How KBS Saved 3 Million Square Feet of Office

Much has been made of the hundreds of millions of dollars in commercial mortgages maturing this year. But behind the so-called wall of maturities are endless workout negotiations between troubled borrowers and the banks that hold their debt. In back-room discussions and blood-boiling Zooms, that wall is being whittled away, or at least pushed back.

A troubled portfolio of office properties in Texas, California and elsewhere just gave a clear line of sight into the kind of deals that are extending maturities and preventing foreclosures — for now.

A real estate investment trust managed by KBS, a real estate private equity company based in Newport Beach, California, received its third extension on a $613 million loan from a series of lenders led by Bank of America.

The loan is backed by six properties. Two of them — Sterling Plaza and Preston Commons — are in Dallas, and another, Legacy Town Center, is in Plano. The Texas properties span nearly 1.3 million square feet. The California properties — Ten Almaden in San Jose and Towers Emeryville — are another 1.1 million square feet. In all, the portfolio spans just over 3 million square feet.

Outside of this particular REIT, KBS owns nine other properties in Texas.

The extension gives KBS’ REIT more time to find a way out of the hole, but it comes at a cost.

The REIT has to deposit all excess cash flow from the properties into a cash collateral account. It can’t withdraw any funds from the account without written consent from the lenders, and in certain cases, the lenders can pull money out of the account and put it toward the debt.

To score the extension, the REIT also had to pay down $5 million of the loan, bringing the outstanding principal to $601 million. Additionally, it paid a $1.4 million, non-refundable fee. The firm wrote that it is in discussions with its lenders on further modifications that would, among other things, provide a longer-term extension of the maturity date.

KBS CEO Marc Deluca called the talks with lenders “productive negotiations.” The agreement “provides a runway to engage with the lenders over a longer-term positioning of the assets,” he said.

The loan has been extended before. It expired on Nov. 3 with an outstanding balance of $606 million, and the portfolio didn’t meet the requirements for a 12-month extension. Instead of pursuing the properties, the lender agreed to push the loan’s maturity to Nov. 17. An unadvanced portion of the loan worth nearly $7 million was canceled.

By Dec. 22, the loan had matured again, with the same $606 million balance. Again, though, the lenders declined to go after the buildings. Instead, on Dec. 29, the maturity date was kicked back again, this time to Feb. 6.

Each of the properties in the portfolio is a recently renovated, Class A property.

KBS disclosed in the filing that the REIT defaulted on the loan for 201 Spear Street in San Francisco, failing to make its November 2023 interest payment. That property is “currently valued at substantially less than the outstanding debt of $125 million,” according to the filing, and the REIT didn’t get a maturity extension. Instead, it simply handed back the keys.