Three partial owners of 1818 Market St., an office
building in Center City, have voluntarily filed for Chapter 11 bankruptcy
protection in the Central District of California, complicating a pending deal
to sell the 37-story, 940,000-million-square-foot tower.
Shorenstein Cos. of San Francisco has the building under
agreement for around $203 million and had been expected to close on it in the
next few weeks. A Shorenstein spokesman said the company had no comment on the
bankruptcy filings or pending sale.
Now called 1818 Beneficial Bank Place, the building
serves as the headquarters for Beneficial Bank and Five Below. It was put on
the market in May 2013 by Sovereign Capital Management Group Inc. of San Diego.
Sovereign came to own a majority stake in the building
when it acquired Daymark Realty Advisors in 2012. When it was in that position,
Sovereign gave 1818 Market some so-called "rescue capital" when its
ownership, nearly three dozen tenant-in-common entities with fractional amounts
of ownership, struggled. That investment gave Sovereign a controlling interest
in the property though it said it continued to "partner" with
fractional owners of the building.
There's more to its ownership history.
The property last traded in 2006 for $153.8 million.
That's when NNN Realty Advisors of Santa Ana, Calif., bought it. NNN Realty
later became known as Daymark. During the recession, Daymark and its
tenant-in-common approach to buying real estate ended up floundering and that's
when Sovereign swooped in.
The three fractional owners that have filed for
bankruptcy protection are tenant-in-common entities. There are a total of 35
fractional entities that have ownership interests in 1818 Market.
John L. Smaha, the attorney representing the three
fractional owners who filed for bankruptcy protection, couldn't be reached for
comment.
Sovereign said in a statement that the three fractional
owners had "interfered with the rights of the majority owners to
sell" the property and litigation ensued. Part of the situation stems from
Sovereign exercising in 2013 an option to buy out two dissenting fractional
entities that have subsequently filed for bankruptcy. A third fractional entity
joined in filing bankruptcy.
An arbitrator in California was appointed to determine
whether, among other issues, the move to sell 1818 Market by Sovereign was
appropriate and whether Soverign had the right to exercise its option to buy
out the two fractional entities. The third entity that filed for bankruptcy
protection was not part of the original dissention.
On Dec. 16, a ruling was handed down through the
arbitration process in favor of Sovereign.
The final phase of the arbitration process was scheduled
earlier this week to determine how much to pay those tenant-in-common
interests, said Todd A. Mikles, chief executive officer of Sovereign. Instead
of going through the arbitration process, the bankruptcy filings were made.
"It's unfortunate because we really helped take the
asset and turn it around," Mikles said.
The situation forced Sovereign to extend Shorenstein's
contract to buy the building until things get settled.
"They are locked and loaded to see the asset
through," Mikles said about the buyer.
Sovereign plans to go through the courts to have the
matter resolved and is hopeful that it will be soon though, like any legal
situation, it could drag on.
"It's a very interesting situation," said Adam
Stein-Sapir, a bankruptcy expert with Pioneer Funding Group. "Normally
with a building you have a single owner but with TIC [tenant in common]
ownership, it can be like herding cats. It can present challenges."
As seen in this scenario, those challenges can arise when
part of the ownership wants to sell, others don't or disagree with the
building's value, and can also impact lenders involved in a property.
Source: Philadelphia
Business Journal
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