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Originally published October 24, 2011 at 12:47 PM | Page modified October 25, 2011 at 10:51 AM

Smith Tower owner in default on big loan

The owner of downtown Seattle's well-known and well-loved — but mostly empty — Smith Tower has defaulted on the loan it took out when it bought the landmark in 2006.

Seattle Times business reporter

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The owner of downtown Seattle's well-known and well-loved — but mostly empty — Smith Tower has defaulted on the loan it took out when it bought the landmark in 2006.

The default was revealed in a news release Monday announcing sale of the $42.5 million mortgage, in which the broker representing the seller described the loan as "nonperforming."

The buyer, New York-based CBRE Capital Partners, presumably paid much less than $42.5 million for the loan, said Seattle land-use economist Matthew Gardner, who had no involvement in the deal. The firm probably will start talks with the Smith Tower's owner, Walton Street Capital of Chicago, about modifying the loan, he said.

Or CBRE could foreclose, Gardner said. "Will they? I have absolutely no idea."

It's not clear when Walton Street defaulted. Walton Street's local operating partner did not return a call or email Monday.

CBRE declined to comment. HFF, the Houston-based brokerage that marketed the loan, would say nothing beyond its news release.

Commercial real-estate website GlobeSt.com reported in July that the loan had matured with an outstanding balance of $39.5 million.

Many commercial real-estate loans issued in the years before the market crashed had five-year terms. If that's the case with Walton Street's 2006 loan, it would have matured this year.

The Smith Tower's status and fate have been the subject of much speculation for years as the building has emptied.

HFF indicated in its news release that the 97-year-old tower, at Second Avenue and Yesler Way, is 80 percent vacant.

When the Seattle-based Samis Foundation sold it to Walton Street five years ago it was 100 percent leased, according to William Justen, Samis' former managing director of real estate.

"It's really had an adverse impact, taking 1,000 jobs out of the neighborhood," he said.

Walton Street paid $44 million for the tower and an adjacent two-story building, according to public records, borrowing all but $1.5 million from investment bank Lehman Brothers, which since has entered bankruptcy.

HFF's news release said the $42.5 million mortgage was sold to CBRE by Munchener Hypothekenbank of Germany. It's not clear how that bank acquired the debt from Lehman, or how much it paid.

HFF said there was "significant interest" from investors in the loan. But the German bank almost certainly sold it for a loss, Gardner said.

"Basically, [the Smith Tower] has been re-priced," he said. "The basis has been reduced — CBRE doesn't have as much skin in the game."

That could influence how the default is resolved, Gardner said.

In 2007, less than a year after it bought the Smith Tower, Walton Street Capital sought — and ultimately received — the city's approval to convert the entire building to condos, a move prompted in part by the impending departure of the tower's two largest office tenants.

Michael Allmon, Walton Street's local operating partner, told the city's Pioneer Square Preservation Board in March 2007 that residential use probably made more sense because most office tenants wanted buildings with more space per floor and other features the Smith Tower just couldn't offer, despite extensive upgrades in the late 1990s.

When the downtown condo market began to cool later in 2007, Walton Street scaled back its condo-conversion plans to just the top 12 stories. But it hasn't pursued permits for that scenario either, city records indicate.

Justen said he began receiving calls several months ago from investors interested in the Smith Tower debt, inquiring about the building's condition and business prospects.

Walton Street missed opportunities to sign or resign office tenants while it was pursuing its condo-conversion plan, he said. Meanwhile, the office market collapsed.

"There's nothing wrong with the building," Justen said. "Walton Street just had a business plan that did not work."

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

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