Oaktree Capital initiated a foreclosure on a 48-story tower in Downtown L.A., a possible sign of distress for the city’s central office market.
An Oaktree real estate debt fund is pursuing a Uniform Commercial Code foreclosure auction for equity interests in Coretrust Capital Partners’ skyscraper at 444 South Flower Street, according to an auction notice. Oaktree, which is the mezzanine lender on the property, set the sale on Nov. 18.
It is unclear why Oaktree’s loan went into default.
“We are both surprised and disappointed that Oaktree moved forward with what we believe are unnecessary and aggressive actions,” said John Sischo, co-founder of Coretrust, in a statement. “Our intent before was, and going forward is, to come to a satisfactory solution much sooner than later. We intend to act in good faith, and expect Oaktree to do likewise.”
The foreclosure auction could be the first major distress event in recent years in Downtown L.A.’s office market, which has struggled because of remote work. In the second quarter, Downtown L.A.’s vacancy rate was close to 30 percent, according to a report from Savills. But so far there have been few notable foreclosures.
Coretrust purchased the building, then known as the Citigroup Center, from Hines in 2016 for $336 million. It took on a $230 million loan from the Bank of China that same year.
In 2018, it secured a $258 million refinancing from American General Life Insurance Company and American Home Assurance Company, records show. Citigroup vacated 55,000 square feet in 2018 to lease space at One Cal Plaza, according to the Los Angeles Business Journal. Earlier this year, three law firms took on 43,850 square feet at the building.
The skyscraper, among the tallest in L.A., has appeared in multiple television shows and movies, including in the opening credits of the 1980’s NBC drama “L.A. Law.”
It is unclear when Oaktree acquired the mezzanine debt.
Brock Cannon of Newmark is marketing the sale. Matthew Mannion of Mannion Auctions is the auctioneer.
Unlike a traditional foreclosure, a UCC foreclosure is not required to go through the court process. By pursuing a UCC foreclosure, a lender is required to set up an auction where a third party can bid. But most often a mezzanine lender wins the auction and has a path to control the property by submitting a credit bid or a bid using its existing debt. The winning bidder then has to pay off the senior lender.
Oaktree, led by Howard Marks, is known for actively buying the debt of troubled companies. Marks told the Financial Times this summer that he is “starting to behave aggressively” because loan prices have fallen. Oaktree was purchased by Brookfield Asset Management in 2019. Brookfield is one of the largest property owners in Downtown L.A., with holdings that include the 55-story Bank of America Plaza nearby. The Canadian investment firm also has plans to build a 34-story apartment building next to the Bank of America building at 333 South Hope Street.
Oaktree declined to comment through a spokesperson.