Region's biggest office landlord pursues 'strategic default' to modify loan

Here's more evidence of the Seattle office market's troubled state:

The region's biggest office landlord, which already defaulted on its loan on the Columbia Center, is playing a high-stakes game of chicken over another mammoth loan it took out three years ago to buy nine more office towers or complexes in Seattle and Bellevue.

Boston-based Beacon Capital Partners borrowed $2.7 billion to buy the Seattle-area properties and 11 others in the Washington, D.C., area in 2007, at the height of the real-estate boom. The package included the 47-story Wells Fargo Center in downtown Seattle and the 27-story City Center Bellevue in downtown Bellevue.

Now, according to a recent report by credit-rating agency Standard & Poor's, Beacon says that in 2010, after subtracting expenses of operating the 20 buildings, its rents from the properties will cover just 20 percent of its debt payments.

And Beacon says it isn't willing to pump any more of its own money into leasing, improving or paying debt on the buildings without a "meaningful loan modification," according to the rating agency.

Standard & Poor's analysts Barbara Hoeltz and James Digney wrote that "due to imminent default," handling of the loan was transferred April 7 to a "special servicer" who deals with troubled debt.

But real-estate observers in New York and Seattle said it's not a sign of desperation, but most likely a move by Beacon to get the interest-only loan modified and extended well before it matures in May 2012.

"We're seeing a lot of these 'strategic defaults,' " said Ben Thypin, senior market analyst with Real Capital Analytics, a commercial real-estate research firm in New York. "Beacon could probably pay the mortgage, but the properties are worth less now, and they don't want to make payments based on outdated values."

Beacon has plenty of cash, said Sven Goldmanis, partner at Bellevue brokerage Regency Group. "But if they're paying the bills on time," he said, "then nobody's going to adjust anything."

A Beacon spokesman declined to comment. But a person familiar with Beacon's thinking said the firm is indeed working to renegotiate the loan, not walk away from it.

The debt's transfer to the "special servicer" came at Beacon's request; it was required before restructuring talks could start.

In addition to Wells Fargo Center and City Center Bellevue, the Seattle-area properties in the loan portfolio include the 23-story Key Center and 16-story Plaza Center, both in downtown Bellevue, and the Sunset North complex in Eastgate.

Also part of the package: Beacon's 63 percent interest in downtown Seattle's 55-story 1201 Third Avenue, known until recently as the Washington Mutual Tower.

Beacon bought those properties, the Columbia Center and four other Seattle-area office buildings — all once part of the Equity Office Properties portfolio — in April 2007 in the biggest real-estate transaction in the region's history.

Each of the nine properties was between 92 and 100 percent leased, according to loan documents prepared at the time. Since then, occupancy has plummeted in those office buildings and across the region.

More than 25 percent of the space in the Wells Fargo Center and 30 percent of the space in City Center Bellevue is listed as available on Officespace.com, a commercial real-estate database.

Beacon bought the buildings anticipating the Seattle office market would remain strong and rents would rise, said Josh Stuart, an associate at brokerage Flinn Ferguson, which represents office tenants.

Instead, he said, Beacon's buildings "are struggling with some massive losses" as many tenants downsize or relocate to other buildings.

The $2.7 billion loan Beacon took to buy the buildings was split into eight smaller notes that were repackaged with other real-estate loans and sold as commercial mortgage-backed securities by Morgan Stanley, Bear Stearns, Wachovia Bank and Bank of America.

Status reports filed this month by the administrators of each of those securities packages indicated Beacon had made monthly interest payments at least through March.

Real Capital Analytics' Thypin and Manus Clancy, senior managing director of New York-based Trepp, which tracks commercial mortgage-backed securities, said Beacon's bid to modify the loan stands a good chance of succeeding.

"It's another case of loans being made very late in the real-estate cycle that from a valuation standpoint were real reaches," Clancy said.

Partly because of that disparity in value, lenders don't want to foreclose on office towers. And a big borrower like Beacon has more leverage than a homeowner who's underwater on his house.

Beacon financed its largest 2007 Seattle-area acquisition, the 76-story Columbia Center, in part with a separate $380 million loan, also packaged into commercial mortgage-backed securities.

A report filed last week by that package's administrator, Wells Fargo, indicated Beacon hasn't made a payment since early February, and the loan is now two months delinquent.

Eric Pryne: 206-464-2231 or epryne@seattletimes.com