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The Hotel Sofitel in Bloomington, Minnesota in Foreclosure After
 Defaulting on $18 million Loan from Eurohypo,
Part of Germany's Commerzbank Group

By Jennifer Bjorhus, Star Tribune, MinneapolisMcClatchy-Tribune Regional News

August  21, 2010 --The owners of the Hotel Sofitel, the Minnesota Center and One Financial Plaza -- three well-known buildings in the Twin Cities -- are trying to restructure $88 million of outstanding debt after defaulting on loans.

The defaults are among the largest in the Twin Cities involving securitized commercial property debt, and such behind-the-scenes bargaining over past-due loans has become a hallmark of the commercial real estate crisis. Hotels have taken a clobbering, but there's plenty of distress to go around.

Borrowers owing $434 million were 60 days or more past due or in foreclosure on 42 commercial buildings across the Twin Cities as of Aug. 1, from shopping centers to office towers, according to data from commercial real estate researcher Trepp LLC in New York. That total counts only loans that were securitized -- bundled with other commercial property mortgages and sold to investors like bonds, much the same as residential mortgages.

That's a local delinquency rate of 8 percent for loans that were part of a commercial mortgage-backed security -- about double the 3.5 percent rate a year ago. The Twin Cities is roughly in line with national averages now and a year ago.

Because of a lag time in reporting after buildings go back to the lender, Trepp's loan numbers include debt on some buildings that lenders have already resold.

Hotel Sofitel

The Hotel Sofitel, a luxury hotel built in the early 1970s, is in foreclosure. Its owner defaulted on the $18 million remainder of an interest only loan from Eurohypo, part of Germany's Commerzbank Group, according to Trepp.

Property records show the Sofitel, at 5601 W. 78th St., is owned by 78th Street Ownerco LLC, although the taxpayer appears to be Accor Business & Leisure North America, part of Accor SA in France, one of the world's largest hotel operators. Sofitel is Accor's luxury brand.

In 2006 Accor said it owned six U.S. Sofitel hotels, including the one in Bloomington, as part of a joint venture with Chicago-based GEM Realty Capital and a Goldman Sachs group called Whitehall Street Global Real Estate Limited Partnership.

Accor would only say it's the long-term manager of the Sofitel and has "no comment about the business of the property owner."

Mark Bernhardson, Bloomington's city manager, said he's aware of Sofitel's troubles. The hotel's debt matured at the same time as three other Sofitels across the country, he said.

"I don't know if they're in the same boat," he said.

Bernhardson said he doesn't expect anything dramatic to happen as a result of the restructuring.

"Commercial properties going through foreclosure are a different animal," he said. "It's generally in the lender's best interest to continue that operation."

Office towers

The Minnesota Center, a 14-floor chunky glass tower at 7760 France Av. S. in Bloomington, and One Financial Plaza, a 27-story tower at 120 S. 6th St. in downtown Minneapolis, are both owned by a real estate investment trust (REIT) near Dallas called Behringer Harvard REIT I.

The REIT has defaulted on a total of $70.4 million in loans on the two buildings, according to documents filed with the Securities and Exchange Commission earlier this month. About $43 million of that debt is an interest-only loan with a balloon payment obtained from Citigroup for One Financial Plaza in 2005, according to Trepp.

Jason Mattox, Behringer Harvard's chief administrative officer, said his company is in discussions with lenders on both properties and hasn't announced plans for either of them.

In its government filing, Behringer Harvard said it's working to either restructure the $70.4 million debt on the two buildings or pay it off at a discount. Foreclosure is possible, it added.

Behringer Harvard paid $64.2 million in 2005 for One Financial Plaza. It suffered a setback when a major tenant, accountants Deloitte & Touche, moved out in 2007, and the tower is about 58 percent leased, said George Janssen a broker with Transwestern, which handles the building's leasing. Key tenants include the Nilan Johnson Lewis law firm and ad agency Clarity Coverdale Fury.

The Minnesota Center is about 62 percent leased, according to the REIT's government filings. Behringer Harvard also owns Lawson Commons in downtown St. Paul, which is 99 percent leased.

Behringer Harvard REIT I is what's known as a private or unlisted REIT, a type that's considered riskier for investors because it's not traded on an exchange. It lost $89.7 million on revenue of $138 million in the quarter ended June 30, and has suffered widening annual losses since 2005.

Jennifer Bjorhus --612-673-4683


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