Colorado Real Estate Journal - December 17, 2014
The energy-efficient EPA building in downtown Denver is the single largest asset in a nine-building General Services Administration-leased office portfolio that is undergoing a workout strategy, according to an analysis by a New York based firm. The buildings, with a total of 1.1 million square feet in five states, are being “reviewed to determine (a) workout strategy going forward,” according to research from Trepp, a leading provider of information, analytics and technology to the global commercial mortgage backed securities, commercial real estate and banking industries. The in-depth report by Trepp provides a rare glimpse of the behind-the-scenes financing of a GSA portfolio. The EPA building at 1501 Wynkoop St. constitutes 28.18 percent of the allocated debt balance of the nine buildings, in which the GSA is the primary tenant. Los Angeles-based Saban Capital, through Denver EPA LLC, purchased the 276,471- sf EPA building in December 2006 for $91.32 million. The EPA is by far the largest tenant in the building, taking 248,849 sf. It is an extremely energy-efficient building that includes such sustainable features as a green roof, solar panels, and extremely efficient heating, ventilation and air-conditioning systems. Other tenants in the building include: • Office Depot, 7,146 sf; • JPMorgan Chase Bank, two leases for a total of 6,636 sf; • Anthony’s Pizza, 2,892 sf; and • MGG Muffins, 1,787 sf. The building is part of a $268.2 million GSA portfolio owned by Saban. The loan was transferred to special servicing in May 2012, as Saban was unable to refinance the debt and it was facing imminent maturity default, according to Trepp’s research. It was returned as a “corrected” loan last March. The loan was broken into two parts: Note A, with $235 million, and Note B, with $34 million. Note A is a first mortgage and Note B represents mezzanine financing. Of Note A, $66.01 million, or 28.18 percent, was allocated to 1501 Wynkoop. Of Note B, $9.58 million was allocated to the Denver building. The maturity on the loan was pushed out by five years to May 2017. That is unusual, said Eric Tupler, who heads the Denver office of Holliday, Fenogolio Fowler, better known as HFF. “Usually, they do not do extensions of more than 12 to 24 months,” said Tupler, who reviewed the Trepp documents at the request of the Colorado Real Estate Journal. The Trepp report illustrates the risks and rewards of buildings primarily net leased to the government, he said. Investors love these GSA deals, “because they know the government will always pay their rent,” Tupler said. On the other hand, when Saban did this deal, it had long-term leases with the GSA that stretched out for 10 or 15 years, he said. “Now, they have got five years or less of some of these deals and so the values of thenet leases have declined,” he said. In other words, a 10-year lease is worth more than a fiveyear lease, he explained. What can happen is that as the leases expire, the GSA can move out and “you go from having a full building to an empty building,” Tupler said. It also is possible, of course, that the GSA will renew its lease or the owner can lease the space to a private company. “But you probably won’t get a 15-year lease,” with a private company, he said. What has not changed during this process is the underlying cash flow or income stream from the properties, he said. From that perspective, the EPA building appears very healthy. Trepp’s research shows that last year the base rent was slightly more than $8 million in the building, which equates to $29.06 per sf. Total revenues were $9.18 million, or $33.20 per sf. Total operating expenses were about $3.1 million, providing $6.08 million in net cash flow.