The buildings were part of the 119-building, 5 million-sf, 70%-leased Peery Arrillaga portfolio that Rreef and GE acquired in 2006 for approximately $205 per sf. The 20-building package being re-traded is approximately 80% occupied and includes one and two-story, mostly single-tenant research and development buildings constructed between 1962 to 1985, according to one local institutional-quality investor who knows R&D buildings and reviewed the offering memorandum.
Nearly all of the buildings are located in Sunnyvale and more than half of them are in the vicinity of highways 237 and 101. The two buildings not in Sunnyvale are next to the San Jose International Airport.
Rreef, a pension fund advisor for the likes of CalPERS and CalSTRS, initially hoped to achieve a sale price of $215 per sf, which would have totaled $86 million, according to multiple brokers. Despite the package's higher occupancy, the buildings are some of the least attractive assets in the larger portfolio--the kind of assets that are harder to sell in an uncertain economy, one local rehab specialist tells GlobeSt.com.
"The Perry-Arrillaga portfolio felt like a good deal at the time," he says. "But Rreef wanted to do one thing with it and GE wanted to do another, so there were conflicting capital requirements. There was a big debate on what assets would be sold and they settled on selling their lower-image stuff. While Bay Area fundamentals are OK, selling lower-image product at this time is difficult; it appears they are going to get less money than they planned and will try to make it up elsewhere in the portfolio."
Another source tells GlobeSt.com that when GE missed its first quarter numbers people pointed to the real estate department, which had its investments skewed more toward equity than debt. "They are trying to flip-flop that and help alleviate other issues as well by liquidating billions of dollars of assets across the US," says the source. "They are the most diversified company in the world; they had bigger fish to fry."
Rreef used equity from GE and a bridge loan to acquire the Peery Arrillaga portfolio. In July 2006, a few months after closing on the portfolio for approximately $1 billion, Rreef America REIT III closed on a $700-million acquisition financing that took out the bridge loan.
The seven-year loan includes a portion with a fixed interest rate and a portion with a floating interest rate, a second industry source tells GlobeSt.com. The loan allows Rreef certain pre-payment options and the ability to release properties from the loan for re-sale while requiring certain loan parameters be maintained, such as the debt service coverage ratio, according to the source.
"You could ask three different people involved and they would come up with a different number for what the ratio is," the source says. "It was a very difficult transaction from a lender's perspective because the vacancy in the portfolio and a significant amount of above-market rents."
JP Morgan Chase Bank provided the bridge and permanent financing and was expected to securitize the current loan. GE reportedly is offering to provide some carry-back financing for the deal. A spokesman for Rreef could not be reached for comment. CB Richard Ellis has the disposition assignment.
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