600 California Street - Northern Financial District Submarket in San Francisco - Accounting and Finance Assignment Help

Assignment Task:

600 California Street is a 359,880 SF Class A office building located in San Francisco, CA.1 Developed in 1990, the building has 20 above ground floors and 3 subterranean parking floors with 200 spaces. The ground floor of the building is occupied by retail tenants, with office tenants above. The property has been Energy Star labeled since 2008, and received LEED Gold status in 2009 and 2016. The property has undergone extensive renovations since 2015, and by the end of the 2020 capital plan, the owners will have spent approximately

$21MM renovating and modernizing the interior and exterior of the building. A recent tour of the property shows that the building is very well maintained, and the interiors are modern and of high quality.

The property most recently sold in August 2019 for $322MM, with the transaction being financed by a $240MM loan from Goldman Sachs and Citigroup, that was securitized as a single asset CMBS deal in GSCG Trust 2019- 600C. The loan has a term of 5 years, is interest only, and has a 4% fixed interest rate.2

The property sits on the western edge of the Northern Financial District submarket in San Francisco. The Northern and Southern Financial Districts form the CBD in San Francisco. Properties to the north of 600 California are lower rise, while buildings south and south east tend to be taller than 600 California. This means that from around the 10th floor up, the property has unobstructed views north out to Alcatraz and the San Francisco Bay.

     In terms of quality, 600 California is a solid Class A asset. There are a handful of what one might call “investment grade” Class A buildings in the market (e.g. 555 California, 101 California.) These buildings are larger (typically 1MM+ SF) and have chunky investment grade tenants in their rent rolls. These properties would demand premium rents and pricing compared to 600 California. Realistically, 600 California competes very well with properties in the second tier of Class A assets. These properties tend to be smaller than the investment grade assets, possess smaller floor plates, and have tenants that typically max out around 40-60,000 SF. The building’s 14,000 – 30,000 SF floor plates are well sized to match full floor non-investment grade Class A tenants in the market.

1. What is the value of the property in July 2020 under both distressed scenarios, assuming any WeWork default happens in July 2020?
2. Do you think a WeWork lease default is likely for either block of space? Why?
3. Based on your analysis in Q1 and Q2, should the bondholders be worried?

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