Why a real estate firm bought an S.F. office building it already owns

Why a real estate firm bought an S.F. office building it already owns

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A building at 115 Sansome St. in San Francisco was sold — to a real estate firm that already owned it.

A building at 115 Sansome St. in San Francisco was sold — to a real estate firm that already owned it.

Yalonda M. James/The Chronicle

San Francisco’s office market has been full of surprises in the wake of the pandemic, and an interesting deal that closed last Friday is on the list of eyebrow-raising developments.

Vanbarton Group, a New York-based real estate investment and advisory firm that owns several San Francisco office towers, has been selected in a recent bid to purchase a 14-story beaux arts office building at 115 Sansome St. that hit the market this fall, multiple individuals familiar with the deal have confirmed to the Chronicle. The firm paid about $35 million, or $300 per rentable square foot, for the property, the Real Deal first reported this week.

The caveat: The property already belonged to Vanbarton. 

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Public records show the firm purchased 115 Sansome for $83 million in 2016, and the individuals say it attempted to flip the property two years later, and received offers in the $100 million range, but ultimately decided to hold on to the building.

The deal that closed last week is known as a “discounted payoff,” a situation in which an owner effectively pays off the loan on a property at a discount to its par value. In retiring the loan at a discount, the owner now has an all-equity stake in the building. 

When the pandemic hit, 115 Sansome, like most other office buildings in San Francisco, saw its value plummet as vacancies skyrocketed amid a sweeping shift to remote work for many office-based companies. More than three years after the start of the pandemic, upward of one-third of the city’s offices sit vacant, and the trend of companies generally taking less space than they once required continues. 

The 115 Sansome building was only about half full when it was listed for sale this year, and its occupancy is expected to slip even further by the end of the year, when another tenant is scheduled to vacate.  

San Francisco’s once notoriously high office rents have softened notably since March 2020, and are now well below the rents that tenants of 115 Sansome committed to when their leases were forged prior to the pandemic. One source who was not involved with the leasing of 115 Sansome or recent efforts to sell the building estimated that remaining tenants are likely still paying around $80 per square foot for their spaces, when average market rents are now somewhere in the $60s per square foot range. 

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The conundrum caused the building’s value to drop below the value of the $54 million loan that Vanbarton secured from Bank of America to purchase the property in 2016. 

That loan was set to come due next year. With vacancy continuing to tick up market-wide in the third quarter of 2023, people familiar with the matter say the building’s lender initiated a short sale process for the property in an effort to recoup some of the debt.

Neither Vanbarton nor Bank of America responded to messages seeking comment on the 115 Sansome deal on Friday. 

Erik Hanson, Rob Hielscher and Adam Lasoff of real estate brokerage JLL represented Vanbarton in the deal. The team did not provide comment. 

“Building values today are well below loan values,” said a San Francisco office market broker who was not involved in the 115 Sansome deal and spoke on the condition of anonymity.  “At the direction of the lender, they all agreed — including Vanbarton, the current owner — that they would run a sale process to see what happens.” 

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With a price tag of roughly one-third of what 115 Sansome was worth pre-pandemic, interest for the property was high: Some two dozen offers were made on the building when bids came back in October. Interested buyers ran the spectrum of institutions, high net worth individuals, 1031 exchange buyers (referring to an investment tool that allows investors to exchange one property for another and defer paying a tax on the profits) and even foreign capital, sources said. 

The broker who was not involved in 115 Sansome’s sale said that the deal was “bid up,” or its pricing was increased, given the level of interest received.

“I think it got bid up because of where it is located and what it is — it’s this boutique, cool building, it has the right floor plate size, and I think a lot of people really liked it for what it is,” the broker said.

Vanbarton ultimately threw its hat in the ring.

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“What we understand from speaking with several people who’ve made bids is that Vanbarton  essentially just matched the top price, with no due diligence,” the broker said. 

An interesting aspect of the 115 Sansome deal is that Vanbarton had already invested some $30 million in equity when it acquired the property in 2016, and after paying off its loan at a discount last week, funneled another $35 million into the building. Experts say that having an institutional investor be willing to “double down” on the San Francisco market despite its challenges is a bright spot. 

“It’s indicative that quality and unique buildings in a good location are able to attract demand,” said Derek Daniels, regional research director for real estate firm Colliers. “It’s indicative that institutional capital is chasing investments in San Francisco and local ownership groups see future opportunity in San Francisco’s office market.”

Reach Laura Waxmann: laura.waxmann@sfchronicle.com

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