In a move that illustrates how the real estate bust could become an opportunity for new investors after years of problems, two partners bought the Redwood Tower office building Friday for about a third of its original mortgage.
Investors Ray P. Turchi of Phoenix, Md., and Angelo Teeter of Orlando, Fla., paid $10.5 million for the 202,400-square-foot building at 217 E. Redwood St. They bought it from a unit of BankAmerica Corp. which has owned the building since merging with one-time rival Security Pacific Corp. earlier this year.
Security Pacific had held a mortgage on the property for about $34.4 million. "We bought it for $52 a square foot, and it cost $150 to build," Mr. Turchi said yesterday. "It puts us in a different ballgame than someone who mortgaged construction costs. . . We can be more competitive."
Brokers said the deal alone won't transform the downtown market for Class A office space, or for space in buildings that are either relatively new or older buildings that have high-prestige tenants such as major banks or law firms.
But those who buy their buildings from banks that have foreclosed on loans would have an advantage over other developers. The banks are likely to discount the properties sharply to sell them, as BankAmerica did in the Redwood Tower sale.
"Would someone pay $24 a square foot [in annual rent] to go with someone else as opposed to $16 to $18 to come with us?" Mr. Turchi said. "That hits the nail on the head as to why we bought it."
Mr. Turchi said the partners also looked into buying 6 St. Paul Centre, the city's tallest office building and the only other downtown Class A building that has been taken over by its lender. But Chemical Banking Corp., the building's owner, wanted too much money, he said.
Mr. Turchi wouldn't say whether current leases were enough to make the building profitable right away, but he hinted that they were. The building is 76 percent occupied, he said.
"We don't normally get into investments without making money," Mr. Turchi said.
Ira J. Miller, a broker with Smithy Braedon & Co. who represented the buyers in the deal, said lower rents on the approximately 50,000 square feet that is vacant at Redwood Tower can't do much itself to alter the competitive balance of the downtown market, which has more than 6.8 million square feet of class A space.
But sales of buildings around the region by lenders that have taken them over from defaulting developers could put pressure on landlords who have hung on during the recession, he said.
Competition from once-repossessed buildings that have lower cost bases after lenders sell them could force developers to consider options such as absorbing losses out of their pockets, renegotiating mortgages or giving more buildings back to lenders.