February 2, 2009
Sand Hill Property Company has secured city council approval for its Main Street project in Cupertino. Sand Hill went into contract on the vacant 17.4 acre property in 2007 for $65M ($85 psf) from Hewlett Packard, and closed the transaction in early 2008 through a debt and equity package provided by Principal Real Estate Investors. The propertyy is located between Stevens Creek Blvd and Vallco Parkway, at the intersection of Tantau Avenue. Finch runs through the middle of the property.
The property was previously tied up by Toll Brothers in 2005-2006 and was destined to be a retail and residential project (380 condos + 113K SF of retail space), but Cupertino citizens got the project put on the ballot and overturned the city council’s decision on that project in 2006.
The project Sand Hill has approval for entails:
- Up to 150,000 square feet of commercial use
- 100,000 square feet of office
- 145,000 square feet of athletic club, or alternate option of 36,000 square feet of commercial use
- Up to 160 units of senior housing
- Up to a 250 room, 5-story hotel; a hotel of more than 160 rooms will require amenities including a 400 person banquet hall.
- A .75 net acre park adjacent to Metropolitan along Stevens Creek Boulevard
- Vallco Parkway approved with one lane and diagonal parking along the south side of Vallco Parkway (project frontage only).
- Future conversion of ground floor parking garage space to retail commercial.
Despite the approvals, it is difficult to see how Sand Hill or its financial partner in the deal (Prudential Real Estate) will be able to go forward without further capital injections. The $85 psf paid for the land is now overpriced considering that demand for every aspect of the project (except the park) is now weaker as office, retail, hospitality, and housing are all down from when Sand Hill acquired the property. Based on an $85 psf number, it is likely that Sand Hill was forecasting retail rents in the $50-60 NNN range, office over $36 NNN, and senior housing north of $450-500 psf, not too mention lofty expectations for the
hotel site (another 138-key hotel was also approved by the city council on January 20th to be built at 10165 North De Anza Blvd in Cupertino).
Those rates might be achievable in a couple of years, but Sand Hill will be hard-pressed finding a lender in the US today that will provide funding today without some significant pre-leasing, and additional capital injections to get the LTV down into the range of 50%. Even if Prudential subordinates its entire piece to the construction lender, it’s likely they will still need to come out of pocket and provide recourse in order to arrange constructioning financing.
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