Investor Group In Debt Deal for Arco Plaza Site

By DANNY KING
Staff Reporter

An investor group has a $300 million deal to acquire the debt on Shuwa Investment Corp.'s portfolio of downtown Los Angeles office properties including Arco Plaza and is positioning itself to take title to the assets, several real estate sources said.

King Capital, based in San Juan Capistrano, is taking over the debt held by about a dozen Japanese-owned banks for four properties totaling about 3 million square feet.

"Estoppel certificates have gone out to tenants it's definitely moving," said one source. "They went in to buy the notes to force the seller to cooperate."

Estoppel certificates verify for a buyer the status of a lease and other financial agreements between a landlord and its tenants.

In acquiring the mortgages, King Capital would be positioning itself to take title to the properties by foreclosing on Shuwa, which has been rumored to be in arrears in its payments.

In addition to Arco Plaza, Shuwa's holdings include the 447,000-square-foot Chase Plaza at 801 S. Grand St., the 126,000-square-foot Figueroa Tower, and the 95,000-square-foot building at 655 S. Hope St.

CB Richard Ellis Senior Vice President Tom Bohlinger, who has a listing agreement for Arco Plaza, said the property was not being actively marketed. He would not comment on the King Capital deal. Shuwa officials did not return calls seeking comment.

"It's an ingenious way to get control of the assets," said Bob Safai, president of Madison Partners, a real estate brokerage. "Obviously, that group has a great relationship with the Japanese lending community."

One source characterized King Capital as "a bunch of high-net-worth individuals" with a penchant for "buying either sub-performing or non-performing note portfolios." Representatives of the buying group could not be reached for comment.

Debt precedes equity

While the asset sale has yet to be confirmed, it's unlikely that King Capital would buy the mortgages without having entered into purchasing discussions with Shuwa, said another source. "That's a whole lot of money to lay out to get the debt and then hassle with Shuwa," said the source.

The most notable local example of a mortgage investor taking control of a property was McCarthy Cook & Co. and Blackstone Real Estate Advisors' purchase of the 1 million-square-foot Wilshire Courtyard. The partnership bought the property's mortgage from Bank of America for $150 million in 1998 following the 1997 Chapter 11 filing by the property's developer, J.H. Snyder Co.

The Shuwa properties long have been viewed as classic turnaround opportunities. Three of the properties are at least half vacant while the fourth, the 31-year-old Arco Plaza, would need between $100 million and $150 million in upgrades due to deferred maintenance.

As recently as last October, developer Robert Maguire proposed to buy Arco Plaza for $200 million, with a plan to upgrade the two towers and sell one to the Los Angeles Unified School District for $230 million. The plan was nixed when LAUSD bought the 928,000-square-foot Beaudry Building instead.

The transaction would be an ignominious exit from the Los Angeles real estate market for Shuwa, which bought Arco Plaza in for $650 million 1986 and paid similarly high prices for the other properties.

"They paid over $200 a foot for Hope Street," said Kevin Dretzka, managing director at Eastdil Realty. "You couldn't get $40 a foot for that now."

Over the past few years, Shuwa has sold Century City properties like 1900 and 1901 Avenue of the Stars, as well as Glendale's 505 N. Brand Blvd.

Premier property suffers

When Shuwa bought Arco Plaza in 1986 it had two anchor tenants, Bank of America and Atlantic Richfield Co., and was one of the premier downtown addresses.

But two years ago Arco was bought out by BP Amoco and its lease commitments, once totaling 900,000 square feet, have been reduced by more than three fourths. Meanwhile, Bank of America, whose signage remains on the south tower, has reduced its occupancy to about 350,000 square feet from 600,000 square feet.

Other notable defections in recent years included Ernst & Young and Deloitte & Touche, which took a combined 300,000 square feet. At the beginning of 2000, the 2.2 million square foot property sat 55 percent vacant.

Things turned around a bit last year in two leases totaling 334,000 square feet and worth more than $120 million.

The larger of the two deals involved law firm Paul Hastings Janofsky & Walker LLP, which signed a 15-year deal for 209,000 square feet worth between $80 million and $90 million in December. The firm also took building top signage in the deal. The new signage, the first for a law firm downtown, will replace the existing Arco logo when the move is made this summer.

Earlier in the year, architecture firm DMJMN+H signed a 15-year lease for three separate blocks of space totaling 125,000 square feet.

The deal, in which the county's largest architecture firm took 110,000 square feet in the north tower while DMJMN+H parent company Aecom Technology Corp. took an additional 15,000 in the south tower, was worth over $40 million. DMJMN+H had made the move from its 100,000-square-foot offices at 3250 Wilshire Blvd.

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