June 2010

Boston firm buys loan at big discount, wins office complex

By Todd J. Behme,
(Crain’s) — A Boston real estate investment firm has gained control of a two-building Oak Brook office complex after buying the loan for about half its $36-million balance.

Davis Cos. obtained 1420 and 1520 Kensington Road, known as the Crossings, through a deed-in-lieu of foreclosure in late March from Alliance Commercial Partners LLC. Davis’ price for the note amounts to less than half of the $41.9 million Colorado-based Alliance paid for the property four years ago.

Davis CEO Jonathan C. Davis declines to specify exactly what his firm paid for the note but says it was somewhat less than the “roughly $20 million” that Commercial Mortgage Alert reported in January was offered by the then-unidentified winning bidder. The loan was originally made by CBRE Realty Finance in 2006 and subsequently became part of a collateralized debt obligation (CDO).

Mr. Davis says his firm, which owns mainly office and medical/life science properties in Massachusetts and Connecticut, plans to be “aggressive” on lease rates and tenant buildout allowances at the 295,000-square-foot complex, which is about a third vacant. This is Davis’ first local acquisition.

Such cut-rate deals for older, Class B buildings will put pressure on rival landlords in the western suburbs who will have a hard time competing because they can’t offer such attractive economics, says James Adler, an executive vice-president with Oakbrook Terrace-based NAI Hiffman, who represents landlords and tenants.

Mr. Adler says several Class B buildings are on the market in the area, particularly in Lisle and Naperville, and he expects those will sell in the mid-$60s per square foot range — roughly what the Crossings fetched. That means the sweet deals tenants have been seeking are more likely to materialize because those owners have a lower cost basis.

“We will start to see tenants start to realize their expectations,” says Mr. Adler, who wasn’t involved in the Crossings deal.

Davis took out an $18.7-million loan on the property in March from TD Bank, part of Toronto-based TD Bank Financial Group. Some of that loan is to be used for improvements and leasing costs, Mr. Davis says.

The loan Davis bought was originally made for $38 million with a maturity of 2011. The original lender, CBRE Realty Finance, was spun off last year from CB Richard Ellis Inc. and renamed Realty Finance Corp.

Lakewood, Colo.-based Alliance handed back another west suburban office building to a lender last year, 373,446-square-foot Highland Pointe in Lombard, and early last year had missed an interest payment on the Crossings.

An Alliance executive declines to comment.

Davis is the majority owner of the Crossings but has partnered with Northbrook-based Arthur Goldner & Associates Inc., which is managing the complex, Mr. Davis says.

Goldner took over management May 1, says Lee Kotler, a vice-president with the firm, which owns and manages real estate.

Mr. Davis says he likes the property’s location and its diverse tenant mix. He adds that his firm got the property “at a significant discount” to replacement cost.

CB Richard Ellis currently leases the complex. Davis is reviewing that contract, Mr. Davis says.

CB Richard Ellis declines to comment.

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