Although 441 Stuart St. sold at foreclosure auction last week, the saga at the historic 11-story Back Bay office building is far from over.
“There’ll be more to the story,” promised Jarvis Kellogg, an attorney at Foley & Lardner. “The process is by no means done.”
Kellogg’s client, Corus Bankshares, lent a $42 million construction loan to owners Gold Associates and Apollo Real Estate Advisors’ Value Enhancement Fund V, which defaulted. The bank bought the building outright last Tuesday, with a bid of $17 million. 441 Stuart St. sits in the shadow of the John Hancock Tower, which fell to foreclosure auction last month. The Hancock sold for a face value of $660 million; real estate insiders believe that the new owners’ all-in costs lie between $750 million and $800 million.
Cash In Hand
The Stuart Street auction drew 20 registered bidders, said Justin Manning, president of J.J. Manning Auctioneers, which conducted the auction. Each walked into the room with a $200,000 cashier’s check in hand. A sizeable crowd of brokers and deep-pocketed developers showed up to watch the action.
Their money stayed on the sidelines, though, as Corus was opposed by just a single bid. That bid knocked the bank’s final price to $17 million, up from an opening bid of $15 million. Bidding was over in less than five minutes.
The auction of the 163,000 square-foot building, which was last sold in May 2004 for $37.5 million, provides a marker for the current state of Boston’s commercial real estate market.
A lot of money watched the auction unfold, but no developer was wiling to sink a significant amount of capital into a building that has limited cash flow and is in need of millions of dollars in renovations.
The building generates well more than $1 million per year in rent from first-floor retail tenants and a two-story gym. The upper eight floors are gutted and empty, though. Industry insiders believe the building’s best fit is as a hotel or as residential (financing for which is currently virtually nonexistent). Low, eight-foot ceilings and floor plates that are frequently broken up by interior columns make a future as a high-end office building unlikely.
Not Worth The Risk
Concerns about pricing and absorption time, as well as general pessimism about Boston’s market fundamentals, kept most potential bidders at bay. There appears to be a consensus that the building wasn’t priced cheaply enough to warrant the risk – even though it ultimately sold for less than half what it traded for in 2004.
“People talk about real estate being about location, location, location,” said Mike Smith, a managing director at Jones Lang LaSalle. In this case, he said, “It’s all about timing.” Smith added, “It’s a great location, in the long term.”
At the same time, Corus Bank clearly believes the former Class B office building, which was mostly gutted by its previous owners in an aborted condominium conversion project, remains a valuable asset in the long term. Corus wasn’t willing to let the building sell for $20 million less than its last sale price. The bank is betting that if it continues to hold the asset, the building’s value will rebound. Some have speculated Corus already has a potential buyer lined up. Whether that proves to be the case, by buying 441 Stuart St. at auction Corus will be able to dispose of the building on its own timeline and terms.
Corus had a brutal April. Early in the month, it announced a $456.5 million loss in 2008, paced by a fourth-quarter loss of $261 million. The bank, which does the bulk of its business in condominium construction loans, also disclosed a going concern qualification from its independent auditor. It ended 2008 with $2 billion in nonperforming assets. The bank’s chairman and its president and CEO recently resigned. The bank ended last week with a market capitalization of less than $12 million.
The Back Story
The mixed-use building at 441 Stuart St., which sits between the Copley Plaza Hotel and Back Bay Station, landed in foreclosure after a fight between the building’s owners became embroiled in a drawn-out legal fight with their tenant, the Healthworks women’s gym. Two lawsuits brought by Healthworks’ owner, Mark Harrington, derailed the planned condo conversion project. The litigation caused Gold and Apollo to miss the Boston condo boom, and ultimately, to default on their $42 million construction loan.
The relationship between Gold, Apollo and Harrington soured, in part, over a fight concerning 100 square feet of space in their building.
