Phoenix, AZ – Interwest Capital is pleased to announce that through its affiliate, PRG Properties Inc, it has entered into a joint venture agreement to acquire nearly 1,000 acres of residential land for single family development. The subject is currently being designed as a master planned community consisting of approximately 2,760 single family residential lots and with an estimated 150 acres reserved for open space, parks and amenities. The property is located in a rapidly growing section of the West Valley one mile north of Interstate 10. Estimated project completion cost is in excess of $100 million. Interwest Capital Corporation is a privately held firm in San Diego pursuing commercial mortgage and real estate acquisition. Interwest corporate offices are located in the Aventine Building at 8910 University Center Lane, Suite 580 San Diego, CA 92122. The company’s web address is www.interwestcapital.com
Interwest Capital Corp., a privately held San Diego-based commercial real estate acquisition firm, specializes in purchasing real estate assets from which most traditional investors shy away: hotels in disrepair, requiring significant capital improvements, property loans that cannot be repaid, vacant office buildings in need of repositioning, and the like.
Last week, Interwest obtained the deed for the Galleria Park Hotel in San Francisco, which it purchased out of bankruptcy in January from the San Francisco-based Kimpton Hotel & Restaurant Group, LLC. According to Interwest’s president, Karl Coleman, this is one of the firm’s most complicated and interesting transactions to date.
The firm has been operating for only about 18 months and has already acquired roughly $100 million in assets, ranging from loans ? performing and non performing? to straight property acquisitions. According to Coleman, the plan is for Interwest to acquire $100 million in the next 12 months. Interwest typically targets assets ranging from $15 million to $50 million.
Across the country, commercial real estate markets are becoming prime targets for acquirers seeking ?distressed assets? ? a trend that Interwest is perfectly positioned to capitalize on.
Coleman said it’s because the industry is in an interesting part of the real estate cycle. The securitized debt market for commercial real estate has existed for only about 10 years. Since commercial loans have normally been written with 10-year terms, Coleman said the market for acquiring such loans is heating up.
?A lot of debt is starting to roll right now out of securitization,? he said. ?And there is a general sense that there might be some refinance risk with the amount of properties that need to refinance in a rising interest rate environment.?
Besides the hotel acquisition, Coleman said Interwest is looking at opportunities in Phoenix, including office buildings with high vacancy rates and residential land development opportunities.
Last year, Interwest purchased a 6-acre parcel in the Scripps Ranch/Poway area of San Diego, where it is now planning to build a 120,000-square-foot speculative office building.
Coleman, a one-time vice president of San Diego-based First Commercial Corp., and his partner, Alex Roudi, who is the founder of San Diego-based Coverall North America, generated the idea for Interwest about two years ago. Since its inception in late 2003, the Interwest team has grown to include a half-dozen analysts, according to Coleman.
By HEATHER BERGMAN
SAN DIEGO BUSINESS JOURNAL STAFF
Interwest’s newest project involves the purchase of a $13 million non performing loan (at a discount), which is secured by a 177-room boutique hotel ? the Galleria Park at 191 Sutter St. in San Francisco’s Financial District. Kimpton Hotel & Restaurant Group, which owned the historic hotel since 1986, had not paid the loan in more than a year when it matured in 2003 and was unable to refinance the loan.
The acquisition of the note marked Interwest’s first hotel acquisition, according to Coleman. It is also notable because it is a true distressed turnaround play: ?the kind of opportunity we look for with a good asset in a good location, just in need of new capital and new management,? said Coleman.
He said the Galleria Park, built in 1910, is also a property of note because ?it’s a great building, with great bones to it; it just needs a little help.?
?But we see the opportunity to restore it to its full potential,? Coleman added.
The Galleria Park was considered distressed because, according to Coleman, it was 10 years overdue for a major renovation and was severely impacted in 2001 by the bursting of the dot-com and telecom bubbles in San Francisco.
Coleman said Interwest expects to hold the asset for about three years, until it is fully stabilized, in line with the firm’s overall strategy of holding an asset for two to four years. In the meantime, major renovations are scheduled to begin this winter, with completion expected in March.
Interwest Capital Corp., a San Diego investment firm, has taken over the Galleria Park Hotel, a 177-room boutique property in San Francisco .
With the purchase, Interwest hopes to make a mark in the real estate investment community.
The opportunistic investment company has completed its first full year of operations, quietly putting together roughly $100 million of acquisitions. It aims to place roughly $100 million to $150 million of equity in the coming year.
The company is headed by Alex Roudi, an entrepreneur who has been investing privately in real estate for several year and Karl P. Coleman, a former executive vice president with First Commercial Corp., a San Diego company that invested in commercial mortgages. The two have put together an executive team that includes a developer and an investment manager who oversees $1.5 billion of mostly non-U.S assets.
Given the background of its principals, Interwest is able to participate in a wide swath of the real estate industry. For instance, it is considering investing in a massive development opportunity in Phoenix . To generate ongoing cash flow, it will invest in performing mortgages and stable properties. But its principals would like to focus on investing in distressed, or otherwise high-yielding mortgages.
The Galleria Park is an example. Interwest acquired a distressed securitized mortgage on the property several months ago and recently took over the property in a deed-in-lieu of foreclosure. An affiliate of Kimpton Hotel & Restaurant Group had owned the property, but it fell on hard times after the 9/11 terrorist attacks.
Interwest plans to upgrade the property and change management to Joie de Vivre Hospitality, an operator of northern California boutiques. It is aiming to stabilize the property over the next couple of years. It will then decide whether to recapitalize it, sell it or refinance it.
The property, constructed in 1910, sits on ground that is leased for another 34 years at Sutter and Kearney streets in the heart of the city’s financial district.
It had perhaps its best year in 2000. And to avoid taking rooms temporarily offline, Kimpton held off on many potential upgrades. When the market tanked, it found that its rooms couldn’t compete with those of other area properties that had been refurbished or recently developed.
In addition to its 177 rooms, the property contains some retail space that was occupied by two retailers that have since filed for bankruptcy.
Thanks in large part to the overall improvement in the economy, the hotel is once again generating positive cash flow and Interwest expects the property’s revenue per available room to grow by double digits next year. Still, it isn’t performing as well as it should largely because of a lack of capital improvements ? something Interwest plans to address in the winter.
Going forward, Interwest hopes to take advantage of the massive volumes of securitized mortgages that are coming due ? many of which no doubt will have problems refinancing at face value.
Comments? E-mail Orest Mandzy, or call him at (215) 504-2860, Ext. 211.
Interwest Capital Corporation is pleased to announce that it has acquired the Galleria Park Hotel located at 191 Sutter Street in the financial district of San Francisco near Union Square and the Moscone Convention Center . The 177 room hotel will be managed by Joie de Vivre Hospitality ( www.jdvhospitality.com ) who is a specialty operator and owner of boutique properties in the San Francisco market. The property will continue to operate as The Galleria Park Hotel with a multi-million dollar renovation beginning later this year. A re-grand opening is anticipated for early 2006 at the completion of the renovation project. The Galleria Park Hotel was formerly the landmark Sutter Hotel, which was built in 1911
Insights and observations from the IMN 3rd Annual Distressed Real Estate Symposium May 5-6, 2004 New York, NY
I recently had the pleasure of attending the Distressed Real Estate Symposium produced by the Information Management Network. This is an annual event held in New York for the purposes of discussing the various insights of opportunistic fund managers, Wall Street firms and other private investors in distressed real estate and debt. I found this year’s event especially informative as it was my second visit to the conference and as such it allowed me the opportunity of framing this year’s tone of discussion against the prior year’s. Representatives of many of the largest and most active distressed debt funds such as Blackacre Capital, Morgan Stanley Real Estate, Goldman Sachs and Colony Capital were among the panelists facilitating discussions centered on the current opportunities and issues in the real estate debt market.
As we are now keenly aware we have entered what is potentially the leading edge of a sharply rising interest rate environment with the ever increasing specter of inflationary pressures. Recent forecasts by economists as to the level and speed of Federal Reserve Board interest rate increases are ratcheting up significantly. With nearly $40 billion in CMBS debt maturing over the next 12 months and nearly $20 billion of that amount maturing before year end one can begin to imagine the implications for the lower tier real estate assets within this group that have to date managed to perform largely thanks to historically low costs of carry. Most of the panelists seemed to agree that an increase of only 100bps to 150bps over the near term combined with the underlying weakness of many real estate classes will propel us once again into a significant cycle of distress.
So where is the distress?
Several asset classes are seen as likely suspects in the coming cycle. Amongst the retail sector, older 1970’s and 80’s constructed open air malls in many markets are viewed as a dying breed. In a common scenario, the center has lost a now out of business big box ?anchor? which in turn has precipitated the exodus of many in line tenants and possibly other large anchors that had ?trigger? clauses. The competition exerted by new regional super malls, power centers, and build to suit big box retail centers may be rendering these older facilities unviable. The general consensus is that such properties will have to be ?de-malled? and redeveloped as alternate uses such as residential, mixed use and possibly industrial/office depending on the specific market demographics.
Similarly, twenty to thirty year old, exterior corridor, limited service hotel/motel properties are viewed as presenting significant challenges. As many national brands are moving away from the exterior corridor properties, requiring significant and costly property improvement plans and in some case simply refusing to renew franchise agreements on such properties this class will continue to struggle. Further exacerbating the problem is the severe over building that has occurred in many markets such as North Carolina, South Carolina, Florida and Texas to name a few. As one speaker remarked, ?There’s a reason we use a 30 year depreciation schedule?. A few of the individual properties that are well operated and extremely efficient may indeed survive leaving the rest to either be razed completely or to be redeveloped as extended stay and efficiency units.
Although many primary office markets have begun to show positive absorption trends, there appears to have been a steady migration over the last several years of ?B? and ?C? property users to ?A? quality space. Taking advantage themselves of recent distress in this sector, tenants have been able to upgrade their space while maintaining or even decreasing their rental rates. This has increased the pressure on the less desirable properties which have in turn had to continue to cut rents in order to attract new tenants. In addition, many markets still contain significant and possibly under reported shadow leased and sub leased space as well as reported vacancy levels averaging mid double digits.
Other suspects include smaller assisted living facilities where ?mom and pop? operators face difficulties reaching efficiency levels capable of producing adequate cash flows as well as ?B? and ?C ?multifamily properties that have experienced the same flight of tenants to better quality properties in addition to a loss of renter base due to the increased affordability of home ownership given the favorable interest rate environment of the past few years.
Important metrics aside from specific asset class issues include the historically high number of bankruptcy filings (both corporate and personal), historically large high yield debt market, the more than doubling year over year of downgrades in commercial debt obligation tranches, and steadily creeping commercial loan delinquency rates.
What’s different now?
During the conference held in 2003, panelist after panelist detailed structured transactions in which an asset which was believed to be an opportunistic investment was acquired at cap rates frequently in the 5% to 6% range on existing or even projected income with the reasoning that actual spreads where higher than in the past due to historically low cost of capital. It was also often assumed that the 15% to 25% vacancy levels would allow for future up side potential. In addition, most of these transactions included mezzanine debt and/or equity participation’s resulting in highly leveraged transactions in which the original sponsor had little true equity. This year?s panelists were more often heard not only to lament investors who took this approach but claimed to not know who these investors were.
The moderator of the final panel session perhaps summed up the current situation best when he posed the question ?are these the distressed assets of the next wave??
Karl P. Coleman is President of Interwest Capital Corporation and can be reached at 858-622-4900 or through the corporate web site at www.interwestcapital.com