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Island Corportate Center to Be Placed in Receivership

Day-to-day operations of Island Corporate Center and 10 other Puget Sound office buildings will be handed over to Kirkland-based Talon Portfolio LLC on July 9 after the owner defaulted on loan repayments in April.

Island Corporate Center and 10 other commercial office buildings in Bellevue, Kirkland and Seattle will be under new day-to-day management after a receiver was appointed in King County Superior Court on Monday.

King County Superior Court Commissioner Nancy Bradburn-Johnson ordered on July 2 that Kirkland-based real estate investment firm Talon Portfolio LLC will act as custodian of the properties, effective July 9. The current owner, a Goldman Sachs-affiliated partnership called Whitehall Street Global Real Estate, defaulted on its commercial loan obligations to creditors Credit Suisse-First Boston on April 9.

The Puget Sound Business Journal reports that Whitehall owned a total of 11 office buildings totaling 2.6 million square feet of prime office space and the commissioner's order could result in renegotiated market-rate rents, tenant improvement and property upgrades.

Business owner John Kuder of , a local on the first floor of the Island Corporate Center, said the demise of Whitehall was expected after the huge downturn in real estate values during the Great Recession.

Whitehall amassed its portfolio of office properties at the market's peak in 2007 for a price of $900 million, according to court records. Island Corporate Center was purchased for $42 million. Its assessed value, according to the King County Assessor's Office, had fallen to $25,426,000 by 2010.

"It's encouraging that they have someone who will base leases on market value and that they treat it like a legitamately 'Class A' building," he said. "It seems as if nothing has been rented out for some time, and there's vast amounts of empty space here."

Kuder said despite attractive offers to relocate to Seattle, he kept offices here because his clients and staff enjoyed the relative ease of driving to Mercer Island and parking a few feet away from his door for free. But that hasn't been true for all businesses in the building. The office next to his, Suite 120, has been vacant for over 5 years.

Built in 1987 and located at 7525 SE 24th Street, the Island Corporate Center is Mercer Island's second-largest office building and holds 106,899 square-feet of "Class A" office space. The building makes up roughly 1/5 of Mercer Island's estimated 500,000 square-feet of office space, said Amber Bergin, an analyst at commercial real estate firm Cushman Wakefield. Island Corporate Center currently maintains a 70-percent occupancy rate, while the rest of Mercer Island is estimated at 88 percent.

There are 26 businesses currently located in the building. Twelve offices are currently available for leasing, according to commercial real estate broker Jones Lang Lasalle, at $33.60 per square-foot.

Lory Lybeck, managing partner of lawfirm , said he relocated his business from the troubled building in May 2011. Shortly after the building was purchased, he said, it became obvious that the building's owners were in trouble and the needs of his business weren't being met.

"I think they were less responsive to tenant needs," he said. "It was obvious that it was unsustainable. It seemed that, about 14 months ago or longer, a change in ownership was inevitable. When you have a business that doesn't run well, it's not worth investing in."

Lybeck & Murphy is now located at 7900 SE 28th Street on the top floor of the Chase Building, managed by local commercial real estate firm .

"They're very nice people, very responsive and a great landlord," he said. "We couldn't be happier."

Jerry Gropp Architect AIA July 05, 2012 at 10:37 PM
. One of our nicest, best-designed office buildings. I'm really sorry to see this financial happening. J-
Kendall Watson July 06, 2012 at 03:00 PM
The New York Times has an excellent piece in this morning's paper by Floyd Norris that provides some background on the continuing fiscal crisis facing commercial real estate. Notably, the story discusses at length one of Mercer Island's other large landlords, Pinnacle — which owns Shorewood Heights Apartments (and the problems that they face).
Kendall Watson July 06, 2012 at 03:01 PM
Oh, sorry. Here's the link to that NYT story: http://www.nytimes.com/2012/07/06/business/bad-mortgage-loans-burn-investors-and-tenants-high-and-low-finance.html?pagewanted=all
Ira B. Appelman July 06, 2012 at 03:54 PM
WHAT CRISIS? Some investors made some very risky investments taking on too much debt. "Everyone's doing it" isn't a reasonable excuse. They were doing it to reap huge profits. Now the buildings will be sold at a deep discount, the risky investors will be cashed out, and new investors will take over. That's the way the market should work, and we should make sure the losses aren't somehow shifted to the government (that is, to us), as the losses were shifted in the Wall Street debacle. Careul investors who didn't take on large debt, weren't expecting to get huge profits, and maintained reserves to get through difficult times, will do just fine. Many years and many companies ago, the Shorewood ownership turnover began. I think the City Council's rezoning to allow more building there was a factor. Long time residents, who had been residents longer than the councilmembers, came to a council meeting to complain that rents were being significantly raised by the new owners, forcing the long time residents off the Island. The City Council couldn't care less and refused to do anything. Why is it a CRISIS when the wealthy may suffer a disadvantage, but it's business as usual when the average citizen suffers?
Kendall Watson July 06, 2012 at 04:08 PM
Ira, I don't think characterizing the New York Times story as reporting on the "fiscal crisis facing commercial real estate" is inaccurate. Conversely, your comments "Why is it a CRISIS when the wealthy may suffer a disadvantage" assumes that these investors in the Island Corporate Center are, without qualification, "wealthy". I don't know that — and I'll bet you don't, either. The story quotes a commercial mortgage analyst stating "Only 28 percent of the loans from 2007 due to mature in 2012 managed to pay off in full," after stating at the outset of the story that delinquency rates in 2007 were at record lows. The article goes on to say that investing in the 2012 maturities was the "worst time to do so." Again, I don't think saying that is a "crisis" is an overstatement or inaccurate.
Kendall Watson July 06, 2012 at 04:13 PM
Obviously, I reported the side of the story you seem to be emphasizing, that market forces will punish the risky investors (Goldman Sachs/Whitehall) and restore balance by rewarding new investors (yet to be determined, no B'rptcy filing yet). And I gathered the perspective of two local business owners who may (or may not) reap a benefit from this market shift.
Ira B. Appelman July 07, 2012 at 04:31 PM
Hi Kendall: Exactly how much would you like to bet that "I don't know" the investors in Island Corporate Center are wealthy? The Wall Street Journal has an excellent piece describing the investors in Whitehall: http://online.wsj.com/article/SB124235434122122561.html. These private equity firms are required to file with the Securities Exchange Commission. On page 4 of their filing (http://www.sec.gov/Archives/edgar/vprr/07/9999999997-07-028328), it shows that the minimum investment is $5,000,000. Please forward whatever you were willing to bet.
Kendall Watson July 07, 2012 at 05:43 PM
Well, a humble pie slice for me. The SEC filing doesn't necessarily mean people of moderate means didn't invest the $5,000,000 — those investors are often involved via pension funds, as the WSJ describes. The key paragraph that confirms you're right is the second to the last one: "Many Whitehall investors are wealthy individuals who have hired Goldman to manage their money. Institutions including those that manage Pennsylvania's school-teacher pensions and Wisconsin's public-employee pensions have invested with Whitehall as well, but neither has money in the 2007 fund." Well done, Ira. We'll figure out what I owe you later. Meanwhile, while I was wrong on this specific fund, the point remains that many of us of moderate means with retirement investments are potentially exposed to this broad, systemic liability — depending on the types of investments you have, of course.

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