Dividend Capital would gain 11.8 million net rentable square feet in 12 geographic markets, consisting of about 6.7 million square feet of industrial and 5.1 million square feet of office space.

The deal would be the biggest ever for Dividend Capital and "would double if not more than double" the existing size of the REIT's portfolio, points out attorney Tom Sestanovich, a partner in the real estate department at Ervin Cohen & Jessup in Los Angeles. Sestanovich, who represents owners of approximately 18 million square feet of commercial real estate, considers the deal good for the market as well as an indication of how buyers and sellers are thinking these days. Sestanovich outlines other reasons the deal could be good for the distressed assets market: "One, it's showing that the sellers, lenders and owners who are taking back these assets are getting ready to evaluate, value and pool them to sell, ' he says, adding that the extend-and-pretend strategy is wearing thin in 2010, two years or so after lenders began the practice. Dividend Capital made an earnest money deposit of $25 million for the portfolio and, as described in both companies' SEC filings, iStar has agreed to provide the Denver-based REIT with up to $125 million in mezzanine financing if Dividend Capital gets a commitment for senior financing.

The agreement for mezz financing is also telling in that it shows that iStar is "really intent on disposing of this portfolio, ' Sestanovich says. The portfolio is encumbered by $947.9 million in secured, non-recourse term debt that matures next April. Dividend Capital says in its public filings that although it would use the majority of its cash on hand and take on significant debt to acquire the portfolio-and although its leverage ratio will be increased significantly compared to its historic levels-"We anticipate that such a ratio will still be well within the limitation of our charter:' The deal would be consummated through two purchase and sale agreements and would add to a Dividend Capital portfolio that included 79 properties totaling approximately 13 million square feet in 27 geographic markets. For iStar, it would provide some relief from the $3.5 billion in nonperforming loans that it was carrying at the end of the first quarter, which represented more than $42% of the company's total managed loans. Despite improving conditions and the company's efforts to shrink its balance sheet, iStar still has large debt maturities to contend with in 2011 and 2012, CEO Sugarman said in the company's recent conference call.

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