SAN JOSE — A downtown San Jose office building is at the heart of a legal battle between the property’s owner and a construction company, a dispute that could trigger a forced sale of the property, court records show.
The building is located at 152 North Third Street in San Jose, a nine-story office site whose principal owner is an affiliate controlled by Nazare Capital Management, a firm headed by WeWork’s co-founder and former CEO Adam Neumann. WeWork pioneered the concept of shared office spaces.
A general contractor for the office property, Build Group, has filed a legal action in Santa Clara County Superior Court against the owner of the building, an LLC operating as 152 North Third Street Owner, legal papers show.
Build Group and the Neumann-led office property ownership group entered into multiple construction work agreements, one in 2018 and one in 2022, according to the legal filing.
In both instances, the construction work pertained to interior improvements for the office building, the court records show.
This news organization requested a comment from Steven Cvitanovic, general counsel for Build Group. New York City-based Nazare Capital Management couldn’t be reached for comment regarding the situation.
Under the 2018 contract, Build Group agreed to construct core and shell improvements, as well as other activities, on floors one through five, for $8.7 million, court papers show.
The 2022 contract required Build Group to construct ground-floor tenant improvements, along with other activities, for $2.6 million, according to the legal filing.
After these projects had been started, Build Group and the Neumann affiliate agreed to expand the scope of the construction in the building, adding nearly $1 million worth of additional work, court papers show.
The combined additional work was valued at $998,000, the litigation claims. The lawsuit was filed in March 2023. Court papers show the dispute remains unresolved with further court hearings scheduled for June 2024.
“Plaintiff (Build Group) has presented its outstanding invoices to the defendant (152 North Third Street Owner) on numerous occasions but the defendant has failed and/or refused to pay the amounts due the plaintiff,” Build Group stated in the court filing.
Other financial difficulties loom over the office building, which is next to St. James Park in downtown San Jose.
In the spring of 2023, the building owner missed at least one monthly loan payment, according to information provided by financial services and research firm Morningstar and a source from the ownership group.
Build Group has requested that a “judgment be made for the sale of the property” and that “the proceeds of the sale of the property be applied to the payment in the amounts due, including interest,” according to the legal filing.
The owner of the building, as of Jan. 26, had not filed any public documents related to the litigation, a review of the docket for the court case revealed.
The Newmann-led affiliate bought the 152 North Third building in 2018, paying $44 million, documents filed with the Santa Clara County Recorder’s Office show.
In 2021, the building owners obtained $45 million in financing from an affiliate of Rialto Capital Management, according to the county real estate records. New York City-based Rialto Capital has provided funding for other properties around the country owned by the Neumann-owned Nazare Capital company.
The mortgage for the Third Street office building now has landed in a status set aside for loans with missed payments.
“The loan was recently transferred to the special servicer due to the borrower’s failure to make its monthly debt service payments,” according to information regarding the loan that was collected by Morningstar and sent to this news organization by David Putro, a Morningstar senior vice president and head of the company’s commercial real estate analytics group.
The missed loan payment occurred in May 2023, Morningstar reported.
The building totals 130,700 square feet, according to a real estate brochure circulated by CBRE, a commercial real estate firm.
About 61,400 square feet of the 152 North Third building have been converted to co-working spaces, according to the CBRE brochure. That’s about 47% of the entire building.
Downtown San Jose’s office market is in a particularly tough state, with an office availability rate of 35.7% at the end of 2023 according to Savills, a commercial real estate firm. Availability measures empty offices available for lease directly from a property owner or indirectly from a tenant through a sublease, according to a report this month.
Put another way, this means more than one-third of the office space in downtown San Jose is empty and available for rent.
“Many large technology companies have realized they now have too much space,” Savills stated.
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