It seemed inevitable given the “upside-down” nature of so many underlying mortgages that at least one major, modern-era downtown L.A. highrise owner would eventually be forced to seek Chapter 11 bankruptcy protection.
And it finally happened.
The O’Melveny & Myers LLP-led partnership that owns the big L.A. law firm’s headquarters highrise atop Bunker Hill has filed its petition, after being unable to negotiate a consentual debt restructuring plan with its mortgage lender.
The partnership known as 400 South Hope Street Associates cited the general 1990s deterioration of the local commercial real estate market for reducing the value of the 1982-vintage, 26-story tower to “significantly” less than the $132.7 million in mortgage debt held by Travelers/Aetna Property Casualty Corp. that comes due this September.
Current partners in the 400 Hope partnership include O’Melveny primarily, along with building tenant Price Waterhouse LLP and Club World LLC.
O’Melveny originally developed the tower in partnership with an affiliate of Canadian real estate giant Olympia & York, which relinquished its interest in the property as O & Y; was restructuring in 1994.
The building was renamed Mellon Bank Center last year in recognition of a 60,000-square-foot tenancy commitment by the namesake bank.
The Travelers-held mortgage on the tower is “non-recourse” to the owners which means the loan is secured by the real estate alone, not any other assets of the various partners.
The partnership’s bankruptcy attorney, Kenneth Klee said the filing has no immediate effect on the property’s day-to-day operations. He added that the debtor expects to file a reorganization plan “within the next few weeks.”
The bankruptcy comes at a time when the depressed downtown market is starting to show signs of life again with Bunker Hill posting the strongest tenant demand.
But that doesn’t mean property values are approaching anything near their late-1980s peaks, as the foreclosure of a nearby hilltop highrise indicates.
The Two California Plaza Tower’s original construction loan was for $300 million, and its lender group took the property back in 1995 and sold it last year for roughly a third of the original loan amount.
That translates to less than $100 per square foot, although the L.A. Community Redevelopment Agency’s ownership of the underlying land reduces the value compared to other properties without such bifurcated ownership.
But even at $150 per square foot, the 663,000-square-foot Mellon Bank tower would still be worth 40 percent less than the mortgage balance.
Good news for Wilshire Center
West of downtown, a major tenant has made a significant commitment to the battered Wilshire Center district, opting to expand and upgrade its operations rather than move out as so many others have.
Washington D.C.-based Computer Learning Centers Inc. will relocate just a few blocks from the 33,650 square feet its L.A. operation has been occupying for a decade at 3130 Wilshire Blvd. to 47,000 square feet on the ground, second and fourth floors of the Paramount Plaza complex, 3550-3580 Wilshire.
The Nasdaq-traded technical school’s L.A. unit substantially upgrades its facility into one of the district’s top properties and gets a huge (10 spaces per 1,000 square feet of leased space) parking “ratio,” said Mike Catalano of Julien J. Studley Inc., CLC’s real estate broker.
No financial details were disclosed, but local real estate sources estimated that the deal is valued at about $7 million. Cushman & Wakefield Inc. and The Seeley Co. negotiated the deal on behalf of the landlord, Mid-Wilshire Associates/DG Anlage Bank.
Virgin stays put
Moving further west into Beverly Hills, Virgin Records America Inc. has renewed its commitment for another seven years at the converted former library/city offices building owned by the City of Beverly Hills.
Metrospace Corp. brokerage in Brentwood helped Virgin negotiate the $13 million transaction, which includes funding for some additional renovation work at the nearly 57,500-square-foot building at 338 N. Foothill Road. The property has served as Virgin Records’ headquarters since 1991.
Douglas Emmett buys mortgage
Even further west, a highly active institutional investment fund managed by Brentwood-based Douglas Emmett Realty Advisors has quietly made a substantial investment into another Westside office building.
In this case, the fund bought the mortgage on the nine-story Brentwood building owned by an affiliate of the diverse Lowe Enterprises real estate operation. The 95,000-square-foot building, completed in 1974 and later renovated and seismically reinforced, houses Lowe’s headquarters operations as well as other tenants.
Title records show that the fund purchased the mortgage which carries a principal balance of $27 million from TCW Realty Fund IV, managed by CB Commercial Real Estate Group unit Westmark Realty Advisors.
Lowe and Douglas Emmett declined to discuss the transaction, as did the broker who is said to have negotiated the transaction, Bob Safai of Madison Partners.
But other Westside real estate sources said Douglas Emmett likely paid the property’s current market value probably in the $17 million to $19 million range for the mortgage.
Given the gap between value and debt, they added, the deal will almost certainly lead to an ownership change at some point in the future.