Sunset Gower Studios is changing hands for just over $200 million, with commercial real estate firm Hudson Capital LLC and an unnamed capital partner picking up the historic property which was marketed as a "redevelopment opportunity."
Headed by veteran real estate player Victor Coleman, who co-founded Arden Realty Inc., Hudson outbid a slew of other interested parties from conventional studio operators to companies not normally associated with Hollywood to purchase the property from owner GI Partners LLC.
Indeed, the 16-acre site, where classic and modern day productions such as "Mr. Smith Goes to Washington" and "The Good Shepherd" were filmed, is the latest studio sale as non-traditional players move into Hollywood and make their presence felt in a region where development opportunities are limited.
Last month, private equity powerhouse Carlyle Group spent $150 million to purchase Manhattan Beach Studios, and there are rumblings that Culver Studios in Culver City is on the market. Moreover, NBC Universal Inc., a unit of General Electric Co., has proposed a big expansion and large residential development for its Universal Studios backlot.
Sunset Gower's suitors, according to sources, included Carlyle; real estate operating company Newport Capital Advisors, which recently bought the Hollywood Palladium for $68 million; and commercial developer and property owner Argent Ventures LLC, which paid $50 million for the Capitol Records Tower last year.
According to the offering memorandum written by the CB Richard Ellis Group team that marketed Sunset Gower, the studio has entitlements for at least 381,000 square feet of additional development. The offering materials call the studio "one of the last redevelopment opportunities of this magnitude in Hollywood."
Little is known about Hudson's plans for the studio at 1438 N. Gower St. or the exact makeup of the company, of which Coleman serves as managing partner. Coleman co-founded commercial real estate firm Arden Realty Inc. in 1996 and served as its president until 2006, when it was sold to GE Real Estate. He declined comment for this story.
However, experts say that real estate investment companies' interest in the 86-year-old studio is a sign that it is being considered for more than just a rent-generating production facility, though it is a busy studio.
"There has got to be some value-add opportunity," said Eric Sussman, a finance and accounting lecturer at UCLA's Anderson School of Management. "With the returns they have to generate for investors, they can't just buy a turn-key asset. There has to be a story they are pitching to their investors."
GI Partners itself is a private equity firm. Robert Papazian, Sunset Gower Studios' chief executive, has an ownership stake in the company. He declined to comment on the record.
While real estate experts speculate on Hudson's plans, both the Community Redevelopment Agency of Los Angeles and the office of Los Angeles City Council President Eric Garcetti say they are not interested in residential development, and instead are hoping for "intensified studio use."
"We are worried that people might be overpaying with the expectation that they might be able to develop residential," said John Perfitt, senior real estate development agent for the CRA. "We are very bullish on the opportunities for creating more commercial office. We would not be in support of residential. We are very concerned about protecting commercial land."
Traditional studio operators did make a run at Sunset Gower Studios but came up short. According to Perfitt, one traditional operator valued the studio at $175 million and bid accordingly. Another industry source told the Business Journal that if the studio were to remain a studio it wasn't worth more than $180 million. A final round of bidding included multiple offers in the $200 million range.
"It kind of just ramps up the entitlement risk," said Perfitt, who noted the studio is zoned for manufacturing use and a residential development would require a zoning change. "If they think they can get something built maybe there is a bigger payoff."
Sunset Gower, Manhattan Beach Studios and Culver Studios are all located in communities experiencing varying degrees of residential upswings. Property values in Manhattan Beach have risen dramatically in recent years, Culver City has recently become hip with a resurgent downtown and Hollywood has experienced a much ballyhooed revitalization. And because the studios sit on large swaths of land, it makes sense that real estate players would eye the properties for redevelopment.
One real estate expert with knowledge of the Sunset Gower deal characterized studios as "interim use properties in the urban infill," likening them to "auto dealerships that are disappearing." When "land values eclipse sound stage income" private equity firms and real estate developers can't ignore studios as development plays, he said.
Veteran entertainment industry analyst Harold Vogel agreed, saying changing land use patterns have indeed brought into question the long-term viability of studios in dense urban neighborhoods.
"They are old line studios with locations that were probably considered suburbs when they first sprung up and today they are in the center of high traffic zones and can earn a much higher return in another form," he said. "Otherwise why would private equity be interested?"
It is unclear if Culver Studios, which sources say is being put up for sale, will be sold as a redevelopment opportunity. Manhattan Beach Studios was not marketed as a redevelopment play. Still, plans for large scale redevelopment of production facilities have been laid out at Universal Studios.
In December, NBC Universal announced an expansion and upgrade of its Universal City property, which would include a 124-acre development of 2,900 homes on the Universal backlot. The 25-year plan also includes additional office space and studio upgrades. Real estate developer Thomas Properties Group Inc., served as an advisor to NBC Universal on the plan.
Of course, there is a history of local studios selling off land for real estate development. In 1961, 20th Century Fox sold off most of its back lot and the area would be developed into Century City.
Still, Lindsay Conner, an entertainment attorney for Dickstein Shapiro, said that just because private equity and real estate development firms are interested in studios doesn't mean that those companies aren't interested in maintaining studios.
"People still think that owning studio properties is good business," Conner said. "There continues to be great activity in production of films, television, video, Internet media and the like. I don't think people should assume that private equity groups buying studio properties are just doing it for the tear down value of the land."
Already, entertainment-related development is going on at Sunset Gower with the construction of a six-story, 97,000-square-foot building for post production house Technicolor Inc. The building was slated to be completed by the end of the year but could be delayed up to a year, according to Perfitt. The $40 million project is not expected to be impacted by the sale.
In fact, local players who support intensified studio uses at Sunset Gower say that the Technicolor building is the sort of development they would like to see at the site. The property has undergone other significant changes in recent years.
GI Partners bought the studio 2 1/2 years ago from Pick-Vanoff Co. LLC for around $110 million and has embarked on a $10 million upgrade and beautification campaign. Television shows such as "Heroes" and "October Road" are currently filmed there.
There is speculation that Hudson may use the entitlements at the property for Hollywood-related office development similar to the Technicolor building, especially given Coleman's experience with office projects.
"The entertainment industry is going to continue to be robust in California," said Bob Safai of Madison Partners, who brokered the sale of Manhattan Beach Studios. "It is a great part of what Southern California is about. These assets will continue to be looked at by different groups. Location, demand and occupancy are everything."
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