Bacchus Development is hoping a late 2010 turnaround in Orange County’s commercial real estate market will help sell a trio of office condominium projects in the Irvine Spectrum and help it get out of bankruptcy.
Its main lender has doubts.
Irvine-based Bacchus, a developer of upscale offices for small-business owners, has been operating under Chapter 11 bankruptcy protection since early September after falling behind on payments to San Francisco-based Union Bank for nearly $55 million in loans.
The bulk of troubled loans are tied to the two most recent developments built in the Spectrum by Bacchus: Jeffrey Office Park and the Bacchus Signature Series.
More than 40 of 90 buildings at those two projects are unsold.
Including other loans, Bacchus owes Union Bank close to $76 million, according to court documents.
Bacchus built office condos on land sold to it by Newport Beach’s Irvine Company.
The president and owner of Bacchus is Steven Bren, son of Irvine Co. Chairman Donald Bren.
The size and prominence of Bacchus’ developments—and the Bren family connection—have made the company’s bankruptcy one of the more notable casualties of the local commercial real estate market.
Steven Bren personally guaranteed three loans Union Bank made to the developer, according to the bank.
It has sued Steven Bren for about $79 million on his guarantees, according to court records. The lawsuit was filed before Bacchus entered into sales agreements for $3 million worth of offices, which stand to cut the total debt.
Bacchus has filed a preliminary plan in bankruptcy court in Santa Ana to pay off its debts to Union Bank and perhaps still make a profit on its developments.
The developer is expecting to file a more detailed plan of reorganization with the court soon, according to filings.
Sales Plan
The preliminary plan calls for the developer to use an aggressive sales program to unload all the remaining buildings it has in the next 18 months.
Those sales could bring in $86 million to $100 million in proceeds.
That would pay off all of the secured debt owed to Union Bank and potentially leave more than $10 million for unsecured creditors and the company.
The sales projections depend on the local market shoring up by late next year.
Bacchus projects the market will be flat for most of 2010. But it could see some “reasonable appreciation” during the fourth quarter of 2010 as sales and marketing efforts progress, it said.
The company is “of the opinion that the value of the buildings is currently stable and there is evidence that values may increase in 2010 based upon the anticipated improvements in the local economy and improvements in the credit markets,” Steven Bren said in a court filing earlier this month.
Newport Beach-based Voit Real Estate Services is projecting prices for office sales to fall another 5% to 10% by the end of the first quarter before starting to stabilize.
Prices now are off about 17% from a year earlier, according to Voit’s third-quarter figures.
Bacchus receives “inquiries from buyers almost daily,” Steven Bren said in a filing. With “the assistance of a reasonable marketing effort,” the company should be able to sell off the balance of its buildings for their fair market value, he said.
Jeffrey Office Park, a 20-acre project at Jeffrey Road and the Santa Ana (I-5) Freeway, has about 186,000 square feet of space still unsold, according to court documents.
The company is aiming to sell 32 buildings from now to March 2011 at an average of $280 per square foot.
At the Signature Series, the 18-acre development near Irvine Center Drive and Lake Forest Drive, the developer has about 66,000 square feet of space to be sold.
Those 11 buildings should sell for an average of about $200 per square foot, according to Bacchus’ projections.
Bacchus also owns 11 buildings at the 79-unit Bacchus Office Park, near Irvine Center Drive and Bake Parkway. Steven Bren kept those buildings as an investment and leases them out. They have about $20 million in debt tied to them.
Bacchus is hoping to sell these buildings for $26 million to $31 million, or about $290 per square foot.
Recent court-approved sales at the Signature Series have gone for about $190 per square foot, while deals at the newer Jeffrey Office Park have been closer to $300 per square foot.
Prices are said to be off about 35% to 40% from the other sales at the company’s developments made near the peak of the market.
Lender’s Take
Union Bank appears skeptical of the plan, particularly the pace of sales that Bacchus believes is attainable, as well as the developer’s assumption that the market will rebound.
Factoring in expenses and commissions, the most recent Signature Series sale was closer to $178 per square foot, and it ended up losing the developer about $4 per square foot, according to the bank’s figures.
Once a new appraisal of the projects is completed, the bank intends to contest the developer’s plan for reorganization, Union Bank said in filing earlier this month.
A “Chapter 11 reorganization is not reasonably in prospect and there is no realizable equity in these office parks,” Union Bank’s lawyers said.
Between May and the time of the bankruptcy filing, only one office condo sale closed at the Signature Series, while only two units sold at the Jeffrey Office Park between August 2008 and the bankruptcy filing, the bank said in court filings.
That makes the assumption of Bacchus that it can sell off its remaining buildings in the next 18 months unlikely at best, according to Union Bank’s filings.
