We continue our look at the movers and shakers behind some of the year's biggest deals, this time focusing on the West and the Midwest.
Editor's note: For our continuing series of case studies spotlighting how some of the biggest deals of the year came together, we look to the West. One thing that stands out, both this month and last, is that relationships are of paramount importance when putting together major transactions.
In March, Toronto-based Trizec-Hahn, through a partnership with Whitehall of New York, purchased Citicorp Center and Seventh Market Place two trophy properties in downtown Los Angeles. The two adjacent properties comprise more than 1.2 million sq. ft. of office and retail space.
The sale was the largest office acquisition in the city in more than 10 years, another sign of the economic return of the city's downtown real estate market, according to David Hasbrouck, executive director with Cushman & Wakefield of California Inc., and Richard Plummer, an associate director with the firm. The two represented the seller, Prudential Insurance Company of America, in the transaction.
"The Los Angeles office market is turning around and we expect more sales activity to take place in the market soon," says Hasbrouck.
With no new buildings planned for the downtown market a recovery in rental rates is expected.
"The downtown Los Angeles market has improved dramatically," agrees Michael Escalante, senior vice president with TrizecHahn's office division. He says overall vacancy, once near 30%, is currently in the 18% to 20% range and around 12% for trophy properties such as Citicorp Center.
Cushman & Wakefield reports that, in the 20 buildings classified as "Tier 1" properties in the Los Angeles CBD, only one block of space in excess of 100,000 sq. ft. exists.
"Tenant improvement dollars and other concessions are on the decline," he adds.
The improvement in the local real estate market should prove to add even more upside to the investment for TrizecHahn and Whitehall. The purchase price was already estimated by Cushman & Wakefield to be at 50% of reproduction cost.
"It was the highest price per square foot ever paid for a building of its quality in the market," says Plummer. "But at the same time, it is 20% less than the price being paid for a similar building that is currently being purchased in the market."
The retail-office combination is seen as a unique mix creating a synergy that will prove beneficial to both the retail and office components. The large population of office workers will augment the number of shoppers for the retail tenants while the convenience of an adjacent retail center will prove an added enticement to potential office tenants.
The transaction took less than three months to complete, a fast track schedule Plummer credits to Cushman & Wakefield's premarketing efforts on behalf of their client and the efficient due diligence procedures of TrizecHahn.
"We used all of our resources putting that book together," says Plummer. "It gave all of the parties involved a thorough understanding of the properties so there were no surprises."
In fact, "the price quoted in the letter of intent and the closing price were the same," he adds. "And for such a large and complicated deal that is very unusual."
The TrizecHahn-Whitehall partnership offer was chosen from among 16 offers made on the properties that were being marketed in a package deal.
Built in 1985, Citicorp Center is an 895,058 sq. ft., 41-story, high-rise office building, at 725 S. Figueroa St., a financial center in the Los Angeles CBD. The buildings were part of a larger development, Citicorp Plaza, which includes another high-rise office tower and a land parcel scheduled to be the site of another office building in the future.
An added advantage to the property's location is its proximity to the main hub of Los Angeles' commuter rail system, which is across the street.
In addition to Seventh Market Place, a 332,924 sq. ft. retail center anchored by Robinson-May, the transactions included: a 2.5-acre landscaped plaza and an on-site parking facility with more than 1,600 spaces. Parking is a very important consideration for large labor intensive tenants and a strong leasing tool in the properties battle with its suburban office competition.
The property is currently 88% leased with a strong tenant roster including: the law firm of Pillsbury, Madison & Sutro, the accounting firm KPMG Peat Marwick, Paine Webber and the building's namesake -- Citicorp -- although Citicorp has announced plans to leave the building.
"The property includes reasonably long-term leases at above market rents," says Escalante. "And we are currently working with Citicorp on plans to sublet the space through the remainder of their lease term."
In addition, as expected, Federated Department Stores pulled its Bullocks anchor store out of Seventh Market Place during the escrow period of the transaction, but "TrizecHahn, which has a great deal of retail expertise and experience, viewed the move as an opportunity to reposition the retail complex." says Plummer.
Escalante says the acquisition is part of TrizecHahn's effort to diversify its holdings geographically. The company has no previous presence downtown, and Escalante adds that TrizecHahn is actively seeking another trophy property acquisition in the market.
Escalante says the property has aged well and only minor upgrades are planned for the properties.
Andersen, Equity Office do a deal In the fall of 1996, Andersen Consulting, the global management and technology consulting firm, had out-grown its downtown Chicago office space. The company employed more than 3,000 people in the office, and estimates call for the addition of at least another 2,000 employees by 1999.
"We are adding several new operations in Chicago, and our growth there has been exponential in recent years," says Jim Nixon, managing director of real estate management for Andersen Worldwide, which is based in the city.
The search promised to be no easy task, given Chicago's tight urban office market.
However, across the country in San Francisco, Andersen had just completed a deal for 125,000 sq. ft. of space with Chicago-based Equity Office Properties, L.L.C.
"Through our company's participation in that deal, we heard about Andersen's space need in Chicago," says Chris Wood, vice president of leasing in the central United States for Equity Office Properties. "And so we showed them what we had to offer."
What Equity had to offer was the last large, vacant block of high-rise office space in downtown Chicago; more specifically, 280,000 sq. ft. in the 161 North Clark Building. Equity had purchased the building in July 1995, from the Bank of Nova Scotia, the project's lender.
Built in 1992, 161 North Clark was the last major office building to come on-line in the city before the real estate recession hit, says Wood. Due to the project's bad timing, most of the space in the 50-story tower had never been leased. However, because of its more recent construction, the building includes many of the technological advances, such as increased power and communication capability, redundant energy systems and augmented elevator capacity, associated with current speculative high-rise office projects -- fact that makes the space more viable in today's office market.
"Clearly some of the older buildings we were considering lacked the same technology as 161 North Clark, and that played a large part in our thinking," stresses Nixon.
Even the design of the space and the building's outward appearance held advantages that swayed Andersen's decision. "The building's floorplates are large, even in its upper levels and the space was not encumbered by columns which provides more flexibility in the use of the space," explains Nixon. "And the building outward appearance projected a certain prestige and I am sure that persuaded some of our people."
The building's location was another strong selling point for Andersen's management. "We employ a lot of young people, and many of them live in downtown Chicago," explains Nixon, adding that occupancy costs in the downtown market were less than the suburbs. "The demographics of our work force just lend itself better to a downtown location and, secondly, the city's transportation system is designed so that all roads lead downtown, so again the address just made sense."
But the same could be said by many other companies looking for space in downtown Chicago. And with other options severely limited, the ability to expedite the decision process and pull the trigger on the deal was the difference. "We had a lot of prospects looking at the space," adds Wood. "So they needed to act quickly."
This was a fact not lost on Nixon and the rest of Andersen's management. "They had other tenants looking at the space and under those circumstances, if we hadn't acted quickly we would have lost the opportunity," says Nixon.
One of the factors that made Nixon's decision easier was Andersen's prior business relationship with Equity Office Properties. In fact, Andersen leases approximately 1 million sq. ft. from Equity, in seven buildings across the country and had recently completed the lease agreement mentioned earlier, in San Francisco.
The two companies' history with one another gave each side a general level of comfort and the recent transaction gave each side an up-to-date understanding of the most important areas of lease negotiation.
"We knew their people, and we had a sense of what worked and what didn't in the negotiation process," says Nixon. "And we had a lease form (from the San Francisco deal) to work from that already made some sense and provided a shortcut through the process."
"The deal was 95% done when we started," adds Wood.
This was apparent in the transaction time. The entire deal from the initial proposal to a signed lease was completed in just four months. "I have never seen a lease negotiation of this size move that fast," says Wood. "But it could not have happened as quickly or as smoothly without the existing relationship of the two companies."
Perhaps an even more telling indicator of the importance of the relationship in the deal was that Andersen completed the transaction without hiring a broker. J.F. McKinney & Associates, the property's leasing agent,handled the transaction for Equity Office Properties. "The deal was handled principal to principal," explains Nixon. "We knew the market and we were able to get to the heart and soul of the transaction very quickly."
Under the terms of the deal, Andersen, signed an 11-year lease to occupy 14 floors of the property, which due to the transaction moves from 40% to 98% leased. This is two years ahead of the schedule Equity Office Properties had set to fill the building.
The deal also included some other advantages for Equity. Since Andersen needed all of the space immediately, Equity did not have to tie up additional space in "fixed expansion encumbrances." Wood adds that the prestige of landing a tenant of Andersen Worldwide's caliber makes filling the remaining space and retaining existing tenants easier. Also, working with expanding firms leads to other business down the line.
"We love to do business with growing companies, like Andersen," says Wood, "because we have an opportunity to grow with them."