The news that Colony Capital is making a multimillion-dollar loan to Grubb & Ellis Co. suggests the Santa Monica private equity firm might be looking to cash in on the budding recovery of the commercial real estate market.
Colony is providing an $18 million loan that will help the struggling Santa Ana-based commercial brokerage stay afloat. The loan agreement, disclosed last month, gives Colony a 9.6 percent stake in Grubb & Ellis’ common shares outstanding and an exclusive 60-day opportunity to negotiate an acquisition.
Purchasing Grubb & Ellis would give Colony immediate access to a large commercial real estate brokerage with some 5,200 professionals in more than 100 offices nationally. Colony has a $36 billion investment portfolio in real estate and other assets, while brokerages generate transactional fees. With lease and sales deals picking up, those fees could start to generate profits.
“If you want to make a name for yourself in cereal, buy Kellogg and the cornflakes brand,” said Fernando Villa, partner in the real estate division of Century City law firm Pircher Nichols & Meeks. “The one thing that I think Colony is counting on is that by acquiring Grubb & Ellis, it acquires an instant name brand.”
Colony has not disclosed whether it will pursue the acquisition of Grubb & Ellis, which has been in trouble since an ill-timed 2007 merger with NNN Realty Advisors Inc. The real estate manager had a $4 billion portfolio that went bust during the real estate crash, forcing Grubb & Ellis to establish a separate entity to manage its share of those assets.
However, the portfolio has continued to plague Grubb & Ellis, which reported a loss topping $78 million last year. By contrast, rivals such as West L.A.’s CB Richard Ellis Group Inc. have emerged from the real estate downturn and are reporting profits.
Grubb & Ellis carries hundreds of millions of dollars of debt and is in danger of being kicked off the New York Stock Exchange for falling below the minimum $1 share threshold. Late last month, the brokerage announced that it had hired San Francisco-based JMP Securities LLC to explore a potential sale or merger. Days later, it received the Colony loan, which is at an 11.7 percent fixed rate over an 11-month term.
Colony has made a profitable business out of investing in sub- and nonperforming commercial real estate debts, earning a billion-dollar fortune for founder Tom Barrack.
Jason Arnold, a research analyst at RBC Capital Markets in San Francisco who follows Colony’s publicly traded real estate investment trust subsidiary, said Barrack might want to operate the company – or sell it off after a turnaround.
“I could envision a scenario where they could be more deeply involved with the company, operate the company for a time and then sell it,” he said. “They are quite savvy in their investments.”
