New Order: No Money, No Problem By Maura Webber Sadovi Wall Street Journal 10-07-2009

New Order: No Money, No Problem
By Maura Webber Sadovi
The Wall Street Journal
October 7, 2009

A Birmingham, Ala., office building has sold for about $147 million, in what is being billed as the largest office-building deal in the Southeast this year. But what is particularly notable about the transaction is how little cash the buyer had to put into it: $1.3 million.

The buyers -- a group that included Rainier Capital Management, a private Dallas real-estate firm; Net Lease Capital Advisors of Nashua, N.H.; and Ray Gee, an investor in Charlotte, N.C. -- purchased the 587,528-square-foot Social Security Administration Center in Birmingham from Opus South Corp. of Atlanta, which filed for bankruptcy protection in April.

To acquire the building, the Rainier group assumed a $140.7 million mortgage on the property held by Transamerica Life Insurance Co., a unit of Aegon Group of the Netherlands, according to Doug Blough, chief financial officer of Net Lease Capital Advisors. It also paid the lender about $1.3 million in cash and issued Aegon a $5 million mezzanine note. Aegon declined to comment on the transaction.

The deal sheds light on a critical factor that is quietly fueling the few transactions that are getting to the closing table these days despite the dearth of new financing: assumable debt.

But the buyers also took other steps to sweeten the deal for Aegon. For example, they bought an insurance policy from HCC Insurance Holdings Inc. that guarantees a $47 million balloon payment on the Aegon mortgage will be paid when it comes due in about 19 years. They paid for that policy with an additional $10 million mezzanine note on the property. "This is what you need to do because there's no cash available," Mr. Blough says. HCC couldn't be reached for comment.

The buyers are in turn selling stakes in the building to investors looking for a so-called 1031-exchange transaction, named for a section of the U.S. tax code, that lets investors delay capital-gains taxes on proceeds from recently sold property by reinvesting in new property.

The transaction represents the highest total price paid for an office building in the southeastern U.S. so far this year, according to Real Capital Analytics, a New York real-estate research firm. At $250 a square foot, it is also the highest per-square-foot price paid for a Birmingham office property since 2001, topping the previous mark of $217 set in March 2008, says Real Capital. The property is expected to produce an annual return of about 7.7% before debt but after expenses, people familiar with the deal said.

Besides assumable financing, the Birmingham building also was attractive to the buyers because it is fully occupied through a 20-year lease signed with a creditworthy tenant: the U.S. General Services Administration. The Social Security Administration, which operates regional payment and training centers at the site, is set to remain in the property through 2028.

Opus South is one of several regional operating companies of Opus Corp., a merchant builder based in Minnetonka, Minn., and until recently one of the largest private real-estate developers in the nation. Its business model of constructing buildings to be leased and sold got caught in the credit crunch, leaving Opus with short-term debt it couldn't refinance and dozens of projects it couldn't sell. An Opus spokeswoman said the sale is part of its plan to close Opus South's operations.

Opus began marketing the Birmingham building more than a year ago when it was in discussions to sell it for a price in the $160 million range, people close to the transaction say. Jay O'Meara, a senior vice president with CB Richard Ellis who represented Transamerica in the transaction, says more than 20 bidders were interested in the property after Opus filed for bankruptcy.