Kylli, whose 22-story office tower in San Francisco is 60 percent vacant, has defaulted on a $350 million mortgage tied to the property.
The locally based unit of China-based Genzon Group saw its troubled loan sent to special servicing for the 580,000-square-foot building at 225 Bush Street, in the Financial District, the San Francisco Business Times reported, citing Morningstar.
The loan matured on Nov. 6, with Kylli failing to pay the debt. Last month, lender Deutsche Bank reported that Kylli had yet to articulate a pay-back plan.
The transfer to special servicing was triggered by the loan maturity, and may suggest Kylli has some interest in retaining ownership of the building.
David Putro, head of commercial real estate analytics at Morningstar, told the Business Times in an email that almost every office loan his firm has seen turned over to special servicing did so because of a “cursory request” by the borrower to extend the terms of the loan.
The landlord has remained current on its monthly payments through the course of the $350 million loan, even as building occupancy and cashflow have declined.
But Putro said that’s because the loan is interest only, and because the loan outlined terms that allow the building to lose as much as 75 percent of its net operating income without falling below break-even, or the cost of its monthly payment.
If the building should hit the market, it would be the second-largest office tower in postpandemic San Francisco to hit the market since Market Center, according to the Business Journal.
When Deutsche Bank originated the $350 million loan in the fall of 2019, the building was fully occupied. The next year, it generated $40.2 million in revenue, according to commercial mortgage-backed security figures.
As of June, the 102-year-old building was 44 percent occupied, after building revenue plunged to $24.6 million last year.
Two months later, Sunrun uprooted its headquarters from 225 Bush Street, leaving nearly 44,000 more square feet of empty offices, or 7.5 percent of the leasable space. The exit put occupancy at less than 40 percent.
Kylli bought the former Standard Oil Building in 2014 for $350 million, or $600 a square foot, according to the Business Times.
The building’s two largest tenants, LiveRamp and Stryder, take up a respective 77,000 and 53,000 square feet, with leases ending in 2029 and 2027.
The overall office vacancy in San Francisco is 37.3 percent, according to CBRE, following a shift to remote work. Office buildings have traded lately for around $300 per square foot.
Some building owners have worked with their lenders to sell buildings at discounts ahead of looming loan maturities, while others have simply walked away from their investments, allowing lenders to foreclose.
Kylli, founded in 2013, has more than $1.6 billion in assets under management in California, which include more than 500,000 square feet of offices in San Francisco, 800,000 square feet of offices under construction in Burlingame and more than 48 acres of land in Santa Clara, according to its LinkedIn page.
This month, the investment firm won key approvals to build a 49-acre urban village in Santa Clara on a site once slated for a Yahoo office campus. If completed, the project could deliver up to 1,800 homes and 3 million square feet of offices and research labs.
— Dana Bartholomew
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