California investor losing grip on holdings

February 19, 2011

A California firm that invested heavily in local office and industrial property faces its second big foreclosure in less than six months.

Blue Real Estate defaulted on a $17.5 million loan for six buildings in Park 100, according to a mortgage foreclosure suit Bank of America filed this month in Marion County.

foreclosure factboxThe lawsuit was filed shortly after a judge approved foreclosure of Blue’s four buildings in Castle Creek Corporate Park. A receiver is managing the property off Allisonville Road, and the next step is a sheriff’s sale. Blue defaulted on a $22 million loan, originally with Lehman Brothers Bank.

Blue Real Estate President Ted Ries did not return messages, and the firm’s lawyer, Mark Wenzel at Krieg DeVault, said he wasn’t authorized to comment.

As of late 2008, family-run Blue controlled 1.6 million square feet in the area—a portfolio then valued at $120 million. Its Indianapolis properties include 17 buildings in Park Fletcher on the southwest side and the Century Building downtown.

Occupancy rates have plummeted since Blue entered the market in late 2006 with the purchase at Castle Creek. The seller, New Boston Fund, boasted at the time that its 324,000 square feet of Class A office space was 82-percent occupied.

January occupancy was 64 percent, about 13 points worse than the market average, according to the latest receiver’s report.

Blue may have needed a best-case scenario to keep up with its financing. Its initial loan for Castle Creek in November 2006 was for $16.9 million, but that was amended a few months later to $22 million.

“They bought Castle Creek at the height of the market,” said Jon Owens, senior vice president at Cassidy Turley. “East- and West-Coast-based buyers were coming in the market and paying rates no one else would pay.”

Occupancy is also low in Park 100, where Blue bought seven buildings from Duke Realty in 2007. (One of the seven buildings is not listed in the foreclosure lawsuit.) Duke says on its website that 17 percent of the 10 million square feet it owns in the park is vacant.

Much of Blue’s space in Park 100 is flexible-use with combined offices and warehouses. Occupancy rates for flex space tend to lag the overall industrial market, which is dominated by big-box distribution centers. The vacancy rate for industrial property in the Indianapolis market in the fourth quarter was 10.5 percent.

Blue Real Estate turned to the Midwest after selling a cache of long-held office buildings in Los Angeles and Fresno in late 2006 and 2007, just as sales prices hit their peak.

Ries told IBJ in 2008 that his firm was attracted to the relatively low prices and stability of Midwest markets.

“You don’t get the huge spikes, the huge troughs,” he said.

Blue’s property downtown doesn’t appear to be in trouble. The Century Building at 36 S. Pennsylvania St. landed a major tenant last fall with the expansion of e-marketer ExactTarget, which will occupy at least one floor.

To buy the downtown building, Blue took out an $8.5 million mortgage, recorded in January 2007.

“I would think they’d be in decent shape,” Owens said of the Century Building. “The occupancy there is probably the highest it’s been in a while.”

Blue defaulted on its loan for the Park 100 properties in December and now owes $22.1 million with penalties and interest. A receiver may be appointed in that case as well. The lender’s attorney, Brian Foley at Miller Canfield in Troy, Mich., did not return messages.•


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