Mesa West buys $130m loan on spec development

Mesa West Capital has acquired the A-note of a speculative development project in Silicon Valley as it eyes value-added debt opportunities in the US.

The Los Angeles-based firm told PERE it had bought the $130 million construction loan secured against three office buildings in developer Jay Paul’s Moffett Towers for a “slight discount” to par, with expectations the properties would, in time, become core-like assets.

What we seeing in relation to tenants upgrading their space is a natural evolution in the cycle. Mesa West principal Ronnie Gul

The three offices total 951,000-square-feet of space and are currently only 13 percent leased. Bought from Morgan Stanley the loans had been marketed for sale individually and as a portfolio.

Principal Ronnie Gul said in an interview the deal was about finding real estate in “good locations with good borrowers”, who had the capital to take advantage of tenants involved in the “flight to quality”.

“What we seeing in relation to tenants upgrading their space is a natural evolution in the cycle,” he said. “The first stage is distress, then assets start to change hands. After that landlords start getting aggressive in terms of cutting deals with tenants who want to take advantage of the opportunities to change their space.”

Gul argued that in places such as Silicon Valley, real estate professionals would see “a lot of growth absorption” despite there still being a lack of net absorption.

Paul originally financed his scheme to build a 1.8 million square foot office complex in two phases in Sunnyvale, California, with a $216.8 million construction loan originated by Morgan Stanley. The bank sold a junior tranche of the loan to NorthStar, which in turn sold a subordinated interest in the B-note to Shorenstein Properties. Shorenstein bought the note through its $2 billion Fund IX, which closed in 2008.

The Mesa West A-note, bought through the firm’s $614.5 million Mesa West Real Estate Income Fund II, which closed in June, is backed by three properties from the fully-completed phase one development. Phase two of the project is currently empty, with three out of the four planned offices completed.

In 2010 alone, Mesa West has closed on more than $400 million of deals targeting value-added loans acquisition and origination opportunities typically with three to five-year loan terms.