Lenders Prepare to Sell Gem Realty, Flynn Properties’ Debt

K-Star Asset Management isn’t moving to foreclose on two office buildings in San Francisco’s Union Square just yet.

The Dallas-based investment firm is planning to begin marketing the debt tied to 222 Kearny Street and 180 Sutter Street this month, the San Francisco Business Times reported. K-Star became the special servicer managing the $47.5 million in mortgage debt after property owners Gem Realty Capital and Flynn Properties were served a notice of default for the loan in April 2024.

An affiliate of Gem and Flynn partnered with the firms to acquire the properties in 2019 for about $75 million, or roughly $516 per square foot. Occupancy at the buildings has plummeted in recent years, from 91 percent in 2019 to 32 percent last September. The appraised value for the 121,000-square-foot 222 Kearny and 24,000-square-foot 180 Sutter fell to $18.3 million, or about $126 per square foot, last summer.

A potential foreclosure auction has been repeatedly rescheduled, most recently to Aug. 28, though it could be delayed again as Gem and Flynn’s lenders seek a third-party buyer for the loan. Auction records list the notice of sale amount as $56.7 million, or $391 per square foot.

Flynn Properties recently acquired one of the 20 largest office buildings in San Francisco, paying $177 million, or $238 per square foot, in a deed in lieu of foreclosure for Market Center in June. The two commercial skyscrapers at 555-575 Market Street were tied down by a $416 million loan from lender ING.

San Francisco had the highest office vacancy rate in the country at 34.7 percent in the first quarter, according to the Kaplan Group. The city clawed its way out of last place when it came to return-to-office rates in the first quarter.

— Chris Malone Méndez