Owner of S.F. apartment complex reaches deal to stave off foreclosure

Crescent Heights, the owner of the 754-unit rental property known as NEMA San Francisco at 8 Tenth St., across the street from X Corp.’s San Francisco headquarters, this year failed to meet certain obligations under a $384 million loan agreement forged for the property in 2019 and began missing payments in the fall. The loan was sent into special servicing this past summer, and last week, Crescent’s lenders sued to launch foreclosure proceedings.

But, a deal that was forged Tuesday afternoon following months of negotiations ensures Crescent Heights will retain control of NEMA, a company spokesperson confirmed. The parties agreed to modifications to Crescent Heights’ loan agreement, the spokesperson said, but details were not disclosed.

Last week, Wells Fargo Bank — the trustee for the loan acting on behalf of the building’s lenders — sued Crescent Heights in an effort to recoup the mortgage debt. The lawsuit, filed in San Francisco Superior Court on Jan. 2, stated that NEMA’s lenders planned to commence a non-judicial foreclosure proceeding for the property. 

This type of proceeding is much quicker and more cost efficient than a judicial foreclosure and allows for the speedy sale of a property — and while it does not require the parties to go to court, the lawsuit filed by Wells Fargo last week was a necessary step to bring the building under new management. 

With its complaint, Wells Fargo sought the “immediate appointment” of a receiver to take control of the apartment complex from Crescent Heights. The receiver would then manage the property in order to stabilize its operations, collect rental income and could opt to sell it on behalf of the lenders to cover the outstanding debt. 

“Plaintiff intends to commence nonjudicial foreclosure proceedings on the Property and is in need of a receiver to manage, operate and preserve the Property pending the foreclosure sale,” Wells Fargo said in the complaint, and recommended that Chris Neilson, the managing partner of San Diego-based property management firmTrigild, be appointed as NEMA’s steward moving forward. 

Wells Fargo did not respond to a message seeking comment on the lawsuit this week. Crescent Heights’ spokesperson described the lawsuit as a “servicing procedure.”

“Crescent Heights is pleased to confirm it has agreed in principal to a loan modification with its lenders, and that this filing is a servicing procedure while loan documentation is finalized,” Crescent Heights’ spokesperson said in a statement on Tuesday. “We are grateful to our lenders and the servicer for working with us to put in place a long term plan that ensures NEMA San Francisco will continue to maintain its position as one of the city’s preeminent residential rental buildings.”

NEMA is short for “New Market.” When the futuristic complex designed by Handel architects opened in 2013, it pioneered a luxury lifestyle in the city’s rental market with its amenities and hospitality-style services that symbolized Mid-Market’s transformation — the neighborhood, long plagued by vacancies, soon after became home to tech giants such as Uber, Zendesk and Twitter (now X Corp.).

NEMA’s $384 million mortgage was sent into special servicing in August, but the loan had been in trouble for some time. According to Trepp, which provides data on structured finance and commercial real estate, the loan posted a debt service coverage ratio (DSCR) level below 1 since 2020, which denotes a negative cash flow.

The loan became delinquent on payments in September when Crescent Heights was “unable to pay operating expenses after the payment of debt service,” according to credit rating agency Morningstar Credit, which last week downgraded its credit ratings on the loan.

Crescent Heights’ spokesperson said that occupancy at the building is currently more than 90% occupied.

“Occupancy-wise we are running fine — but the prices are way off from before COVID-19,” the spokesperson said, referring to rental rates. 

Per Morningstar, a 2018 appraisal valued NEMA at $543 million, but an updated appraisal issued in September showed a close to 50% decline in the property’s value. 

“The appraiser attributed the collateral property’s under performance to various factors including the increase in crime and homelessness in downtown San Francisco, changes in in-person workplace dynamics, and the disruption of the technology sector driven by mass layoffs and higher interest rates,” Morningstar said in its report.

Crescent Heights’ spokesperson said that the deal struck Tuesday, which also involves Crescent Heights infusing more capital into the property in order for the developer to “maintain its position,” represents “a vote of confidence in the city” by both Crescent Heights and its lenders.

“We believe in the city and we are moving forward,” the spokesperson said. “Crescent Heights has other projects that we are involved with in San Francisco and we are working diligently to see those come to fruition.”

In June 2020, Crescent Heights won the city’s approval to build a 966-unit, 55-story residential tower at the site of a shuttered Honda dealership at 10 South Van Ness Ave. But the project is unlikely to be constructed any time soon, as most market rate projects in San Francisco have been on hold in recent years amid a worsening economy. The 10 South Van Ness project has yet to break ground, and, earlier this year, the city approved a four-year extension of its entitlements.

Similarly, the financial situation surrounding the NEMA complex is yet the latest symptom of ongoing distress in San Francisco’s real estate market ushered in by the COVID-19 pandemic. San Francisco recorded a 35.9% vacancy rate across its downtown office buildings at the end of 2023, a percentage that has been steadily on the rise since March 2020, when the pandemic first shuttered offices and businesses. Since then, many office-based companies have adopted permanent remote work options for their employees, leading to massive office space dumps and downsizing in downtown.