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Blackstone Takes Majority Stake in California Portfolio

Blackstone Group LP took a majority stake in an investor group that owns a 31-property Southern California office portfolio after a debt restructuring led by SL Green Realty Corp.

Blackstone’s Real Estate Partners VII fund invested about $85 million into the 4.5 million-square-foot (418,000-square-meter) portfolio, according to a statement today from New York-based SL Green, which gained control of the properties in August through its holding of junior debt. Gramercy Capital Corp. and Square Mile Capital Management LLC are also in the venture.

“We were able to successfully structure a recapitalization, bring in a very strong owner and operator to run the portfolio, and from our standpoint to preserve our investment, and hopefully make a return,” David Schonbraun, SL Green’s co-chief investment officer, said in a phone interview.

Blackstone’s Equity Office division will take over management and leasing for the portfolio, which includes properties in Los Angeles, Orange County and San Diego, to expand its presence in Southern California. The New York-based firm has raised $13.3 billion for Blackstone Real Estate Partners VII, the largest-ever private-equity real estate fund.

Blackstone has said it intends to exit Equity Office in the next few years, possibly by selling its buildings in chunks to various buyers. Michael Kim, an analyst with Sandler O’Neill & Partners LP in New York, said the California deal isn’t inconsistent with that strategy.

Deal Timing

“This is a function of timing and where the assets sit in the business cycle,” Kim said in a phone interview. “They just raised a big new real estate fund, and they have plenty of capacity to invest in new properties.”

For SL Green, the deal enables it to refocus its attention on its almost exclusively New York-based portfolio. About 95 percent of its properties are in Manhattan, according to an analysis released today by Green Street Advisors Inc., a Newport Beach, California-based real estate research firm.

In addition to owning and managing New York skyscrapers, SL Green lends money to other real estate investors, typically providing higher-interest “mezzanine” loans, which are subordinate to the senior mortgage and provide an opportunity to take equity in case of non-payment. Most of those loans have been on New York properties, Schonbraun said.

Cabi Purchase

In the case of the Southern California buildings, SL Green loaned about $50 million to a joint venture including Cabi Developers, a division of Mexican real estate company GICSA, in 2007, when U.S. commercial-property values were peaking. The buyers paid $1.5 billion to Arden Realty Inc. for the properties.

“Outside of New York, we’ve seen a few deals that we thought selectively were interesting enough to pursue, and this was one of them,” Schonbraun said. “There was a large equity cushion behind us. For us it was a yield play.”

As property values plummeted after the deal, Hines, a Houston-based real estate investment firm, foreclosed on the borrower. Since then, SL Green has been acquiring interests in other holders of junior debt on the portfolio, so it could have control when the senior debt matured in August, Schonbraun said.

New York Life Insurance Co. led an extended $678.8 million mortgage financing on the portfolio. After the recapitalization, total debt is $746.8 million.

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