Real Estate in New York City.

He is 39-years-old.

Are you seeing any signs of life in the CMBS market?

BZ No. However, the good news is that TALF (Term AssetBacked Securities Loan Facility) has unlocked some of the legacy CMBS and tightened spreads considerably. Some form of CMBS will need to emerge to account for the massive debt maturities we will experience over the next several years.

CMBS represents roughly 23 percent of the $3.5 trillion commercial real estate debt market in this country. Banks account for 50 percent, insurance companies are 10 percent, and other sources represent 17 percent. We will see roughly $1.3 trillion in debt maturities over the next four years. While CMBS has been a driver for the industry because it was so plentiful and aggressive, it has now become the poster-child of what went wrong. The delinquent CMBS balance in August was $28.2 billion. That’s more than ten times the low point in March 2007.

The federal government will have to influence the commercial mortgage market more going forward and will need to expand on TALF and PPIP (Public-Private Investment Program).

BZ CMBS will be much more simplistic. Rather than splicing the loan into multiple tranches with multiple owners, it will be less complicated and more transparent. It was way too complicated, and the originators did not have enough skin in the game. Right now the big problem with CMBS is that you can have upwards of 10 players involved in a single mortgage.

Unwinding these deals is extremely difficult because you have competing interests up and down the capital stack.

When did it become apparent to you that we were in trouble in commercial real estate?

BZ It wasn’t obvious until the middle of 2007 that it was going to end badly. I realized it with the Blackstone purchase of EOP (Equity Office Properties Trust) and the flip out to multiple investors and the same products changing hands multiple times for rising prices each time. People were betting on cap-rate compression and didn’t focus on operations. Going forward, operations will be the key. I don’t see rents rising and cap rates falling for a long time.

Do you expect to see some new financial products emerge to serve the commercial real estate market?

What is happening with new originations?

BZ Yes. Most recently there have been several debt funds and mortgage REITs (real estate investment trusts) that have raised capital to buy existing performing and non-performing notes and to provide new senior mortgages. There is a lot of talent on Wall Street that has lost jobs, and those guys have gone out and raised money. There is a huge opportunity to buy and originate senior mortgages. These funds are trying to offer higher leverage, say 65 percent to 70 percent, but are also more than 100 basis points higher in rates than insurance companies and banks.

BZ There are very few, and the box is very tight for what you can do. Recently the life-insurance companies have stepped up a bit and are looking for plain-vanilla deals with best-in-class borrowers and real estate. They want only stabilized assets in major metropolitan markets. Rates on 10-year money are between 7 percent and 8 percent, and leverage is 55 percent to 60 percent. Regional and community banks are focused more on the strength of the borrower than the real estate and are providing three- to five-year terms. But they want very liquid borrowers, best-in-class assets and recourse.

How will the Bay Area fare compared to other U.S. metro areas?

Will people who have given back their properties or not paid debts suffer long term?

BZ The Bay area is resilient because Silicon Valley always reinvents itself. That said, with continued layoffs, unemployment in the double digits, and virtually no venture capital funding, there is still considerable downside. On a positive note, opportunities are going to be plentiful. Even in the last 30 to 60 days I’ve started to see deals finally shake loose. Long-term investors are seeing an opportunity to come into the San Francisco real-estate market for roughly half the price of 2007.

Are the steps we are taking to restructure financial markets and banks going to solve the problems we’ve seen?

36 theregistrysf.com

no v ember 2 0 0 9

BZ Short term, yes, long term, I don’t think so. I know many excellent operators who have lost assets and filed bankruptcy in previous cycles only to come roaring back. Investing is risky, especially in the Bay Area, where the highs are very high and the lows are very low. It’s all timing. You could have done everything right in the last cycle and still gotten burned. If you sold in the first quarter of 2007 you are a hero, but most people did not. While a correction was obvious, nobody foresaw the magnitude of what was coming. n

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