Veritas Defaults on $448M CMBS Loan for San Francisco Portfolio

The largest apartment owner in San Francisco has defaulted on a $448M CMBS loan secured by 62 properties encompassing more than 1,700 apartments in the city.

A joint venture of San Francisco-based Veritas Investments and hedge fund Baupost Group, based in Boston, failed to repay the loan—a cross-collateralized, SASB package known as the Veritas Multifamily Portfolio Pool—when it matured on Nov. 15.

The loan was transferred into special servicing and was reported in December as a non-performing matured balloon loan, according to Fitch Ratings. Veritas declined to exercise a one-year extension option on the loan, Fitch said.

In a statement, Veritas said it would continue to manage the 62 properties covered by the non-performing CMBS loan while the ownership group tries work out a new financial arrangement. According to Fitch, they have yet to present a workout proposal to the special servicer, but “expressed interest in finding a partner to recapitalize the properties.”

Baupost sponsored 90% of the non-performing $448M loan and Veritas the other 10%, according to a KBRA report. The two-year floating-rate loan was structured with a $16.6M debt-service reserve, the equivalent of six months of payment.

According to the report, as of November, the reserve account had been depleted. A $30M capital reserve budget that had been earmarked for renovations also had zeroed out, the report said.

Veritas told Fitch that 12% of the units that back the loan are offline due to ongoing renovations and are expected to be offered for lease soon at market rental rates.

In the company’s statement, a Veritas spokesperson attributed the difficulty with the CMBS loan to the spiraling cost of debt—and to the struggling San Francisco metro, which has never really recovered from the vacancies of the pandemic, first as tech players embraced remote work and more recently as the tech giants have downsized their office footprints in the city.

“The multifamily real estate sector is facing many of the same financial challenges as have been reported on for other asset classes including office, retail and hotel-hospitality right now, including the spiraling costs of debt,” Veritas said.

“While we’ve all seen the stories about office usage going down in the wake of hybrid work, multifamily operators in San Francisco have to contend with even more challenges, including increased city regulation, increased taxes, more pandemic impacts and the rising cost of doing business here,” the statement continued.

Veritas said it remains committed to its portfolio in San Francisco, saying it believes “in the long-term attraction of living in the city and in our character-rich properties.”

Veritas became the largest landlord in San Francisco in 2011 when it bought the Lembi family’s 2,000-unit CitiApartments in a $500M transaction in a venture funded by Baupost.

In October, Veritas made the priciest multifamily acquisition in San Francisco in 2022, a 42-unit Russian Hill property that it bought for more than $33M.