WMC/18/ cw1st/LK2nd/mark2nd

By SHELLY GARCIA

Staff Reporter

Two major lease deals in West Hills have unraveled in recent weeks, a troubling sign that the turmoil on Wall Street has hit the San Fernando Valley.

With leases signed, WMC Mortgage Corp. pulled out of a deal to lease 160,000 square feet of space, and State Compensation Insurance Fund, with the final copy of a lease out for signature, backed away from a 150,000-square-foot build-to-suit in the West Hills Corporate Village complex, which is being developed by Regent Properties and Shamrock Holdings of California Inc.

The events leave the development with just one firm lease: Boeing Co. signed a 10-year, $35 million lease for 170,000 square feet of space to relocate about 500 workers from its Rocketdyne Propulsion and Power division.

While brokers say there is no reason to panic, the events of recent weeks have been sobering.

"It's put a chill on this unbridled optimism of everybody's," said Gerald Porter, president of Metrospace/CRESA, the brokerage that represented WMC.

The State Compensation deal fell through because the company did not want to relocate to the West Valley, according to a company spokesperson.

But the aborted WMC deal also is tied to recent events in the international financial markets, raising the specter that the weakening global economy is looming ever closer to the local Valley community.

"I am seeing some real caution," Porter said. "There are a number of players out in the market right now and they're being much more deliberate about their choices. I think the pace is going to slow."

Just a few months ago, WMC was moving full speed with aggressive plans to expand its sub-prime lending business. The company, which lends to consumers considered a poor credit risk by traditional mortgage lenders, was at the crest of an upturn in business. It originated nearly $1 billion in loans for the second quarter of 1998 and added 33 retail outlets.

The company began looking for more space to accommodate its expansion when a lucrative opportunity presented itself.

Blue Shield of California was holding a lease for 160,000 square feet of space it wanted to unload in the West Hills Corporate Village, and WMC had seven years to go on its lease at the Trillium in Warner Center. A swap would save each company the cost of subleasing.

The timing ultimately proved unworkable, and Blue Shield paid out its sublease instead. But the Blue Shield payout gave the West Hills developers some financial maneuvering room.

"We went to Regent and said, 'We have a big subleasing obligation. You've got a fat check in your hand. Give us some of your windfall to offset our subleasing costs,' " recalled Porter, who worked on the deal with Metrospace senior consultant Chris Riegel.

The strategy worked. By early September, the leases were signed, with the proviso that WMC would submit a letter of credit to cement the deal. But by then, Wall Street was in turmoil. WMC, like other sub-prime lenders, depends on high-risk investors for its financing, and those markets had dried up. The deal collapsed when WMC decided this wasn't the right time to make a move.

"We're making a mid-course correction in terms of growth rate and some product offerings," said Carl Geuther, WMC's chief financial officer. "You have to moderate the pace of growth of originations with your ability to sell those originations in the secondary market."

At about the same time, Bill Inglis, a broker with CB Richard Ellis Inc. who was representing State Compensation Insurance Fund, had received copies of the final lease on a 150,000-square-foot building the company planned to build at West Hills Corporate Village. Then he got a call from the fund's San Francisco headquarters.

The company had plans to close offices in Cerritos and West Los Angeles, and relocate many of those employees to the new location. But management feared that the West Valley location would not be palatable to many of those employees, and, at the 11th hour, handed down new marching orders: Find a more central location.

"The people at Regent did everything right," said Inglis. "It's just that the current planning of the company is different than when we started."

The aborted deals are not likely to have a financial impact on Regent. Blue Shield "made a significant monetary payment to buy out their lease," said Doug Brown, managing partner. And construction had not yet begun for State Compensation Insurance Fund's build-to-suit.

Brown said that the company is still ahead of schedule. Regent expected to have leases for 100,000 square feet completed by the end of this year, and the Boeing deal puts it ahead of those plans.

But the events have taken a toll on morale in the industry.

"It was such a home run to have WMC and State Compensation that it's a disappointment to everyone concerned," said Porter.

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