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NAILED: Sunnyvale Town Center

August 28, 2009

Sunnyvale Town Center is in a world of hurt. Lenders have pulled the plug on financing, and contractors are filing mechanic’s liens like they’re going out of style.

This trouble has been looming for some time. RREEF and Peter Pau of Sand Hill Property Co. took the property down back in Q2 of 2007 for some $80 psf. They then began to build a massive project ($750M per Business Journal report) and hit an economic wall. Compound that with the fact that Peter Pau is a very small piece of the deal (single digits), that leaves RREEF in the driver’s seat.

Unfortunately for the RREEF fund undertaking this project, it’s got its hand full with other investments, such as the Peery/Arrillaga portfolio. The fund that holds the Sunnyvale project is in such bad shape that they are working on possibly handing the management reins over to Stockbridge Funds.

A couple of local brokers were interviewed in the article, and they think money is the problem. While on a high-level that may be true since money can solve almost any problem, it’s a simplistic analysis of the situation. The real problem is not that there is no money, it’s how do RREEF and SHPCO find an outfit stupid enough to give them $300 psf to build an office building that will lease for $1.25 NNN. It’s not going to happen in this market. The market has changed. The solution now is not one for the developer to find, but instead one for the bank.

The banks have $108M in loans out (per the article). Their downside risk should the project move forward and flop or linger is a lot bigger than what they stand to lose from just forcing a halt to construction. Take that fact and couple it with the financial malaise the developers behind the project are facing, and you have an answer as to why the banks have decided to stop lending.

At the end of the day, this project will move forward. But what it’s likely going to take is RREEF and Sand Hill Property Co. getting wiped away, and a new developer coming in to move this project forward in cautious and stepped phases with initial focus put on the retail component.

[more from SJ Business Journal]

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Categories: Commercial Construction | Commercial Development | Commercial Finance and Lending | Notable Deals
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