An affiliate of Newport Beach-based KBS Realty Advisors quietly took over ownership of an Irvine office tower last month after its prior owner defaulted on $85 million worth of loans.
A real estate investment trust overseen by KBS Realty is the new owner of 18301Von Karman Ave., an 11-story office at Von Kar-man Avenue and Michelson Drive, a few blocks from John Wayne Airport.
The 230,615-square-foot building, part of the four-building Von Karman Towers office complex, serves as the headquarters for food supplier Golden State Foods Corp.
The Hearn Co., a Chicago-based real estate investor, was the previous owner of the building. It fell behind on loan payments beginning in July, according to KBS Realty.
Increasing amounts of empty space at the office appear to have been one reason for Hearn’s troubles at the Von Karman office.
The 18301 Von Karman building is about 40% full, according to CoStar Group Inc. Two years ago, its occupancy was closer to 90%.
KBS Real Estate Investment Trust Inc., an affiliate of KBS Realty that was formed in 2005, invested in loans tied to the Irvine property last year.
The trust received a deed in lieu of foreclosure—when a borrower gives back a property to a lender to avoid foreclosure proceedings—and gained control of the Von Karman property in October, according to a quarterly filing made with the Securities and Exchange Commission this month.
Along with a section of Irvine’s Park Place campus that was turned over to Irvine-based LBA Realty LLC by Los Angeles-based Maguire Properties Inc. this fall, the Von Karman building is one of the largest in Orange County to change owners during the downturn via a deed in lieu of foreclosure.
It’s no surprise that the Von Karman building was in distress, not just due to the high vacancy, but because of the near-record price paid for the building in 2007, according to market watchers.
Hearn bought the building from Maguire for a reported $112 million in the summer of 2007, near the peak of the commercial real estate market.
The sale went for a staggering $486 per square foot. That price was more than $100 per square foot higher than most of the other individual office deals made that year.
On a per square foot basis, it’s also believed to be well above the price that developers Hines Interest LP and Crescent Real Estate Equities Co. paid to build the new 2211 Michelson tower, which is part of the Von Karman Towers complex.
Other large Irvine offices that have sold in recent months have traded in the $150 to $300 per square foot range.
The 18301 Von Karman tower was the only local property that Hearn owned, according to the company’s Web site. The company’s still managing the property, according to sources.
The KBS trust invested in debt tied to the building about a year after Hearn bought the building.
KBS Purchases
In June 2008, the KBS trust purchased a $76 million first mortgage loan and a $9 million mezzanine loan tied to the property. The loans were bought at a discount; the trust reported this month that the value of the combined investment in the loans was about $63.7 million.
The loans had a 2017 maturity date, and at the end of 2008 counted an effective annual interest rate of 10.3%, according to filings made with the SEC.
Due to difficulty leasing up the property, Hearn missed its monthly debt service payments starting in July, the KBS trust said in its quarterly report.
KBS Realty is asking monthly rents in the $2.10 to $2.45 per square foot range for space at 18301 Von Karman. The Newport Beach office of CB Richard Ellis Group Inc. is marketing the space.
The Irvine office appears to be the first local building that KBS Realty and its affiliates—which had been among the most active buyers of commercial real estate in the past two years—have acquired in more than a year.
Its last deal here was in mid-2008, when the company bought Dupont Centre, a two-building office complex in Irvine. KBS Realty paid about $80 million for the 250,867-square-foot building, or about $319 per square foot.
KBS Realty was founded in 1992 by Chuck Schreiber and Peter Bren, brother of Irvine Co. Chairman Don Bren.
The KBS trust is the first of four real estate investment trusts that the company has launched or planned to launch since 2005. The initial trust has bought close to 20 million square feet of commercial properties across the country in the past few years, as well as debt tied to commercial buildings.
Another Irvine office that the KBS trust has a loan interest in also could be close to changing hands.
In mid-2008, the company bought a $15 million mezzanine loan tied to Maguire Properties’ 2600 Michelson tower in Irvine. The value of the loan is about $8.9 million, according to the company’s recent financial statements.
Maguire missed a debt service payment due Aug. 11 and said at the time that it didn’t plan to make any future debt payments on the property and several other local offices.
Earlier this month, Bank of America Corp., acting as a trustee on behalf of other 2600 Michelson debt holders, filed suit against Maguire in regards to the property, according to Orange County Superior Court records.
