Published on Wednesday, February 21, 2024

Newport Beach-based REIT must raise $100M in new equity or debt by July 15.


KBS Real Estate Investment Trust III has negotiated an extension until August of a $613M loan backed by a portfolio of six office assets encompassing more than 3M SF, a debt package that originally was scheduled to come due last November.

The California-based REIT must raise $100M in new equity, debt or a combination of both in order to recapitalize the debt package, according to an SEC filing. The new due date is August 6.

According to the filing, KBS is required to pay lenders, led by Bank of America, $1.9M in fees and to deposit $5M into a collateral account that can be used to cover expenses including tenant improvements, leasing commissions and capital improvements.

Missing any of the above requirements will result in immediate default, the filing said. KBS has tapped investment bank Moelis & Co. to assist it with fundraising.

The portfolio backed by the loan includes three Texas properties encompassing 1.3M SF, including the Sterling Plaza and Preston Commons developments in Dallas and the Legacy Town Center in Plano.

Two properties encompassing 1.1M SF in California, The Almaden in San Jose and The Towers Emeryville near Oakland, also are backed by the loan, as is the RBC Plaza in Minneapolis.

Facing $1.7B in loan maturities in the next 12 months as valuations of its office assets plunge, KBS Real Estate Investment Trust III warned shareholders in December that there is "substantial doubt" it can stay in business.

According to a regulatory filing, the Newport Beach, CA-based fund reported in December that the net asset value of its portfolio, estimated at $1.3B in September 2022, has fallen to about $833M as of last month, a drop of more than $430M.

"Considering the current commercial real estate lending environment, this raises substantial doubt as to KBS REIT III's ability to continue as a going concern," the shareholders were told.

"Continued disruptions in the financial markets and economic uncertainty could adversely affect the company's ability to implement its business strategy and continue as a going concern," the statement to shareholders continued.

The filing said the KBS REIT "anticipates it may relinquish ownership of one or more secured properties."

The company, which has more than $1B in office holdings across the country, cited "severe leasing challenges" facing the San Francisco market, which is struggling with a 35% office vacancy rate as well as surging crime and homelessness in its hollowed-out downtown.

KBS has given back the keys on 201 Spear Street, a 253K SF building in San Francisco which saw its occupancy drop from pre-pandemic levels of 97% to 64% in September 2023.

The lender on 201 Spear is finalizing the sale of the mortgage loan and title to the property in a Deed in Lieu agreement with KBS. The deal is expected to close for about $60M, which is less than half of what KBS paid for the property in 2013. KBS took a $51M write-down on the South Financial District tower in December.