Brookfield’s $400M DTLA Office Loan Heads to Special Servicer

Brookfield Asset Management is once again in hot water with a lender for a big downtown Los Angeles office tower.

The alternative investment giant’s lender for its 1.4 million-square-foot Bank of America Plaza office tower at 333 South Hope Street has transferred a $400 million debt secured by the property to a special servicer, which is usually a sign that a lender foresees a growing chance of a borrower failing to pay off a loan before its maturity.

The loan was transferred to special servicing in recent weeks, according to Morningstar. The landlord’s looming trouble with the debt stems from losing its third-largest tenant, law firm Sheppard Mullin Richter, which has long rented space within the Bank of America Plaza before inking a 119,000-square-foot lease last year across the street at CIM Group’s 350 South Grand Avenue.

Sheppard’s lease in Brookfield’s tower expires at the end of the year and the firm plans to vacate, which will pull the property’s occupancy below 70 percent, according to Morningstar.

Brookfield didn’t return a request for comment.

Sheppard Mullin accounts for about 13 percent of the building’s net rentable area, according to a May Fitch Ratings report, and is the building’s third largest tenant. The law firm’s lease ends in December after which it reportedly makes the move to CIM Group’s City National 2CAL building at 250 Grand Avenue.

Sheppard Mullin’s expected departure comes after another law firm, Alston & Bird, left the building after its lease expired in December.

That leaves the office tower with Capital Group Companies, which occupies about 27 percent of the net rentable area, as a key tenant. Its lease expires in February 2033, according to Fitch.

It’s the latest hit to Downtown’s office market.

The area’s second-quarter vacancy rate sat at 32 percent, according to a market report from CBRE. The submarket’s also the most pressured, in the red by about 490,000 square feet and leading the negative net absorption for the greater Los Angeles area in the quarter, CBRE reported.

Brookfield’s debt on the property matures in September, and refinancing L.A. office towers before the clock runs out has already proven difficult for Brookfield, amid waning demand for commercial real estate due to remote work trends and rising interest rates cutting into real estate values.

Last year, the landlord lost control of two L.A. towers — the Gas Company Tower and EY Plaza — to a court-appointed receiver due to debt trouble, and it was in technical default on 777 Tower, even as it continued to service debt on the latter. The Gas Company and 777 Tower properties have since been marketed for sale by their respective receivers, but a potential buyer pulled out of a deal to buy 777 Tower earlier this year at a huge discount from its $319 million in debt.

As of May, the borrower hadn’t disclosed how it plans to handle the Bank of America Plaza maturity or pursue refinancing, according to Morningstar.

The likelihood of Brookfield failing to pay off the $400 million loan for 333 South Hope on schedule is no surprise to its lender. Fitch Ratings last year labeled the loan with a heightened risk of maturity default, and Wells Fargo, Goldman Sachs, Morgan Stanley and Citigroup — which collectively originated various portions of the property’s debt — were already reporting a loss on the deal.