So I have written about Smith Tower a few times and it is in an interesting situation. A commercial brokerage and management firm now owns the building and he delinquint mortgage, however, the courts appointed a reciever to manage the facility. The reciever is Goodman real estate, which is now responsible for the management of the facility. I don’t exactly know why the court ordered a reciever to manage the building, other than the fact that CBRE had requested that it be done. Originally I had thought there were legal reasons for doing so, but there was a lingering suspicion that perhapes CBRE didn’t want to involved with the building. It doesn’t make sense for a company that is able to manage a commercial space to not do so, unless they never intended to acquire the property to begin with. I cannot say for sure, but the fact that CBRE has announced a foreclosure auction of Smith Tower set for March 23rd certainly makes it look like that’s the case.
It is interesting because I had postulated earlier that the building looked to be a good investment even with a loan default. Though the occupancy numbers were poor, it seemed a result of bad timing and possibly poor decision making by the former owners, rather than any inherent flaw with the property itself. By moving straight to a foreclosure auction, rather than an acquisition and eventual sale, it definetly looks like CBRE is trying to dump the property as soon as possible. Was this part of the original plan by CBRE when they bought the non-performing loan, or did they make a mistake and guess that Walton Street would be able to cover their loans? I don’t know, and frankly I am still very much a neophyte so I couldn’t make a good guess either way. Though this sort of course of action seems strange to me, perhapes this is normal procedure in this market sector.
The sale does depend on one thing though, whether or not anyone shows any interest in the property. If CBRE cannot auction off the building then things will become more difficult and they will be forced to deal with a property that it appears they do not want. It is all dependent on whether or not they can increase occupancy levels and with them cash flows. This is were the little birdies come in. Real estate is a somewhat insular field in certain respects. There are national companies, but much of the development and management is done by local businesses. Because of that it is not uncommon for there to be cross company relationships, and with that an informational grape vine. I heard something through this grape vine that could spell potential trouble for the eventual sale of Smith Tower. One thing I never anticipated was what happens to the people who work at the building. They are now employees of a new company, and with it new company rules apply. One thing I have heard is that the vacation time that had been accrued by the manager, facility, and security personnel has been reset. I am sure that those individuals are not happy about this.
It also makes me wonder if any benefits were lost. If that were the case, then I would not be surprised if some of those individuals were looking to jump ship. Ordinarily that probably wouldn’t be a big problem, save for the rapidly approaching auction date. Training new managers and facility personell takes some time, and during that time it would probably be harder to convince potential tenants to become actual tenants. This could potentialy be a major stumbling block for CBRE and I am confused as to why CBRE or Walton Street would take an action like this. Transfer of ownerships and forclosures are a very sensitive time and it seems that prudence would dictate to try and not create any more hurdles. Let’s keep this in mind:
According to CBRE:
• The 42-story tower is 70 percent vacant.
• Monthly rents total just $250,000.
• The rents aren’t adequate to pay the 257,000-square-foot building’s monthly operating expenses, and CBRE has been advancing Walton Street money to make up the difference.
“It’s unfortunate, because it’s a great building — it’s iconic,” said Kip Spencer, co-founder of commercial real-estate database Officespace.com.
“It’s obviously severely under performing.”
It’s severly underperforming yet another potential clog might have been thrown in the machinery? It seems like a very poor decision was made, whether or not CBRE has any say the matter I do not know, but the last thing I would want to do would be to potentially anger the individuals that manage and care for the building. We will see in a few short months whether or not this move will come to haunt them, or if it really doesn’t matter at all. Either way I will be taking notes.
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