The morning sun hasn’t even peeked over the L.A. horizon yet, and Nick Forde has already done more than many of his colleagues will do all day.
He sits alone in his third-floor downtown L.A. office, his British accent lending a regal air to the latest in a seemingly endless series of conference calls to the East Coast.
On the other end of the line are Forde’s counterparts on a gargantuan deal that has absorbed much of their lives for well over a year.
Such is the fate of the people trying to close the biggest U.S. real estate sale in more than a year, and the biggest one Southern California has seen in more than a decade.
The deal the $480 million sale of the Century Plaza Towers complex in Century City was scheduled to close by the end of last year.
And with February fast approaching the mid-way point, the monster deal drags on.
“They must have hit a snag,” non-insiders are whispering. “Or they’re still haggling over money.”
The topics that Forde a vice president at Citicorp Real Estate Inc. (one of the selling entities) and his counterparts are discussing in today’s conference call are tediously technical, but the actual sales price hasn’t been a matter of debate for several months.
The lead negotiators are haggling more mundane matters these days like when to hold a conference call with their respective attorneys to review some of the final documents bound for the big deal’s ultimate “purchase and sale agreement.”
They’re also said to be reviewing the progress of another time-consuming necessity: getting the 200-odd tenants of the twin 44-story Century Plaza Towers to sign documents known as “estoppel certificates,” establishing the legitimacy of their lease agreements.
In short, the deal is so complex and involves so many different assets and parties, that monitoring its progress toward completion “is like watching an iceberg melt,” quipped one source close to the negotiations.
Price is one of the easier issues to settle on, according to veterans of such battles.
“The guys who come out on top of deals like that aren’t fighting over pennies,” said Steve Roth, president of real estate investment banking firm Secured Capital Corp. in West L.A. Holding out “for every last buck” is a strategy likely to backfire when chasing a mega-deal, he added.
So, given that the sellers and buyers essentially settled on the price last summer, what kinds of issues are still engaging the small army (estimated at about 100) of negotiators, attorneys and consultants?
According to the experts, the answer in part is those pesky estoppel certificates.
The complicated set of assets being sold by the seller (a partnership of Prudential Realty and Citicorp Real Estate) and bought by the buyer (an investment fund managed by J.P. Morgan & Co.) must be documented in excruciating detail with regard to their physical and financial make-up.
The entity selling those assets is actually made up of numerous independent entities, each with its own concerns and motivations. Likewise, the buyer group is composed of various investors that aren’t likely to view every issue in absolute unison.
“You’re talking about two sophisticated-but-very-different institutions selling the property and that inherently complicates things,” said Howard Sadowsky, executive vice president at commercial brokerage Julien J. Studley Inc. and a veteran of multi-party real estate mega-sales.
Insurance giant Prudential has held its stake in the so-called “Delta Towers” complex for decades.
Citicorp actually was the lead lender behind a multinational banking consortium that took back a half-interest in Century Plaza from the former owner. And each of the consortium members or their respective successors, as some have sold their stakes has to sign off on the final deal terms.
“Remember how long it took the Citicorp group just to finalize the deal that gave them the Delta Towers (stake) back?” asked one source who asked not to be named. The answer: Well over two years.
Meanwhile, representatives of J.P. Morgan’s investment management clients (the buyers) thought to primarily include General Motors Corp.’s and AT & T;’s pension funds likewise have to give final go-aheads before putting their hundreds of millions into Century Plaza Towers.
“The greater the number of players involved, the greater the amount of time it takes to build consensus,” said Dave Naus, senior vice president of acquisitions with Chicago’s Equity Office Properties LLC, which last summer was the buyer on the biggest downtown L.A. acquisition in several years, Two California Plaza.
“Two Cal is a 52-story building and you have to look at all 52 floors, not to mention the roof, the skin, the mechanical systems, the foundation, the lobby, the garage,” Naus noted.
That same exercise is now being carried out with regard to Century Plaza Towers, whose physical elements require even more such “due diligence” investigation, several experts agreed.
That’s because the complex is now nearly a quarter-century old; features nearly twice the amount of rentable office space as Two Cal Plaza (2.25 million square feet vs. 1.3 million); and includes the world’s biggest subterranean parking garage, as well as the land under the adjacent ABC Entertainment Center.
Another complication is that the ABC Entertainment Center itself is scheduled to revert back to Century Plaza’s ownership in the year 2002.
The complex’s age alone means “you have to look closely at the life expectancies of every major system fire/life-safety, elevators, HVAC,” said another source familiar with the sale.
And on the revenue-stream side, “you have to review every lease including every nuance, such as renewal options and cancellation clauses,” added Sadowsky, who helped close such big local office sales as Santa Monica’s MGM Plaza and Glendale’s Carnation Building.
“It’s not like an apartment, where everyone has a similar unit and pays about the same rent,” he continued. With a big complex like Century Plaza, “everyone’s lease affects other space in the building.”
Leasing attorney Anton Natis declined to comment on Century Plaza specifically he’s representing the sellers but agreed to discuss mega-deals generally.
“When the price tag is that high, money issues are easier to resolve. But you end up spending a lot more time and money making sure it’s in good shape,” Natsis said. “You’re not going to cut corners” when it comes to due diligence.
Other key issues that consume a lot of time both early and late in the game pertain to structuring the sale.
“There are myriad ways to structure a deal, and the structure changes all the time with most big deals,” said Sadowsky. Tax treatments particularly, along with payment methods, financing, ownership structures and other such subtleties reflect the needs of buyers and sellers and take final form only after extensive negotiations, he added.
Citicorp’s Forde and his dealmaker counterparts with Prudential and J.P. Morgan have been through the mega-deal battles before. So they’re not going to start screaming when progress stalls at least not yet.