MGM Sale Puts a Question Mark Over Studio’s Leases
By ANDY FIXMER and KATHRYN MAESE
Staff Reporters
Sony Corp.’s $5 billion purchase of Metro-Goldwyn-Mayer Inc. will almost certainly lead to an unhappy ending for most of the studio’s 1,300 employees, including its suddenly redundant production division.
Less clear is what will happen to MGM’s real estate holdings, including a 15-year lease for its Century City headquarters in Constellation Tower, the newest high-rise in Los Angeles.
While the Sony merger is expected to close in six to eight months, it could take longer before the Japanese company decides what to do with the MGM leases.
MGM, which rents sound studios in the area for the few films it produces every year, has a 341,000-square-foot headquarters lease expiring in 2018.
In addition, MGM’s home video department, its fastest growing division, has four years remaining on a lease for a little more than 112,000 square feet in Santa Monica’s Colorado Center, where the company was headquartered before moving to Century City in 2003. It could be one of the few departments that survives the consolidation.
“MGM’s home video staff is outstanding,” said Dave Miller, media and entertainment analyst for Los Angeles-based Sanders Morris Harris. “Home video accounts for more than 50 percent of their cash flow and has been a resounding success for the last five years. I would think it would behoove Sony to take a hard look at retaining a lot of those employees.”
Including a small office the company rents in New York for its publicity department, MGM pays about $1.9 million in rent annually, according to the company’s Securities and Exchange Commission filings.
That figure doesn’t include all the improvements MGM made to its Century City office space. The company imported polished marble from Italy and other parts of Europe for finishes and built high-tech screening rooms in the tower’s basement and the company’s lobby. Area brokers said MGM had spent upwards of $225 a foot on improvements, an investment on the order of $75 million.
Finding enough sublets to fill its offices in Century City would likely take several years, said Madison Partners Principal Gary Weiss.
“The likelihood of MGM releasing all of its space to one tenant in a relatively short amount of time seems very unlikely,” he said. “It’s going to take years and years to lease up all that space.”
On average, Century City tenants are only looking for about 6,000 square feet, Weiss said. The few large tenants can be counted on one hand: Twentieth Century Fox, ABC, Northrop Grumman Corp. and Herbalife.
Also, the expensive improvements MGM made to the space could make it difficult to find tenants.
“The key will be if you can find a tenant that can reuse the improvements,” Weiss said. “You need to find someone willing to take the space the way it is. MGM won’t want to give a large tenant improvement allowance in addition to a cheap sublease rate.”
As part of a cost-cutting measure, MGM’s 87-year-old controlling shareholder, Kirk Kirkorian, sold off MGM’s fabled Culver City back lot on Washington Boulevard when he took over the company for the second time in the early 1970s.
Part of the lot was torn up to develop apartments and condominiums, while the remaining parcels are now home to Sony’s Columbia and Tri-Star film studios. MGM’s studio operations are likely to be folded in with them.
The fate of MGM’s studio employees is more dramatic. News of the movie studio’s sale has spurred talk that as many as 900 employees could get axed. Losses are expected to be particularly heavy in studio production, since Sony already has a well-oiled division.
Jonathan Taplin, professor at the USC Annenberg School for Communication, said the Sony merger will devastate MGM, which will likely lose most, if not all, of its syndication, sales and DVD distribution operations.
“Sony doesn’t plan to maintain a very large production operation under the MGM name,” Taplin said. “They may make an occasional movie like James Bond, but this deal will mean very severe cutbacks.”
In the last such media consolidation, when NBC purchased Vivendi Universal in May, cutbacks were not as significant. Unlike Sony, NBC wasn’t in the movie business and retained most of the Universal Studios staff, with the exception of about 300 employees.
The outlook for MGM employees would likely have been no brighter if Time Warner Inc., which pulled out of its competing bid last week, had won out. There was speculation that the New York-based conglomerate would divest MGM’s distribution, marketing and production arms in favor of its own.
End of an Era – Metro-Goldwyn-Mayer Inc. at a glance.
Founded: 1924
Trademark: Leo the Lion
Employees: 1,300
Major Leases:
-341,000-square-foot lease at
Constellation Tower, expires 2018
-112,000 square feet in Santa Monica’s Colorado Center, expires 2004
-Small publicity office in New York
Rent Paid: $1.9 million annually
Legacy: Once the most powerful studio in Hollywood, MGM has been noted for its history of Technicolor films, lavish wardrobes, costly sets and stable of stars
