Trophy Towers Turned Over

by on September 26, 2012 3:18 am GMT

If the property bull market had lasted awhile longer, big bets by a firm headed by C. Frederick Wehba might have made him one of the most successful property investors of the era, capping a remarkable rise from his early days in the grocery-store business.

Instead, the Los Angeles firm he co-founded with his son has turned over or sold at a loss several of its trophy assets, such as the Watergate office building in Washington and Atlanta’s shimmering Bank of America Plaza.

Now, the company, BentleyForbes, faces the departure of the largest tenant in its remaining high-profile office property, Chicago’s Prudential Plaza. That is raising questions among analysts about its ability to hold onto the property if it can’t fill the vacated space.

BentleyForbes’s retreat shows how troubles in the commercial real-estate market continue, four years after the financial crisis reached its peak with Lehman Brothers Holdings Inc.’s bankruptcy filing. Even as troubled developers and lenders resolve problems that popped up in the early years of the crisis, other properties are still getting dragged down.

The 65-year old son of Lebanese immigrants, Mr. Wehba worked his way up from his father’s grocery store to oversee a $2.5 billion property empire—success that came despite him pleading guilty to a felony and later being incarcerated for financial fraud.

Few investors borrowed more aggressively during the property boom than BentleyForbes, say analysts and people familiar with the company and industry. The firm put up less than $50 million to acquire eight of its largest properties—with a combined purchase price of $1.64 billion—between 2005 and 2007. Those deals relied on loans, also known as leverage, for about 97% of the combined acquisition price, according to loan documents.

“That’s an extraordinarily high amount of leverage to put on properties,” said Vincent Costantini, chief executive of Boston-based property firm Roseview. “It’s hard to rationalize, even during heady times.”

If the market had kept on soaring, Mr. Wehba’s firm could have seen returns of 10 to 25 times its investment, industry peers say. “He would have been seen as a genius,” Mr. Costantini said.

While BentleyForbes still owns several properties, it has lost to lenders or sold at a loss seven of its trophy assets.

[image]Michael Ochs Archives/Getty Images

BentleyForbes’s Prudential Plaza in Chicago is losing some tenants.

A BentleyForbes spokesman said the firm is charting a “strategic plan of action” with its financial partners on Prudential Plaza “that will enhance the property’s underlying capital structure to ensure the long-term stability of the towers.” The spokesman declined further comment. Mr. Wehba didn’t return requests for comment.

BentleyForbes’s largest lenders included major banks such as J.P. Morgan Chase

& Co. and Bank of America Corp.

Both banks declined to comment.

Mr. Wehba began his real-estate career buying and selling grocery stores in Texas and Oklahoma. After running a 20-store supermarket chain in the 1970s, he turned to real-estate investing full time in the 1980s.

In 1993, Mr. Wehba co-founded with his son a real-estate firm he named BentleyForbes because it combined two names associated with luxury, said a person who heard him tell the story. He became chairman of the firm, which is owned by the Wehba family and trusts controlled by the family.

Mr. Wehba built his own mansion in Beverly Hills, where he hosted weekly Bible sessions. He dresses in bespoke suits and has bragged about not owning a single pair of jeans, say people who know him.

Along the way, Mr. Wehba also had run-ins with the law. In 1978, he pleaded guilty to felony charges in Oklahoma of “devising and executing a scheme and artifice to defraud and obtain extension of credit by false and fraudulent representations,” U.S. District Court documents show. He was given probation.

In 1996, he served about three months in a Los Angeles halfway house, according to a spokesman for the Bureau of Prisons, who said he was sentenced in Texas for “concealment of assets from a liquidating agent of a financial institution.”

Despite his incarceration, BentleyForbes had little trouble finding loans during the boom years through the peak 2007. The firm amassed dozens of buildings including, the Four Seasons Resort in Dallas.

His jewel was Atlanta’s Bank of America Plaza, the tallest skyscraper in the South. BentleyForbes bought the property for about $436 million in 2006, a record price in the city.

Mr. Wehba’s firm was able to borrow so heavily, real-estate experts say, in part because financial markets provided creditors a way to unload risk. Mortgage lenders could securitize their loans, or sell them in the commercial mortgage-backed securities market.

After the recession hit, financing dried up and property values tumbled. In February, LNR Partners, a distressed-debt specialist acting on behalf of bondholders on a $363 million mortgage, foreclosed on Bank of America Plaza. Last year, BentleyForbes sold at a loss the Watergate office complex, home to the infamous burglary of Democratic headquarters during the Nixon administration.

BentleyForbes is dealing with a loss of tenants at Prudential Plaza, which it bought for $470 million in 2006. The twin-tower property has 2.2 million square feet and currently is 86% leased, according to CoStar Group, a real-estate research firm. But the lease of the building’s largest tenant, Baker & McKenzie, is expiring in November, and the company already has vacated the space. Integrys Energy Group Inc.

said last year that it was vacating its 196,000 square feet when its lease expires in 2014.

It isn’t clear if BentleyForbes has replacement tenants lined up. Without the space filled, analysts say, the building would have difficulty supporting the $470 million of debt that the firm put on it, and BentleyForbes could end up being forced to consider turning it over to creditors or selling it, analysts say. “It’s one of those ones that’s on the bubble,” said, Steve Jellinek, vice president with Morningstar Credit Ratings LLC.

BentleyForbes isn’t the only real-estate company still suffering a boom-time hangover. MPG Office Trust Inc.

has wrestled with too much debt after an ill-timed buying spree in 2007 and has been forced to hand over numerous buildings to creditors. The firm, one of the largest office landlords in downtown Los Angeles, is actively looking for investors to buy the company or otherwise make a substantial investment in it, according to real-estate executives with direct knowledge of the planning.

Mr. Wehba is downsizing in other ways. In 2009, his firm’s private jet was repossessed after it missed lease payments, according to the repossession documents. This spring, he sold his Beverly Hills mansion, which was decked out with gold door knobs and marble columns, for $34.5 million, about half the initial asking price.

Write to Craig Karmin at craig.karmin@wsj.com and Maura Webber Sadovi at maura.sadovi@wsj.com