A half-empty building at the corner of one of downtown’s busiest intersections will go on the auction block soon, and the weak real estate market means that potential investors could land a bargain.
The building is listed for $7.25 million, although many believe it will sell for considerably less.
Owned by Grubb & Ellis Co., the five-story building — located at 6 N. Tejon St., at the intersection of what that has historically been the city’s banking and financial epicenter — most recently housed a Chase bank operation. It also has been home to Bank One and First National. The first floor has sat empty since Chase moved out more than a year ago.
“It’s been on the market for a long time at that asking price, so people have had the opportunity to buy it,” said Dorman Real Estate CEO Todd Dorman.
So what will it take to sell it?
“It’s going to take a cash-rich buyer purchasing at a deep discount or some extremely creative financing terms,” Dorman said.
And if that doesn’t happen, the lender, Bank of America, could hold onto the property until the economy improves.
The prospects don’t look good for a sale. A number of businesses, including a few banks, have looked at the location and passed up the opportunity to even lease it, Grubb & Ellis Investment Specialist Andy Oyler said.
About 44,000 of the 100,000 square feet are available for lease. Vladmir Jones advertising agency, the Melting Pot Restaurant, FedEx and Creative Gold Jewelry are the remaining tenants.
Grubb & Ellis said it continues to work on leasing the space as the building moves toward auction. While finding a new tenant could vastly improve the value of the property, even a fully-occupied building will likely sell at deep discount.
“The investment market for a property like that has shrunk to almost nothing out here, and we haven’t seen any activity on large investment properties like this,” said Sierra Commercial Real Estate Managing Director Kent Mau. “And if it goes into foreclosure, it will sell at a highly discounted price.”
Similar office spaces are trading at $30 to $40 dollars per square foot, Mau said. That would put the value of the property somewhere between $3 and $4 million, or about the half the asking price.
But the property is suffering from more than just the market. Mau said it has two other strikes against it.
“The building doesn’t have a very efficient set-up,” he said. “It was originally constructed as a single-tenant building, so there is a lot of common area. It’s difficult to make an efficient multi-tenant building out of that. Also, there’s no parking. Most of the top buildings downtown have some degree of parking, and you just don’t have that there.”
Still, the Grubb & Ellis team remains hopeful that some sort of deal will come through to avoid foreclosure.
“We’ve received several offers from qualified investors and we’ve been very aggressive in continuing the search for new tenant opportunities,” said Steven Shipp, managing director of structured finance. “If we can do an arms-length sale and avoid foreclosure, that would be the best outcome for the investor and the bank.”
The building was originally scheduled to be auctioned by the El Paso County Trustee’s office on Dec. 15, but Bank of America requested a month’s delay in the auction. The bank’s lawyers did not return phone calls this week, nor provide a reason to the trustee for its request.
The auction is now set for Jan. 12.
In Dorman’s thinking, the bank will hold onto the property unless the right buyer can be found.
“It used to be that banks would look to unload the property right away, but they’re taking back so much property now that they have to get creative,” he said. “They might keep it on their books and sell it at a later date when the market gets better. It’s just not realistic to think that they could turn around and sell it for the balance remaining on the note.”
A foreclosure notice on the building was filed in August against two California-based limited liability corporations, NNN Pikes Peak & Tejon and NNN 6 Tejon Street. The two entities are now owned by Grubb & Ellis, and trustee records show a balance of $7 million owed on an original loan amount of $8 million. The building was purchased by NNN Realty in 1999 for $8.73 million.
The problems leading up to the foreclosure mirror the problems faced by large investment properties in the broader market. The building became an unsustainable investment after it lost its primary tenant, leaving the lender and the borrower scrambling to unload.
“After it lost its major tenant, the property just didn’t have the funds to support itself, and there hasn’t been the demand to re-tenant,” said Grubb & Ellis spokesman Damon Elder. “The loan matured, and to refinance would require considerable funds. The (decreased) value of the property does not make that a viable option.”
Bank of America offered numerous extensions on the loan, but the high balance coupled with the devaluation of the property restricted its options. Shipp said Grubb & Ellis and Bank of America agreed to move forward on a “friendly foreclosure.”
This likely means a private agreement between the two parties will settle the difference between what’s owed on the loan and the auction price following the building’s sale.
“It’s a good piece of real estate in a great location, but it’s a victim like so many others of the general deterioration of economic fundamentals,” Shipp said. “There’s no value for investors to pursue and the bank wants the loan off its books. Our objective now is to minimize losses for the both the lenders and the investors.”
While Grubb & Ellis is the owner today, it was never a direct investor in the property. NNN Realty’s holdings were folded into the Grubb & Ellis portfolio in 2007, after NNN Realty owner Anthony Thompson initiated a takeover of Grubb & Ellis through a reverse merger. The property remained in the company’s portfolio after Thompson left the chairmanship of Grubb & Ellis in early 2008 to form Thompson National Properties.
The building was not Thompson’s first investment in Colorado Springs. His firm also transferred the Tiffany Square office complex on the city’s north side to Grubb & Ellis through the merger. Earlier this year Grubb & Ellis sold that property back to the lender for $12.4 million, which was equal to the principal on the balance of the loan.
As Grubb & Ellis looks to shed these inherited properties, opportunistic investors will be standing by to scoop up the pieces.
“It might look like a fire-sale, but it’s just a reflection of how long it’s going to take the real estate market to recover,” Mau said. “Buyers can’t get properties low enough, and that’s just the overriding mentality. The leverage is with the buyers and it’s going to remain there for a good amount of time. It’s not a real rosy picture.”