SAN RAFAEL – Paul Financial, the 3-year-old San Rafael-based mortgage company, is expanding to Southern California as demand for non-traditional mortgages spurs the company's growth.

The company will be in operation in the region by the end of the year, said Paul Financial CEO and founder Peter Paul.

Higher value and specialized products that offer borrowers adjustable payments have fueled the company's third profitable year.

A recently released survey by the trade group Mortgage Bankers Association said that interest-only loans accounted for 26 percent of all loan originations in the first half of 2006, up from 13 percent in the second half of 2005.

Payment-option mortgages accounted for 15 percent of the dollar volume of loan originations in the first half of 2006, up from 8 percent in the second half of 2005. The statistics are based on the response of 115 trade group members, including a majority of the top 30 loan originators.

Currently, 10 percent of new loan applications at Paul Financial are for the Equity Advantage mortgage. The loan is aimed at homeowners with good credit and significant equity that they wish to tap, Mr. Paul said.

He described Equity Advantage as a cross between an option adjustable-rate loan and a reverse mortgage. The loan allows borrowers to bypass payments to principal and wrap any leftover interest back into the mortgage.

"It has characteristics of reverse, but it's more like an option ARM that gives them the option of making extremely low payments," Mr. Paul said.

Equity Advantage offers a fixed rate for five, seven or 10 years. Borrowers can make payments as low as a quarter of one percent interest to a full payment of interest and principal.

Non-traditional loans like the Equity Advantage are not for everyone, Mr. Paul said. He said people who would benefit from that type of loan would need to have good credit and also have a good amount of equity built up in their home.

Non-traditional mortgages have been criticized by some for allowing borrowers to overextend their finances.

In response, the Office of the Comptroller of the Currency and other federal bank regulators recently issued new guidelines requiring lenders to use the fully indexed rate to analyze a borrower's ability to repay interest-only mortgages and payment-option loans. Under those guidelines, if the interest rate on an adjustable-rate mortgage increases after a five-year introductory period, a borrower must have the ability to pay off the loan at the highest rate in order to be eligible.

Mr. Paul is the former owner and CEO of Headlands Mortgage Company, which merged with GreenPoint Mortgage in 1998. He stayed on with the company through 2000 and remained on the board through 2003.

He incorporated Paul Financial in September of 2003. In 2004, the company had a loan volume of $1.8 billion. In 2005, loan volume grew to 2.5 billion, Mr. Paul said.

Mr. Paul said recently he expected his 210-employee company to underwrite $250 million in loan volume for October, and about one-third of that business is generated in Southern California.

Paul Financial is leasing 20,000 square feet near the John Wayne Airport beginning Nov. 1. at 2600 Michelson Drive in Irvine.

Brian Eisberg of Orion Partners brokered the deal for Paul Financial.

Mr. Paul said though the housing market has slowed, the large population base in Southern California makes it easier to grab a piece of the business and makes hiring easier, too.

ROHNERT PARK – Gateway Financial Corp. of San Rafael acquired the 135,000-square-foot former Next Level Communications headquarters and plans to convert it into a home for multiple tenants.

The real estate development firm purchased the building, located at 5789 State Farm Drive, last Tuesday for an undisclosed sum from Next Level's parent company, Motorola. The purchase came a month and a half after Motorola shut down the local operation, which employed 190 at the time of the announcement in February, and moved development of Next Level's video-over-DSL products to other Motorola facilities.

"We spent a year looking for a high-quality building in Marin and Sonoma counties, and this was a prime candidate," Gateway President Ed Coyne said.

Deciding factors were the high-end interior finishes, the space's easy divisibility into suites of 15,000 square feet or smaller, the 8.5 acres of gardens and landscaping, its central location in Sonoma County and close access to services and Highway 101, Mr. Coyne said.

The building's interiors and landscaping became an icon of the high-flying days of Telecom Valley in the late 1990s. General Instrument, which acquired Next Level in 1994, paid $17.5 million – $25 million including the land – to build it, and it was finished in 1998, according to Sonny Childers, facilities manager at the time and a driving force with co-founder Peter Keeler in the design of the building.

"I don't understand the big to-do about that building, because I've built a lot of buildings in Silicon Valley and consider that the norm," Mr. Childers said.

Orion Partners' Brian Eisberg, who represented Gateway in the purchase, said Next Level used good sense in designing it for multiple tenants.

"It mitigated a challenge overlooked on some large buildings locally," he said.

Building designer Korth Sunseri Hagey Architects of San Francisco and interior designer Disrud & Associates of Healdsburg configured offices and restrooms off the striking 10-foot-wide "main street" corridors in the building to allow for construction of smaller suites in a multitenant building.

And much of the exposed structural steel and colored concrete in the building was part of making the project fit in the budget, Mr. Childers said.

A couple of miles southeast, Sonoma Mountain Village, the former Agilent Technologies plant, has 565,000 square feet of available office space in three large buildings. The new space from Gateway at 5789 State Farm raises the office vacancy rate in Rohnert Park to 44.9 percent from 39.9 percent in the third quarter, all but 20,000 square feet of which was at Sonoma Mountain Village, according to NAI BT Commercial.

Codding has been securing some smaller tenants in one of the buildings and has been working toward a redevelopment plan that could convert some of the office space to housing and shops in addition to more homes that could be built on the 200-acre property.

Gateway is no stranger to large North Bay commercial buildings. It developed a 126,000-square-foot class A office building called Wood Hollow for GreenPointe Financial in Novato, and Gateway put WorkRite into a 124,000-square-foot building in Lakeville Business Park in south Petaluma.

Gateway also owns the 138-unit southeast Santa Rosa apartment complex Bella Oaks, which is being sold, as well as residential land in Santa Rosa, parcels zoned for offices in Petaluma and large-scale land holdings in Southern California. The firm acquired 5789 State Farm in a tax-deferred exchange following the sale of some of that land, part of a Bakersfield-area project called Estates at Rio Bravo, according to Mr. Coyne.

The other Next Level property for sale or lease is the adjacent 65,000-square-foot flex building at 6085 State Farm Drive, which is being marketed by Paul Schwartz of Orion Partners in Santa Rosa. The quoted rent is $1.05 a square foot per month on a triple-net basis.

Kaiser Permanente approached Next Level several times since 6085 State Farm was built in 1996 about buying it for Rohnert Park medical offices. Next Level declined, and Kaiser built its own space.

Marketing 5789 State Farm for lease along with Mr. Eisberg are Orion colleagues Peter O'Brien and Rich Henderson. The quoted rent is $2.15 a square foot per month on a full-service basis initially, which is higher than the Rohnert Park full-service average asking rent of $1.75 a square foot but less than new office buildings in Santa Rosa and Petaluma on the market for $2.50 a square foot.

Shawn Johnson and Dave Peterson of Keegan & Coppin assisted Lee & Associates selling the building for Motorola.

SANTA ROSA – Heart-device maker Medtronic Inc. has put 40 acres of prime land in the Fountaingrove area of northeast Santa Rosa on the market to raise research-and-development dollars for investment in its fast-growing Santa Rosa-based vascular business unit.

The sale of the land, considered surplus by Medtronic, could raise from several million to tens of millions, real estate experts said.

Experts said the land is attractive because it's one of the largest undeveloped properties in the high-end Fountaingrove residential and commercial area and includes ruins of the historic late 19th-century Fountain Grove commune winery. However, the experts said it could be a complex venture for a prospective buyer.

The land went on the market four weeks ago for the first time since Medtronic's predecessor, Arterial Vascular Engineering, acquired it in 1998, according to Sean Heaton, one of the listing real estate brokers with Cushman & Wakefield in San Rafael.

Medtronic has not set an asking price and wants to sell all the half-dozen parcels together.

How much Medtronic can get for the surplus Fountaingrove land depends on whether the company is willing to wait for a prospective buyer to obtain development entitlements from the City of Santa Rosa, according to experts familiar with the property.

Although the property technically is zoned retail, the city designated the land for business-park-type development in its general plan update around the time AVE bought it, according to city planner Joel Galbraith. The city would like the property developed with a mixture of uses, including housing and retail, including reconstructing the winery building, he added.

Paul Schwartz, an Orion Partners agent who studied uses for the property and vied for the listing, said one configuration he worked out for the property, considering ridgetop and hillside housing restrictions, included 27 acres for multifamily housing, nine acres for offices and four acres for retail.

"Given the need for a general plan amendment, rezoning and a tentative map, which can take 12 to 18 months, it's difficult to determine the value of the property," he said.

In 1998, AVE acquired the land to add to 30 adjacent acres on which is already had two buildings and room for a third. The company announced plans to restore the historic winery and convert it to an employee recreational facility with a deli, meeting rooms and a day-care center and was looking to build production buildings on the property.

That plan was shelved after Minnesota-based Medtronic acquired AVE for $4.1 billion in 1998 and shifted production to other plants.

However, Medtronic Vascular hardly is abandoning its presence in Santa Rosa, according to spokesman Scott Papillon.

"The land is considered a nonstrategic asset, and we want to turn it into a valuable working asset by using the proceeds to develop products in Santa Rosa," he said.

Medronic Vascular's current and approved facilities in Santa Rosa should suit projected local growth well for the next five years, Mr. Papillon said.

The company has 200,000 square feet in two office buildings at its Fountaingrove campus at 3576 Unocal Place and has approvals to build a 137,000-square-foot research-and-development building there. It has leased a warehouse and two 62,000-square-foot office buildings near Charles M. Schulz–Sonoma County Airport and is currently occupying one of those office buildings.

"We're committed to Santa Rosa," Mr. Papillon said. "Santa Rosa is one of our technology centers of excellence, and we plan to remain here for many years in that capacity."

He said it is possible the property could be sold by the end of this year, but he wouldn't confirm real estate industry speculation that is a goal. He said the company would not sell the property unless it received an offer above an undisclosed price.