American Financial Realty Buys 215 Fremont

SAN FRANCISCO-American Financial Realty Trust acquired a fully leased 373,500-sf class A office building here for $137.5 million. The building, 215 Fremont St., was sold and then leased back for 20 years by Charles Schwab & Co., which will pay annual rent totaling $10.8 million, or about $28.90 per sf. The annual rental rate represents a capitalization rate of 7.93%.In addition to the acquisition, the Jenkintown, PA-based REIT says it agreed to sublease from Schwab approximately 288,000 sf of vacant space at the class A Harborside Financial Center building in Jersey City, NJ, and to assume certain management functions over an additional 306,000 sf of space in the same building that is also leased to Schwab but has been previously subleased to third party tenants. American Financial’s subleases will terminate in October 2017, the same date that Schwab’s leases with the ultimate owner of the property terminate.In exchange for the sublease agreement described above, Schwab will pay American Financial a “sublease management and standby subtenant” fee of approximately $11.5 million, payable over the next 18 months, including a payment of $4 million upon closing of the transaction. Additionally, Schwab will provide a $40-million rent credit against American Financial’s initial sublease obligations. The rent credit, which will be applied to American Financial’s sublease rent in installments through December 2007, reflects approximately 27.1% of American Financial’s anticipated total rental obligation with respect to the initial 288,000 sf of space it is subleasing. The transaction did not turn out as announced by the company in May. At that time, American Financial said that in addition to 215 Fremont it would purchase Schwab’s leasehold interests in three other buildings in Northern California totaling 450,000 sf. The May announcement did not make mention of the New Jersey property. Darin Buchalter, a partner with Ernst & Young LLP, Charles Schwab’s advisor, tells GlobeSt.com that American Financial was required to announce the transaction in May because it had signed a preliminary letter of intent. At that time, Buchalter says the San Francisco leasehold interests were part of the deal but negotiations were still ongoing. The ultimate change in the deal composition “had everything to do with (Charles Schwab’s) corporate strategy and very little to do with real estate dynamics,” says Buchalter. Looking forward, Buchalter says this type of asset and liability transfer transaction is something that will continue to occur. “It’s a way for investors and users of real estate to meet common objectives,” he says.According to SEC filings, Charles Schwab formed a trust in 2000 to finance the $245-million acquisition and renovation of 215 Fremont–an arrangement commonly known as a synthetic lease. In 2003, as a result of Financial Accounting Standards Board Interpretation (FIN) No. 46, the company was forced to consolidate (record the assets and liabilities on the balance sheet) the variable interest entity. The $235-million note for the project carries a variable-rate and matures in June 2005. The interest rate on the note was 1.58% at Dec. 31, 2003, and ranged from 1.54% to 1.82% during the year. The building and land had been pledged as collateral for the note payable. At Dec. 31, 2003, the carrying value of the building and land was $218 million (net of accumulated depreciation of $27 million). Additionally, the company has guaranteed the debt of the Trust up to a maximum of $202 million. It is likely that American Financial used the proceeds from the sale of the property to pay off a portion of the note. Muriel Lange of American Financial IR was not immediately available Tuesday for comment.