Prime Sunnyvale downtown property in foreclosure; no one bids at auction

Dozens of people, including sharply dressed business types, women in sundresses and reporters, showed up outside the Santa Clara County Superior Courthouse Wednesday morning as a 36-acre development project known as Sunnyvale Town Center went up for bid at a foreclosure sale.

But when the time came to enter the bidding, nobody but the bank came forward.

The bank, Wells Fargo, foreclosed on the property at $108.8 million and walked away with it. That was a fraction of the $750 million the development was valued at only a few years ago.

“I’m a little surprised nobody bid,” said Vanessa Chow, a Milpitas contractor who showed up to watch the auction. As a contractor, she was interested in business that could come from the project changing hands.

But for those with a sense of the project’s history, this was just the latest strange event in the saga of Sunnyvale’s attempts to redevelop 36-acres acres smack in the middle of downtown.

This giant, mixed-use Sunnyvale Town Center project stands partially completed. (Photo: Jamie Hansen)

The beleaguered town center’s history goes back decades. Since the 1970’s, Sunnyvale’s redevelopment agency has focused on converting the town center area into a bustling hub of activity. According to the redevelopment agency’s online history, a mall opened there in 1979 and ran successfully for almost two decades.

Then, in 1998, the mall changed hands. That seems to be where the trouble really began. The new company, American Mall Properties, attempted to expand the mall but ran into financial problems by 2002, defaulted on its loans and ultimately lost ownership of the project.

After that, the project transfered through a series of owners and developers, including Lehman Brothers and Fourth Quarter Realty. Each group failed, defaulting on loans or breaching its contract in one way or another.

The latest group to take a stab at the mammoth project was Downtown Sunnyvale Mixed Use LLC. Hopes were high when it took the job in 2007. The corporation was created by Sand Hill Property Company, a local developer with a good reputation, and RREEF, a global financing organization.

A 2006 article in the Silicon Valley/San Jose Business Journal cited area commercial real estate professionals as saying that, if anyone could get the job done, it was Peter Pau, the principal at Sand Hill Property Company.

By that time, the old mall was mostly shuttered. Downtown Sunnyvale Mixed Use agreed to demolish much of the old structure and build a new, mixed-use development akin to San Jose’s high-end residential and retail hub, Santana Row.

The new developer got off to a strong start, quickly demolishing most of the old complex.

Around that time, Leigh Odum moved in and opened a bookstore on the historic Murphy Avenue, adjacent to the development project.

“We thought we were moving into a vibrant downtown, with the expectation that the mall would go in,” she said.

But then, partway through construction of the new office, retail and residential space, the developers lost funding in the throes of the economic downturn in 2009 and defaulted on a $108.8 million loan.

The property has been in receivership since late 2009. Sunnyvale’s City Attorney David Kahn said that the city has identified a new group, consisting of Hines Interests, Starwood Capital and Madison Marquette, to take over the project.

But Peter Pau, of Sand Hill Property Company, wants to pay off the loan and keep the property, according to his attorney Ron Rossi. He sued to stop the property from being sold through recievership earlier this year. Rossi said that Wednesday’s auction was what his client wanted.

So, many were surprised when Wednesday arrived and neither Pau nor Hines, Starwood and Madison Marquette bid.

However, reading an official statement by the city, Kahn said that the bank taking ownership of the property was “a positive and important step forward to the successful completion of the Sunnyvale Town Center Project.”

Last minute legal issues had prevented the city-approved group from bidding, said Kahn, who could not elaborate on the nature of the legal issues. The city now expects the bank to transition the project to the new developer.

But according to Rossi, Pau still wants to finish the development, though he contests the amount owed and must settle a dispute with RREEF in order to actually pay off the loan. Rossi said that Pau and Sandhill plan to file suit asking that the foreclosure sale be set aside.

Meanwhile, the would-be stores, offices and condominiums that stretch across six city blocks in downtown Sunnyvale await completion.

“Its like a sore thumb sticking out,” said Kenny Lam, owner of the Bean Scene Cafe. The small coffee shop is situated on the newly-renovated Murphy Avenue, near Leigh Odum’s bookstore, just across from the town center project.

Lam says he’s pretty sure that an open mall would drive much more traffic to his business.

“Anything they put there would be great,” he said, “as long as they get it done and have enough funding.”

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