Commercial real estate was booming in Charlotte when a group of New York investors closed on the 12-story Cameron Brown Building in uptown nearly six years ago.
The new landlord, which also owns the former Sears Tower in Chicago, told tenants improvements were on the way. They pledged to spend money on everything from fresh paint jobs to elevator upgrades.
Instead of being improved, however, the 40-year-old building and lot are falling into disrepair, tenants say. Office temperatures can be frigid and sweltering, often on the same day. The electronic parking arm won't raise and the lot is cratered with potholes. Elevators are often inoperable.
In May, the owner defaulted on its $21 million loan, according to data by real-estate research firm TREPP. A foreclosure sale is scheduled for next month.
The building is the latest uptown project to struggle, a victim of overly optimistic expectations and lingering economic weakness. The default is also the beginning of what some say is an approaching wave of distressed commercial real estate that could make landfall this year or next.
TREPP analyst Spencer Hollerith said the Cameron Brown Building's fate shows just how loose loan underwriting was in the mid-2000s, when the real estate market was booming, employers were hiring and property values were rising. Hollerith expects to see more defaults for five-year loans originated in 2006 and packaged and sold to investors, as the Cameron Brown Building's loan was.
Those packaged loans, known as collateralized mortgage-backed securities, account for about a quarter of commercial real estate loans nationally. They are generally thought to be among the least risky.
Distressed sales on the way
Of such loans in the Charlotte area, 68 percent that originated in 2006 and were scheduled to mature in 2011 are still outstanding - a red flag. About half of those loans, representing $20.2 million, are delinquent, TREPP research shows.
"It's not just that lending is more constrained now," Hollerith said, "but many properties backing those loans have had significant declines in their net operating income and aren't even worth as much as the outstanding loan balance."
Since it was bought, the tower at 301 South McDowell St. has lost tenants and revenues, loan documents show.
The building's manager said he was not allowed to comment on the property.
The owners, who last year bought New York's iconic Hotel Chelsea for $77.8 million, did not respond to a request for comment.
Tenants say the Brown building's condition is hurting their business. Some have had to close their offices early because of uncomfortable temperatures. One worker said she gets headaches because of the stifling heat. Others say it gets so cold they can't type.
"It's hard to do your best work when one day it's 53 degrees and then later the same day it's 85 or 90," said attorney Martin Hunter, who leases an office on the 10th floor. One day this month, temperatures in his office had reached 74 degrees by 8:30 a.m., so Hunter rescheduled clients who were supposed to come in that afternoon.
Now, with a possible foreclosure sale looming, tenants face uncertainty: Will a new owner honor existing leases? Or should tenants look to move, a costly disruption to their daily operation?
Optimistic plans
Close to Interstate 277, the Mecklenburg courthouse and government offices, the 183,000-square-foot Modernist mid-rise has long been popular among attorneys, architects, accountants and other professionals.
Decades ago, the city shot its annual July Fourth fireworks from the rooftop, said C. Robert "Bob" Percival, whose father, Robert H. Percival, developed the building at East Third and South McDowell streets in 1972. The building was named for the Cameron Brown Mortgage Co., a mortgage broker acquired in the 1980s by First Union Corp., which is now part of Wells Fargo & Co.
"It's got unparalleled views," Percival said.
In June 2005, The Chetrit Group LLC and 301 Cameron Associates LLC bought the building and the neighboring Adam's Mark hotel from HBE Corp. for slightly more than $47 million. The groups paid $16.1 million for the tower, Mecklenburg County property records show.
In April 2006, the investors took out a five-year, $21 million loan from Wachovia Bank for the building and 2.7 acres. Occupancy at the time was 98 percent, and the building was generating a healthy $1.22 for every dollar it owed, according to loan records provided by TREPP.
About that same time, city and county planners and developers spoke of ambitious plans for the area, including creating an urban village offering homes, office buildings, parks, restaurants, shops and condos within the area bounded by Third Street, Brevard Street and I-277. Plans have since been shelved.
Loan underwriting for the Cameron Brown Building was equally optimistic.
The loan was highly leveraged, and based on a property value of $26.3 million, according to TREPP. About 58 percent of the building's leases were scheduled to roll over by the end of 2009, something viewed as a positive at the time, said Hollerith, the analyst. The thinking was that the owners could replace the expiring leases with tenants paying current market rents, which it was assumed would be higher.
That didn't happen. As the economy tanked, companies laid off workers or shuttered, boosting the uptown office vacancy rate from 4.7 percent in early 2006 to 12.8 percent in the third quarter of last year, according to Karnes, a real-estate research firm in Charlotte. Average rents, meanwhile, rose less than $2 per foot to $25.86, excluding the many concessions property owners offered, such as free rent, to attract tenants during the downturn.
By the end of 2010, the building was generating less money - $1.08 for every dollar owed - and occupancy had fallen to 77 percent, loan records show. Lenders like to see properties earn a minimum of $1.20 for every dollar owed. Last June, the building appraised for $18.8 million, a 30 percent drop from 2006.
In December, Wells Fargo Bank started foreclosure proceedings as the loan's master servicer. The bank declined to comment other than to say "modification negotiations are ongoing."
Foreclosure filings show the note was guaranteed by Joseph Chetrit of The Chetrit Group, Charles Dayan of Bonjour Equity in New York, and Sharon Olsen and Shirley Reinfeld, both of Brooklyn.
Articles by the New York Observer and The Real Deal show the Chetrit family, a Moroccan clan that initially made its money in textiles, once bought and sold nearly $2 billion worth of real estate in a single year.
Two of the company's major properties, the Willis Tower in Chicago - formerly the Sears Tower - and an 800,000-square-foot building in New York are for sale. A loan on another New York office building is nearing default and has been transferred to special servicing, reports say.
'Untenable' situation
Meanwhile, the Cameron Brown Building continues to deteriorate.
Attorney Paul Hefferon, who operates a law firm on the first floor, said he tolerated the poor heating and cooling at first. But he became frustrated when the elevators started breaking down more often and he had trouble entering the parking lot because of broken equipment. He bought a temperature gauge to record the changes.
"You're constantly having to make excuses," said Hefferon, who meets with other attorneys and clients in his conference room on the first floor. "It's embarrassing when you are a professional and you have these problems."
Making the situation worse, he said, is the lack of response from the building's owner and management, 301 Cameron Associates.
"Because we have no communication, it leads to some personal anxiety," he said.
Brokers, meanwhile, have quietly been steering clients away from the building, say people in the real estate community.
On Nov. 2, about two dozen tenants wrote a letter to the building's owner and management company complaining of various conditions "that make our building uncomfortable, unsafe and untenable."
The city of Charlotte, which leases space on the building's 10th floor, said the situation "is obviously not an ideal one." Real Estate Division Manager Jeff Reid said he and the city have been in contact with the building's management and the city is "considering its options."
A foreclosure sale could be good for the building, tenants and surrounding area, said Andrew Jenkins, managing partner with Karnes. That's because a new owner could afford to add upgrades, he said.
On the flip side, if no one wanted the building, it could continue to lose tenants and push uptown office vacancy rates higher.
Percival, the son of the building's developer, said it'd be nice to see the building rebound.
"For those with business with the city, the county or the courthouse, there's no better building," Percival said. "The building's got such excellent bones, it could stand the test of time for another 50 or 60 years."
