May 12, 2009
The developers behind Sunnyvale City Center have run into a brick wall as far as financing is concerned, and now they want the government’s help to get the project back on track. The Mercury News is quoting Peter Pau, the principal behind Sand Hill Property Company as wanting the city to essentially act as a co-signer (at least that’s what it sounds like) to help get the project back on track.
Pau said that the city could help the developer secure construction loans by acting as a partner or backer, providing some “incentive” or “encouragement” to Sand Hill’s lenders. He said that he does not support taking money away from public works projects such as those in the Sunnyvale Works plan.
He doesn’t support taking money away from public works? How nice of him. The reality is that Peter Pau is only a small piece of the pie when compared to his partner in the deal, RREEF. The two acquired the Sunnyvale Town Center site at the peak of the market, around April 2007 for a rumoured $80-90 psf. As the market continued to deteriorate, the developers pushed forward on the project. The writing has been on the wall for quite some time and it didn’t take any real expertise to figure out that retail and office rents were not sustainable and soon would be on the way down along with the economy, but hey if the lenders were willing to lend, the developers were willing to build.
I don’t blame SHPCO and RREEF for trying to get the city on board to finish out the project, but the handouts are out of control. In the good ‘ole days when the concept of risk ruled the day, the developers would default, the property would be foreclosed on, and another developer would step in and finish out the project at a lower basis and get the space leased up at rents more in line with the marketplace. Getting this project finished out at the current cost doesn’t make a whole lot of sense, since it was probably acquired upon the premise that the developers could get $48-60 NNN retail rents, and $40 NNN office rents, both of which are numbers that are not representative of today’s market. Who knows what they penciled for the residential units. Last I heard they were trying to just do the facade and not build out the interiors.
The other issue is that this isn’t the only project SHPCO is likely facing some difficulty with. They are also the developer behind the Main Street mixed-use project in Cupertino, a project they are in bed with Principal Real Estate Investors (PREI) and Bank of America on. In that deal, SHPCO also has very little “skin in the game”, so if that ends up going sideways Principal and BofA will be left holding the bag, though strategically it is a more solid asset in my opinion in terms of location, demographics, and scarcity. Still, I suspect that 17.4 acre site has lost some 35-40% of its value since it was acquired by Sand Hill Property Company for $65M in early 2008.
- Hammer Dropping on Sunnyvale Town Center
- NAILED: Sunnyvale Town Center
- New Owners Squeeze Market
- RREEF Portfolio Under Distress
- Cupertino Approves Main Street Project