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Originally published October 23, 2010 at 10:00 PM | Page modified October 24, 2010 at 12:34 PM

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Double whammy hits big local real-estate portfolio

A Goldman Sachs affiliate paid $930 million for 11 Seattle and Eastside office properties in 2007 but now — as a balloon payment looms ever larger — it's reeling from plunging real-estate values and emptied cubicles.

Seattle Times business reporter

When investment-banking giant Goldman Sachs bought 11 Seattle and Eastside office buildings and complexes in 2007 — overnight becoming one of the market's largest landlords — there wasn't much talk of risk.

The 2.5-million-square-foot portfolio was almost fully leased, its market value on the rise. Stable, venerable Washington Mutual, the largest tenant, had been locked in for another decade.

A Goldman affiliate, Whitehall Street Global Real Estate Limited Partnership 2007, paid a whopping $930 million for the buildings, borrowing almost all of it.

What's happened since then makes the deal a poster child for the troubles confronting Seattle's commercial real-estate scene.

Today, one-third of Whitehall's local space sits vacant. That includes about half of the biggest building, 34-story 1111 Third Avenue in downtown Seattle, hit hard by WaMu's implosion.

The portfolio's value has plummeted, perhaps as much as 60 percent. Bond-rating agency Fitch estimated it at $342 million in a recent report.

Fitch also predicted the Goldman Sachs affiliate will default when the huge, interest-only loan Whitehall took out in 2007 matures in 18 months and all the principal — about $900 million — must be paid back.

Fitch's somber assessment came a few months after Key Bank, which services the mammoth mortgage, put the loan on its "watchlist," citing the big drop in occupancy.

"It's an early indicator to investors of potential trouble," said Paul Mancuso, a vice president with Trepp, a New York firm that analyzes commercial real-estate debt.

Whitehall's 11 properties, which include two downtown Bellevue high-rises, are better known in Seattle as the Archon portfolio, for another Goldman Sachs subsidiary that manages them.

Goldman declined comment on its Seattle holdings. But it is hardly the only office landlord experiencing financial stress in this era of high vacancies, lower rents and declining property values.

"This is not uncommon in the industry today, unfortunately," said Patrick Callahan, who bought and managed Goldman's buildings for their previous owner, Equity Office Properties.

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• Boston-based Beacon Capital Partners, Seattle's largest landlord, defaulted in March on the loan it took out in 2007 to buy the region's tallest building, the 76-story Columbia Center. Beacon recently got the loan extended.

• Beacon also has been negotiating since spring with its lenders to modify a $2.7-billion loan it took out in 2007 to buy 20 office properties, including nine in Seattle and Bellevue.

The owners of several other prominent Seattle office towers could default when balloon payments on big loans come due over the next few months (see sidebar).

• Developer Opus Northwest last month turned over its new, empty 7th & Madison building to its construction lender to head off foreclosure.

The shakeout is far from over: Nationally, most commercial real-estate loans that originated between 2006 and 2008 are likely to default at maturity, if not before, said Chris Bushart, director of Fitch's commercial mortgage-backed securities group.

Real-estate reshuffle

Goldman's entry into the Seattle office market 3 ½ years ago was part of the real-estate reshuffle of the decade.

In late 2006 Equity Office Properties owned 29 Seattle and Eastside properties. By mid-2007, in a breathtaking series of transactions, it had sold them all. Most were quickly flipped again, even two or three times.

Beacon ended up with 14 of them, including Columbia Center. Goldman bought 15, then sold off four within months.

Most of Goldman's remaining 11 were built in the 1980s. In addition to 1111 Third Avenue, they include 25-story Symetra Financial Center and 21-story One Bellevue Center in downtown Bellevue, and the sprawling, woodsy Bellefield Office Park in south Bellevue.

To finance its purchase, Goldman turned to another Wall Street giant, Credit Suisse. An affiliate of that investment bank loaned Whitehall a total of about $900 million, in two chunks.

The largest, about $750 million, was a two-year, interest-only loan with options for three one-year extensions. Whitehall already has exercised two; Fitch and other observers expect it will exercise the last one next April.

Whitehall also borrowed another $150 million in subordinate, "mezzanine" debt, something like a second mortgage.

Dealings between real-estate borrowers and lenders usually are closely guarded secrets. Outsiders don't know there's a problem until a foreclosure notice is filed.

But all kinds of details are available about the Whitehall Seattle debt. That's because Credit Suisse chose to offer some of it to other investors through commercial mortgage-backed securities.

The bank took about 40 percent of the $750 million first mortgage, pooled it with a half-dozen other big real-estate loans, and sliced the resulting amalgam into bonds.

Before selling those securities, Credit Suisse had to prepare a public-offering statement with details on all the underlying loans. Servicer Key Bank files monthly financial reports on them, also public. Those reports are tracked by rating agencies like Fitch and research companies like Trepp.

They reveal, for instance, that despite the portfolio's high vacancy rate, Whitehall still is making the monthly interest payments on the loan and doesn't seem to be in imminent financial distress.

The loan has an adjustable rate that has fallen steeply since 2007; debt-service costs have dropped accordingly. The buildings' net income still is nearly double what's needed to make the payments, Key Bank said in a recent note.

But that's just the interest. That April 2012 balloon payment looms larger each month.

Losing tenants, and value

Back in 2007 Credit Suisse said the 11 buildings were 96 percent occupied. Washington Mutual alone leased 15 percent, with most of that space tied up until 2017.

In September 2008, of course, federal regulators seized WaMu and sold most of its assets to JP Morgan Chase. The deal allowed Chase to terminate all WaMu's office leases.

No Seattle landlord was hit harder than Goldman. WaMu vacated 288,000 square feet in 1111 Third — half the tower.

"That's a zombie building," one Seattle broker said.

WaMu also emptied more than 60 percent of the space in the smaller, neighboring Second & Spring building. Thanks largely to the thrift's collapse, Key Bank said in its most recent report, just 69 percent of the office space in all 11 Whitehall properties is occupied.

Now Whitehall is losing more big tenants. The regional office of the U.S. Labor Department is relocating from 1111 Third to developer Martin Selig's new 5th & Yesler building. Bellevue College, which leased all of the two-story 10700 Building off Highway 520 for a satellite campus, also is moving out.

Together, those two tenants occupied about 120,000 square feet.

All that empty space has helped drive down the portfolio's value. The King County Assessor appraises the buildings for tax purposes at about $545 million, $200 million higher than Fitch's estimate.

Whatever their value, it's clearly hundreds of millions less than the $900 million Whitehall owes. The Goldman affiliate is unlikely to find refinancing when the balloon payment comes due, Fitch concluded in its report.

If Whitehall does default, the bondholders who invested in those securities Credit Suisse sold in 2007 probably won't suffer losses, Fitch said. Theirs is the most senior debt, and the buildings still have enough value to pay them back.

But investors who hold the rest of the first mortgage and the mezzanine debt stand to lose millions, Fitch's Brushart and Trepp's Mancuso said.

Who are those investors? That's not known. Credit Suisse indicated in 2007 that Whitehall itself had acquired at least some of the mezzanine debt.

Those subordinate creditors could determine how any default plays out, said Callahan, now CEO of Seattle real-estate-investment firm Urban Renaissance Group. If they reach agreement, he said, it's possible the debt could be extended or restructured.

"But you fundamentally need a consensus," he added. "Otherwise you end up in court with a foreclosure."Whitehall still has 18 months before the loan matures, Mancuso noted: "The market can change pretty dramatically in that time frame."

Eric Pryne: 206-464-2231 or epryne@seattletimes.com

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