BANKING / FINANCE : Early 1980s ‘Convertible’ Mortgages Back in Vogue With Tustin Plaza Deal

In a return to a financing method born in the early 1980s to help cope with high interest rates, a Japanese company has provided a $25-million “convertible” mortgage to Carver Development in Newport Beach for the Tustin Plaza retail-office complex.

Convertible mortgages are loans that give the lender the option of buying the property later for an additional amount.

In times of higher interest rates, convertible mortgages provide borrowers with lower rates while giving lenders higher returns than they could get from investments such as U.S. Treasury bills, according to Jack S. Cooper, managing director of Bank of America’s investment real estate group.

Convertible mortgages are coming back in vogue to help developers beat higher interest rates and, if the leases generate good income, sell the projects later, Cooper said.

“There was extensive use of convertible mortgages in early 1980s,” he said. “But the marriage has to be right. The lender has to have the right party.”

In the Tustin Plaza deal, the bank acted as an adviser to the Japanese firm in the transaction, but Cooper would not divulge the ultimate sale price or the identity of the firm. One source said the firm was Asahi Urban Development of Japan.

Cooper said the Japanese firm has the option of purchasing the complex in five years or demanding repayment of the note.

Tustin Plaza, built by Carver in downtown Tustin two years ago with other financing, consists of a shopping center and, across the street, two two-story office buildings with 44,371 square feet of space, of which about 95% is leased.

The plaza’s retail tenants include a shoe store, several restaurants, a record store and a florist. Office tenants include branches of two large savings and loan associations.

Orange County has become a popular target for Japanese investment because of its strong economic growth, Cooper said.

“We have a number of clients that have requested us to conduct searches on their behalf in Orange County due to its healthy, diversified economy,” he added.