Even with all the capital now chasing distressed commercial real estate, it's still not clear whether these bargains are really much of a bargain. 250 Montgomery St., a downtown San Francisco office building that traded via a distressed note sale is the latest example of the uncertainty. The building, located on San Francisco's "Wall Street of the West", was purchased by Lincoln Properties for $400 a square foot in 2006, but it just sold in a deed-in-lieu-of-foreclosure for $172 a square foot.

Clearly, this is a huge decline in price, and even the senior lender, Realty Finance Corp, took a $22 million hit. It was also the first San Francisco office building to trade in a year, and the first “round trip” sale, where a property goes from a one new owner directly to another new owner via a deed in lieu of foreclosure. The total sale price of $19.9 million represents about 25% of replacement cost.

From that standpoint, the buyer got a fantastic deal. But a broker familiar with the sale said the building actually traded about 40% ABOVE his initial BOV and also attracted three times as many bidders as a traditional fee-simple sale would have seen. The broker said they are advising all of their lender clients to do note sales to the high level of interest in properties marketed as "distressed assets."

Part of the reason for the lower opinion of value was rent growth, or the lack of it. The broker, who has been selling instutional office property for the better part of 20 years, doesn't see any. In fact, he is reducing typical rent rolls by 20%, and then assuming no growth for 5 years.

Who was the buyer? It was Argonaut Capital, a Tulsa-based private equity firm controlled by just one investor, billionaire George Kaiser, who was nowhere on the commercial real estate radar until this purchase. Argonaut is neither a distressed asset neophyte nor a stranger to alternative assets (one of its most recent purchases was $412 million in natural gas assets from Chesapeake Energy), but real estate doesn't appear to be a major area of focus for the firm.

Surely 25% of replacement cost for an office building in downtown San Francisco can't be all bad, but given the fundamentals, it may be quite some time before any new money is pulled out of this deal. Nevertheless, if you're a billionaire with plenty of cash and other interesting things to do in the meantime, who cares? These are the kinds of buyers now swimming in the distressed asset pool, and with approximately 30 of them all clamoring a piece of San Francisco dirt with no clear value, it's practically deja vu all over again.