3 Southland Office Towers May Be Seized : * Real estate: A bankruptcy judge says Swiss Bank can foreclose on the VMS Realty holdings in Los Angeles and San Diego.
A U.S. bankruptcy judge cleared the way Wednesday for a major creditor of the troubled VMS Realty Partners syndicate of Chicago to foreclose on three Southern California office towers owned by VMS Realty Partnerships.
Bankruptcy Judge David H. Coar in Chicago gave Swiss Bank Corp. of Zurich approval to foreclose, lifting a court order that had prevented the bank from taking over the 312,000-square-foot Bank of California Plaza building at 110 West A St. in San Diego and two 500,000-square-foot office towers at 10960 and 10880 Wilshire Blvd. in Los Angeles. VMS was in default on $226 million in mortgages on the properties.
The ruling is a setback for investors who had poured more than $1 billion into VMS’ eight real estate investment trusts that evolved into an investment group called Banyan Funds. The Banyan Funds, which are public companies that invested in mortgages on VMS-owned properties, may lose $100 million, experts say.
“The (real estate) market went bad on them,” explained Alan D. Levy, president of Tishman West Cos., the firm that manages all three office buildings. “They had a large amount of debt on the building, the market got soft and debt service (on the mortgages) started to eat them up.”
A spokesman for VMS Realty could not be reached for comment. VMS has been in bankruptcy proceedings since May. Swiss Bank spokeswoman Joan Moschello declined to comment.
But Swiss Bank lawyer William McKenna Jr. said his client will take control of the three properties, “maintain them in first-class condition,” then sell when the market permits.
Experts have long predicted an increase in commercial real estate foreclosures in the wake of an office glut that has sent vacancy rates soaring above 20% in downtown Los Angeles. But the Swiss Bank foreclosure of the three VMS properties would be one of the few so far of large office buildings in Los Angeles, experts say.
In recent weeks, a few big hotels, such as the Bonaventure in downtown Los Angeles and the L’Ermitage in Beverly Hills, have been threatened with foreclosure. But many lenders have indicated that they aren’t interested in taking over office buildings at a time when there are virtually no prospective buyers of such property.
VMS’ two Wilshire buildings are now less than three-quarters occupied. A stream of disgruntled tenants have left in recent months as maintenance suffered during the bankruptcy proceeding, said Levy of Tishman West.
But some real estate brokers believe that new ownership and a building face-lift could help revive the office towers.
“It’s a well located but poorly maintained property that sorely needs new leadership,” said H. Carl Muhlstein, executive vice president of Willrock National of California. He estimates that the Wilshire buildings could be worth $125 million apiece if refurbished.
McKenna said appraisers who testified at the bankruptcy proceeding placed the market value of all three VMS buildings about $70 million less than their combined $226 million in mortgages.
A spokeswoman for Swiss Bank declined to indicate whether the foreclosure on the VMS buildings represents a new get-tough policy on the part of the bank. However, Swiss Bank is a significant real estate lender that has bankrolled some of the downtown investments of financially embattled Los Angeles developer Ray Watt.
VMS was one of the nation’s largest real estate syndicators, owning billions of dollars in properties around the world.