Stop trying to make “Emporium” happen! A few months after the temporary stewards of San Francisco’s struggling downtown mall attempted to rename the place, the San Francisco Centre is again the San Francisco Centre this week, they announced.
It’s been just over a year since the mall’s previous owners, Unibail-Rodamco-Westfield and Brookfield Properties, defaulted on a $558 million loan and chose to abandon the 800,000 square foot property. Now, it’s headed to a public auction on the steps of the Memorial Court on Van Ness Avenue on Nov. 14.
Technically, the property will change hands that day to the highest bidder. And it’s true that anyone could go up and put in a winning offer for the mall. But don’t expect a dramatic tussle between real estate interests looking to buy a slice of San Francisco, says Joel Zeldin, an attorney at law firm Shartsis Friese specializing in sophisticated business litigation.
An auction for a property severely underwater like the San Francisco Centre, Zeldin explained, is generally a process for lenders — in this case, Deutsche Bank AG and JPMorgan Chase Bank — to make their own “credit bid.” This means using their existing debt on the property as leverage to formally gain control over the property and market it for sale themselves.
Zeldin is not involved in the mall or its sales process, but provided general insight in line with his work on complex real estate foreclosures over his 50-year legal career. He said his comments do not reflect the facts or merits of disputes concerning the San Francisco Centre Mall.
“It is unlikely that a local buyer would emerge in a case like this,” Zeldin said. “They would have already surfaced and tried to negotiate directly with the borrower and the creditor long ago.”
Generally, defaulting borrowers want to escape and put failed investments in the rear-view mirror, Zeldin explained. But in a judicial foreclosure, which involves court approval, the borrower can be exposed to a judgment that allows the lender to recover the amount by which the outstanding loan balance and other costs exceed the lender’s winning credit bid.
At this point, interest and penalties have been accruing on the previous mall owners’ debt, which has seen the loan amount increase to $625.6 million, according to the auction notice.
In some cases, the borrower can challenge whether the credit bid reflects the fair value of the property or the calculation of the outstanding loan balance, Zeldin said.
Brookfield and Westfield did not respond to a request for comment. Gregg Williams of Trident Pacific, which is overseeing the property as the court-appointed receiver, told the San Francisco Business Times last week that “the notice simply reflects that the lenders are moving forward in the foreclosure process as planned.”
Trident and real estate firm JLL will continue managing the mall until its sale. As its custodians, they have the authority to collect rent, negotiate leases, and make changes to the property so long as they align with their fiduciary obligation to preserve as much of the asset’s value as possible.
Since the onset of the pandemic rocked San Francisco’s commercial real estate market four years ago, borrowers and lenders have been playing an elaborate game of musical chairs to align debt levels with current real estate values.
Brookfield Properties, for instance, purchased a lender’s position of nearly $1 billion of mortgages this year, previously loaned to apartment building owner Veritas Investments, after the latter had defaulted on their loan. When the portfolio went on public auction later that month, no one else made a bid and Brookfield walked away as the new owner.
For the San Francisco Centre, indications are that had the borrowers thought it was still redeemable, they would have injected more money into the project or made a sincere attempt to buy out the loan at a discount price, Zeldin said.
As for a future sale of the property, Zeldin said, from his experience, the lender will likely engage a high-end broker, who will already have a list of potential buyers that would make sense for a property of that size and/or price.
“If there is a party with substantial buying power who appears genuine in its desire to acquire the foreclosed property, that buyer may request an exclusive negotiation period since conducting due diligence costs a lot of money and is time-consuming for the buyer’s executives,” Zeldin said.
Once it is officially on the market, the Centre Mall will be one of several trophy retail properties for sale in the city’s Union Square.
Earlier this month, JLL started marketing The Metreon, which is more than 90% leased, for sale. Meanwhile, the building that houses the popular Ross Dress for Less store on Market Street is also reportedly on the market with an asking price of around $50 million.