LA Brookfield Office Tower Goes to Receivership – What is a Ground Lease?
Brokerage, Featured, Los Angeles, News, Office, West, Brookfield Properties, Colliers, Morgan Stanley, Trepp Inc., Wells Fargo
After defaulting on $275 million in CMBS financing for the 920,300-square-foot EY Plaza tower in downtown Los Angeles, Brookfield’s 41-story office building has been placed in receivership.
Colliers announced yesterday that it was awarded the exclusive leasing and property management assignment for the tower at 725 S. Figueroa St. by Gregg Williams of Trident Pacific Real Estate, who was appointed receiver for the property.
Sean Fulp, Head of Office Capital Markets, U.S. Southwest, at Colliers, was named lead advisor and is tasked with ensuring EY Plaza’s value is preserved despite the turbulent market conditions. He is joined by Vice Chair Matthew Heyn and Executive Vice President Ian Gilbert, who will oversee the leasing efforts. Kevin Rude, regional managing director of West Coast, and Tina Minook, regional managing director of California Real Estate Management Services, will lead full-service property management.
READ ALSO: Office Owners Face Financing Dilemma
The news was not surprising as word spread in recent weeks that Brookfield DTLA Fund Office Trust Investor Inc. had not made payments on the 4-acre property’s CMBS package—a $220 million senior loan and $35 million mezzanine loan. Last week, Morgan Stanley and Wells Fargo, the lenders on the CMBS package, filed a lawsuit in Los Angeles County Superior Court asking that the property go to a special servicer, according to The Real Deal.
Brookfield DTLA had also stated in early April it might not be able to make payments on the EY Plaza building along with the 54-story Wells Fargo Center North Tower. Brookfield DTLA has been dealing with distressed assets in its downtown Los Angeles office portfolio since early this year. In February, the fund defaulted on $755 million in loans for the Gas Company Tower and the 777 Tower. To date, Brookfield has defaulted on $1.1 billion in loans for the portfolio.
The 52-story Gas Company Tower at 555 W. 5th St. was sent to receivership last month. Gregg Williams of Trident Pacific Real Estate was also appointed as receiver for that asset and tapped the Colliers team to lease and manage it.
Colliers noted in a prepared statement that Gilbert, who joined the firm in April from Brookfield, is ideally suited to taking on the leasing duties for the two former Brookfield assets.
Regarding EY Plaza, Gilbert said in prepared remarks few office assets of that caliber exist in downtown Los Angeles. He cited the building’s rich history, open-air design and highly desirable walkability as advantages for tenants.
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Fulp agreed, noting in a prepared statement that it’s one of the best buildings in Los Angeles and its value is worth protecting. Fulp said the firm will not sit back and wait for the market to determine the building’s fate. He said it is now very well capitalized and remains one of the premier options for tenants in downtown LA.
Built in 1985, Brookfield acquired the LEED-certified Platinum building in June 2002 for approximately $150 million, according to CommercialEdge data. In September 2020, Wilmington Trust originated a $275 million loan for the property that matured in October 2022, CommercialEdge reported. The building has first-floor retail and a fitness center along with a 904-space multi-level parking structure. As of last week, EY Plaza had 114,905 square feet in available space, according to CommercialEdge.
Brookfield, the Canadian-based alternative asset management firm, also recently defaulted on a mortgage for Class B office properties in the Washington, D.C., area. The properties were located mainly in the Maryland suburbs and were transferred to a special servicer working with Brookfield to execute a pre-negotiation agreement, according to several news reports. Rising interest rates that have more than doubled in the last year were cited as contributing to increased monthly payments for an approximately $161.4 million mortgage held by Brookfield that had initially backed the purchase in 2018 of a dozen smaller office buildings. At the time of the default, Brookfield still owned nine of the assets and had sold three of the assets in the mortgage.
A Brookfield spokesperson told Commercial Property Executive in April the DC-area assets represented a very small percentage of the firm’s office portfolio. The spokesperson noted most of the company’s office properties are Class A trophy buildings that see strong demand globally and benefit from the flight-to-quality trend.
In February, asset manager PIMCO’s Columbia Property Trust defaulted on $1.7 billion of debt tied to an office portfolio that included properties in New York City and San Francisco.
The situation, exacerbated by higher interest rates and lower vacancy rates due to more companies adopting hybrid work schedules or moving to newer, higher-quality buildings, could worsen in the second half of this year and 2024. In February, Trepp reported a total of $40.47 billion in office loans is scheduled to mature by late 2024, consisting of 353 loans backed by 583 office properties.
The office delinquency rate rose to 2.77 percent in April, up from 2.61 percent in March and was up almost 1 percent over a three-month period, according to the Trepp CMBS Delinquency Rate. By comparison, in April 2022, the office delinquency rate was 1.71 percent.
The Trepp Special Servicing Rate for all property types rose 7 basis points between March and April to 5.62 percent. The largest increase in delinquency rates occurred in the office sector, which had a rate of 5.39 percent, up from 4.77 percent in March. Trepp stated the office sector was responsible for 53.4 percent of the new special servicing transfers in April. A total of $2.75 billion worth of CMBS loans were transferred to special serving in April, with office and lodging making up $2.51 billion of the total.
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Colliers has been tapped to lease and manage the downtown property.
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In the simplest form, a ground lease is a long-term net lease (usually 49 years or 99 years) of land including any improvements on the said land. Assets that can be subject to a ground lease include but are not limited to, vacant land, office buildings, and large residential buildings.
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