In another sign of law firms becoming more focused on the bottom line, O’Melveny & Myers LLP has put up for sale its 26-story downtown L.A. office tower.
The move would close an up-and-down financial chapter for O’Melveny, which has been the only law firm in decades to own a major office building. It also marks a significant financial decision for the Los Angeles firm, whose partners have been in frequent discussions on what to do with the building that it acquired in 1982.
Over the past week, O’Melveny’s partners were reviewing offers for the Mellon Bank Center at 400 S. Hope St. “It is an opportune time to market the building for sale, given the resurgence of the downtown Los Angeles area,” said Peter Columbus, a spokesman for O’Melveny.
He declined to comment further.
O’Melveny’s decision to shed its real estate investment comes as many law firms, in a race to increase profits, have focused on better managing their finances. As firms transform from medium-sized partnerships to large corporations, many find that filling office space takes time away from making millions of dollars in annual profits per partner, said Michael Roster, executive vice president of Golden West Financial Corp. in Oakland and former managing partner of the Los Angeles office of Morrison & Foerster LLP.
Additionally, many firms have lost money on their building ownership while others have not made enough to justify the overhead. “Many firms learned harsh lessons,” he said. “Lawyers aren’t good managers of anything. They are lawyers. They are particularly skilled lawyers, but may not be good real estate managers.”
Manatt Phelps & Phillips LLP and Mitchell Silberberg & Knupp LLP are in talks to sell their joint towers at the Trident Center on Olympic Boulevard in West Los Angeles.
Jerry Kaufman, executive director of Mitchell Silberberg, said that three limited partnerships, including those made up of partners at each firm, have owned the towers since 1983 but opted to put them up for sale because it “seemed like an opportune time.” He declined to elaborate further.
The other major firms in Los Angeles Latham & Watkins LLP, Gibson Dunn & Crutcher LLP and Paul Hastings Janofsky & Walker LLP, which has its name affixed to the top of its downtown tower do not own their office space.
No other law firm building approaches the size of O’Melveny’s 660,000-square-foot property, which real estate brokers say could fetch $180 million, given current market rates. It is 94-percent leased.
Located in the Bunker Hill area, the building is surrounded by several downtown revitalization projects, including Related Cos.’ $1.8 billion proposal for refashioning Grand Avenue.
“It’s a well-located building on Bunker Hill with an excellent roster of tenants,” said Jonathan Larsen, principal at Trammell Crow Co. “Pretty much, the higher rents are in the Bunker Hill corridor of downtown.”
Downtown office towers are selling at steadily higher prices, a reflection of an overheated property market. Earlier this month, Trizec Properties Inc. bought the 52-story building at 601 S. Figueroa St. for $356 million.
O’Melveny initially acquired a partial ownership in 400 S. Hope after now-defunct real estate firm Olympia & York Developments Ltd. built the tower in 1982. The developer, which also owned a share of the structure, filed for bankruptcy protection amid the real estate collapse in the early 1990s.
Since the mid-1990s, O’Melveny has owned the building through a separate legal entity. In 1997, that entity was forced to file for bankruptcy protection and reorganize after the real estate market plummeted in downtown Los Angeles, according to a former O’Melveny partner who served on the firm’s building committee.
The firm’s investment in the building, of which it occupies half, is held entirely by O’Melveny’s partner retirement fund.
“There’s been a discussion about whether we can sell, how the market is doing, what the value would be,” said the partner, who asked to remain anonymous. “It’s been going on for years, constantly on the radar screen of the building committee and retirement folks.”
Focusing on bottom line
O’Melveny has been clamping down on costs to boost its profits per partner. In 2001, the firm restructured its partnership tiers to boost profits 33 percent, to $940,000, close to the industry threshold of $1 million in profits per partner. The firm needed to restructure to become more profitable against its local rivals such as Latham and Gibson, and to gain a foothold in New York, where it later acquired boutique corporate firm O’Sullivan LLP.
As part of the restructuring, the firm began to hold its partners more accountable and base their compensation on performance, rather than the traditional seniority track.
Continuing its focus on the bottom line, the firm, which made $1.3 million in profits per partner last year, recently offered early retirement packages to many of its senior partners.
The retirement fund, the majority of which is invested in the building, would be diversified with the sale of O’Melveny’s building. On average, O’Melveny partners and their spouses receive about $100,000 per year, said a former senior partner at the firm who asked to remain anonymous.
Most of the firm’s current partners are unlikely to notice a change in their retirement portfolio, especially given that traditional pension plans are no longer common at law firms, which increasingly have replaced them with 401(k) plans for their younger partners.
Further, most law firm partners don’t depend financially on retirement funds.
“Most attorneys don’t even think about it,” said Ted Bavly, a legal recruiter at BCG Attorney Search. “It’s a wonderful perk when it happens, and they’re very appreciative. But it’s more like finding something of value in your attic that you didn’t know you had.”