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Distress at Equastone LLC; Trouble in Milpitas, San Antonio, and Georgia

March 7, 2009

Equastone LogoOver the past several years Equastone LLC was an aggressive buyer of office and industrial real estate. They have limited assets in the Bay Area, but two of their three real estate funds hold real estate which was acquired in large part during late 2006 to 2007.

1331 California CircleTheir assets are concentrated in large part in Texas, but they do have some assets outside that region, including a 100,041 SF R&D building in Milpitas (1331 California Circle) which they acquired for $10.99M ($100 psf) back in July 2007 from South Bay Development. Following the acquisition they began marketing the property for lease at $1.35 NNN and sale at $125 psf and after about 18 unsuccessful months, Equastone switched brokerages and dropped the asking price on the asset to $85 psf ($8,500,000), and the lease rate to $.79 NNN in January 2009.

There are now reports that this isn’t the only Equastone asset that is in trouble. The WSJ is reporting that Equastone has defaulted on River Walk, an 18-story Class A office building that it acquired in San Antonio, TX in 2006. What is eye-catching is the report in the WSJ indicates that the last mortgage payment on that asset was made in November – and that the $14M mortgage had an interest-only mortgage payment of $16,121 per month, implying an annual interest rate of only 1.3%! Whether this is accurate or not, it does underscore the type of financing that was fueling the insanity in the real estate market during 2006 and first half of 2007.

In addition to Equastone running into trouble with the Milpitas and San Antonio assets, there are reports as of mid last month about a third troubled asset in Atlanta, Equitable Tower (aka 100 Peachtree). That asset was acquired for $57M in 2007 using 90% leverage provided by Capmark Financial. The tower, which is only about 50% occupied has since dropped in value by some 30% according to some sources, wiping out Equastone’s equity and putting that deal well under water.

That’s three assets this group is having trouble with, and likely won’t be the last. A quick look at Equastone’s web site shows them having raised three funds, Equastone Value Fund I, II, and III. Fund I seems to have performed, though only less than half of the investments have been realized. Fund II and III are the likely ones to run into the most trouble. According to their site, Fund II consists of 16 investments (including California Circle and Equitable Tower) with no investments realized, and both Fund II and III are comprised mostly of assets acquired in 2006 and 2007 making it much more likely that these two funds will be in severe distress.

Lastly, the CEO of Equastone did an interview with CoStar back in October of 2007. It’s worth a quick read to gain some insight into the company and the type of deals they were doing. An interesting part of the interview comes in the response Equastone’s CEO provided to CoStar when asked about Equastone’s background:

Historically, we were only buying three, four deals a year and we were very, very disciplined and strict with our investment criteria. We were raising money from private, high-net-worth individuals and syndicating each transaction. We were very, very selective to make sure we didn’t have any bad deals.

…”were” is right.

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Categories: Commercial Finance and Lending | Commercial Real Estate Investing | Notable Deals
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MTBiggs March 8, 2009

You know, it’s funny that Equastone finds themselves hitting the stone. I remember back in Portland when Equastone would fly an entourage into town and they would take all the local brokerage houses to the most elaborate steak dinners – wine was flowing, steaks were grilling, and they would sing their song and dance about bringing them deals and that they would buy anything that moves.

Now their investors are left holding the bag. Good riddance.

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