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Commercial
San Francisco

Gem Realty defaults on SF office complex with $47M debt load

WeWork location in Union Square could face foreclosure, depending on loan negotiations

Gem Realty Defaults on SF Buildings With $47M in Loans
GEM Realty Capital's Michael Elrad; 222 Kearny Street (CBRE, Getty, digestivehealthfoundation)

Gem Realty Capital has defaulted on $47 million in loans tied to a two-building office complex in San Francisco. 

An affiliate of the Chicago-based investor is behind $2.2 million in its mortgage payments and was served a notice of default for the loans linked to buildings at 222 Kearny Street and 180 Sutter Street, in Union Square, the San Francisco Business Times reported.

The originator of the loans in 2019 was New York-based Goldman Sachs, which then repackaged them into commercial mortgage-backed securities loans sold to bondholders.

The loans went into special servicing in August, according to The Real Deal. The buildings have two loans of $23.75 million associated with them, totaling $47 million.

The move came after tenant WeWork admitted to “substantial doubt” about whether it could continue operations in light of a cash shortage. WeWork is the complex’s second-largest tenant, occupying about 18,000 square feet at the 148,000-square-foot property.

In March 2020, the building was 100 percent occupied, according to Morningstar, with a net cash flow of about $6.1 million over a three-month period. 

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By March last year, occupancy dropped to 73 percent and net cash flow was $686,000 over a three-month period. 

Gem Realty and locally based Flynn Properties, owned by restaurant franchise mogul Greg Flynn, bought the building complex in 2019 for about $75 million. LBA Realty was the seller of both properties. It’s not clear if Flynn still had an interest in the properties.

The notice of default is the first step toward foreclosure, unless the trust for the CMBS investors and the borrower work out a deal. The owner-borrower could also regain control of the property after handing back the keys by submitting a winning bid at a foreclosure auction.

It appears less and less likely that Gem Realty will keep the building as negotiations on the unpaid debt drag on. A report prepared for bondholders this month listed “foreclosure” as the workout for every month since October.

— Dana Bartholomew

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