CASE STUDY:
THE GALLERIA & MONTGOMERY PARK

The Challenge

In 2018, The Bill Naito Company decided it was time to sell two of its iconic Portland properties. The Galleria, a 1910 building, had been purchased in 1975 and repositioned as a mall that helped reignite activity downtown. Montgomery Park, a nine-story, 1920s warehouse, had been transformed into Oregon’s second largest office building in the 1980s. Both assets held tremendous potential to be redeveloped in ways that would benefit the city and build on Bill Naito’s transformative legacy. Selling would also help the family diversify their real estate holdings and meet philanthropic goals.

The Opportunity

The Galleria’s West End district had blossomed into a vibrant pocket of restaurants, chic hotels, eclectic boutiques and businesses. Renovated in 2013, the building offered historic architecture, large, light-filled floor plates, substantial amenities and immediate access to subterranean parking and public transit. There was also 80,000 sq. ft. of vacant space on the fourth and fifth floors. A retail anchor tenant dominated the first-floor experience with its large lobby entrance and ubiquitous signage, and two-thirds of the ground floor was vacant.

Montgomery Park, meanwhile, offered a roster of stellar tenants, the largest leasable floorplates in the city, expansive window lines with striking 360-degree views and amenities ranging from indoor food service to multiple conference rooms. In 2017, the building installed sustainable features, including a rooftop solar farm, which helped cut utility costs by 50 percent and made it the number one Energy-Star ranked building in Portland. Redevelopment opportunities included the former American Can Company complex on the site’s east side. The warehouse, 950-stall garage and two ancillary structures had the potential to become 300,000 square feet of creative office space. On the west side, a parking lot could accommodate a 400- to 600-unit multifamily project. In addition, the office rents were below market, presenting significant upside as leases expired. Located on 17.5 acres, Montgomery Park enjoys direct access to Highway 30 and I-405 and the NW Portland Office Market. The area is slated for investments that will transform it into a walkable, mixed-use neighborhood, including a Portland Streetcar extension to pass directly in front of the property.

The Solution

The Naito Family engaged CBRE in July 2018. CBRE’s Portland Investment Sales team collaborated with CBRE’s specialized Global Capital Team and CBRE’s Capital Markets Office West team to target a specific set of global bidders who could handle the complexity and scale of the projects and provide both speed and certainty of execution. CBRE’s Portland Debt and Structured Finance concurrently worked with buyers to understand the lease entitlements, real estate demands, specific asset and sub-market drivers and other key factors impacting their business plans. The team sought the best loan terms along with a flexible structure that allowed for the release of separate development projects for their respective business plans during the loan term. As the process moved forward, the CBRE team leveraged its internal knowledge platform to keep bidders informed of capital markets shifts in real-time, and the implications for each of their deals.

The Outcome

The bidding was highly competitive, given Portland’s status as a top secondary market for institutional capital, the premier scale and locations of the assets and the rare redevelopment opportunity they represented. The winning bidder was a joint venture between Unico Properties, LLC, a real estate investment firm with 17 million square feet of office and multifamily assets in the western United States, and Partners Group, a Swiss-based global private markets investment manager with $78 billion in assets under management. In a market-making transaction, The Galleria sold for $64.1 million in late 2018 and Montgomery Park sold for $255 million in Spring 2019.

CBRE’s Debt and Structured Finance Portland team procured the $51.6 million transitional loan that was used for the initial acquisition of The Galleria, as well as future capital needs for renovation and stabilization of the property. The team also facilitated the Montgomery Park debt, a $204 million bridge loan, inclusive of future funding, for the acquisition and repositioning of the asset. The relative size of the Montgomery Park deal brought out a stable of institutional capital, both on the equity and the debt side, with the top four debt quotes coming from providers that underwrote the initial sale on their equity platforms. They were driven to the top of the debt heap after losing out on placing equity capital on the compelling asset, but happily settling for a stake in the same asset with a debt capital position.

Unico and Partners were initially looking for 70% LTV/LTC (3+1+1 term) bridge financing to acquire and lease up The Galleria. CBRE took the deal out to 31 groups, including a mix of debt funds, banks and life company lenders. The range of quotes varied from 55% LTV up to the 70% LTV ask, and the pricing spreads had wide range at +/- 105bps of one another.

After the initial quotes came in, Global Atlantic, a life company, provided the debt at a spread just below CBRE’s initial guidance, which stood out among the quotes and helped make the decision to go with a slightly lower leverage than the ask. The lender also had the most reasonable fee schedule, provided additional flexibility on utilization of the future funding component, had a lower prepayment penalty than the alternatives and was able to move quickly to close the loan.

As for Montgomery Park, Unico/Partners requested 65% LTV/LTC floating rate full-term I/O (4+1+1 term) bridge financing to acquire and modernize the asset. They sought 100% of the first-year good new funding (net to 65% total LTC future funding). One of the unique aspects of the ask was the need to release portions of the collateral associated with the potential to develop the West Lot into multifamily and the potential to develop the American Can warehouse (and parking structure) into a creative office asset. These collateral carveouts were complicated by trying to answer the question of how to address the existing and future parking lease obligations. CBRE took the deal out to 38 lenders, including a mix of debt funds, banks, and life company lenders.

Five lenders provided a range of quotes at or around the ask at 65%+/- LTV/LTC, with a tight spread range of +/-25bps of one another. One of the quotes came in at a much higher leverage than the ask, which wasn’t compelling to the borrower, who ultimately adjusted their preference to ~68% after deliberation with Partners and a re-evaluation of the returns at the various leverage points. The final round of quotes came in at lower spreads. The deal was won by a lender whose offer included a committee pre-approval of term sheet at this round (certainty of close); willingness to 100% future fund CapX spend (offset by good news funding for fully funded 68% LTC); and a prior relationship with lender with a recent closing in another market. The winning quote was within 5 bps of CBRE’s initial guidance.

At The Galleria, Unico and Partners Group plan to convert 80,000 sq. ft. of vacant space on the fourth and fifth floors to creative office space, renovate the lobby and add new common area amenities. At Montgomery Park, the buyers plan will reposition and redevelop the site, including a $25 million world-class atrium, transforming it into a preeminent urban campus and bringing a first-class, amenity-rich tenant experience to the property.