Energy News Beat
The two-tower property sold at a 75% discount. ING’s loss was much smaller. Investors took a bigger loss.
By Wolf Richter for WOLF STREET.
Banks have been trying to get rid of bad commercial real estate loans to make room on their balance sheets for new loans that they can show income from. To avoid ending up with the property, banks have extended mortgages when landlords could not pay off the mortgage at due date because they could not get a new mortgage, and banks have been modifying existing mortgages such as to lower payments to avoid a default.
This “extend and pretend” has been the standard method, where possible, to provide for more time and runway to deal with this stuff. For all lenders, not just banks, 40% ($384 billion) of the loans that mature in 2025 already matured in prior years and were extended, and another $205 billion were extended to 2026, according to a report by Colliers in March. These loan maturities in 2025 and 2026 are in addition to the scheduled loan maturities. And they all have to be refinanced.
Meanwhile, banks have been setting aside substantial amounts to cover expected CRE losses, and those amounts have already hit their income statements on a quarterly basis.
Foreign banks were among the banks that heavily invested in US CRE, especially in trophy office buildings in trophy office markets in the US, including Dutch megabank ING.
So here is a defaulted large two-tower office property in San Francisco that ING now got rid of at a big loss. But investors took an even bigger loss.
In 2019, New York-based Paramount Group acquired Market Center, a 770,000-square-foot two-tower office property on Market St., for $722 million, according to Paramount’s press release at the time. The deal was hailed as “one of the biggest single sales in San Francisco history” by the local media.
ING provided a $402 million fixed-rate loan at 3.07%, on the premise that a trophy office property in a trophy office market with a huge office shortage was a nearly risk-free proposition. The loan had an initial term of five years and two one-year extensions. At the time, ING said that it planned to syndicate the loan in “early 2020.”
In its December 2019 announcement of the loan, ING gushed about its CRE activities in the US, especially on the West Coast:
“The closing of the Market Center financing caps a busy year for ING’s Real Estate Finance team in the U.S. In 2019, the team will have originated $2.75 billion of new loan commitments secured by commercial properties in primary markets across the country. The West Coast continues to be a focus for the team. Since hiring Lynch to ING’s Los Angeles office in 2018, the team has closed transactions in Seattle, San Francisco, Los Angeles, Anaheim, and Dallas.”
Three months later, Covid came. In August 2024, Paramount defaulted on the loan, and ING took possession of the property via a “deed in lieu of foreclosure” process.
So now it’s time to clean up the mess. ING recently sold the loan, along with the property, for $177 million to Flynn Properties, headed by Bay Area real-estate investor Greg Flynn. DRA Advisors is the primary investment partner on the deal, according to the San Francisco Standard.
The transaction value of $177 million ($238 per square foot) represents a discount of 75% from the last transaction value in 2019 of $722 million.
There has been a slew of office property sales in 2024 and 2025 at discounts from pre-covid transaction prices of round 70%, give or take some. That seems to be the going rate now, as the market has completely reset, and sellers understand it.
ING lost about $235 million. The original loan was for $402 million. On top of that was unpaid interest, bringing the outstanding balance to $412 million. If that was still the outstanding loan balance when the loan was sold for $177 million, ING would have written off $235 million, or 57%.
ING likely set aside an amount covering the expected loss in some prior quarter, and there may be no additional hit on its financial statements for the current quarter. But it got rid of a bad loan that wasn’t producing any income. And the clean-up makes room on its balance sheet for new loans that it can show current income from.
Investors lost about $320 million, or 100% of their equity in the property: Paramount’s acquisition costs of $722 minus the original loan of $402 million.
And the new investors can do something with the property. They came in at a much lower cost basis ($177 million), and they plan to invest in the property and offer deals to make it more attractive to current tenants (which include Waymo) and new tenants.
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The post Banks Getting Rid of Bad CRE Loans: Dutch Megabank ING Dumps One of the Largest Office Properties in San Francisco appeared first on Energy News Beat.
