The Tentative Tenants : With a Return Date to First Interstate Tower Uncertain, Some Lessees Say They May Look Elsewhere for New Home
Rebecca Mocciaro and her law partners began their countdown when they and thousands of others were barred from their offices in the First Interstate Tower after the May 4 fire that heavily damaged the 62-story structure in downtown Los Angeles.
While repairs and city inspections take place, employees of First Interstate Bank and all of the building’s other tenants have been forced to find temporary quarters. But in the case of Mocciaro’s firm at least, the displacement will not be temporary.
Mocciaro and her partners quickly tallied the cost of resettlement and tried to figure the number of days they were likely to be displaced--with each day bringing them closer to a decision about their lease, which had 11 months left to run.
The countdown ended last week when the law partners informed First Interstate’s leasing manager that they had found a new permanent address and would not return to the bank building.
“First Interstate couldn’t give me a (move-in) date,” Mocciaro said, explaining the decision. “What they were telling me is that they have to wait for city approval before they can make a final decision.”
The leasing managers of the 1-million-square-foot tower at Wilshire Boulevard and Hope Street, faced with the growing impatience of some of their tenants, are in a race against time.
Although Mocciaro and her partners are the only tenants to have said they are leaving, real estate specialists say that others are likely to challenge their leases and seek new offices if the building is not restored and reopened in timely fashion.
That development could disrupt the relatively stable downtown commercial leasing market. Already, the displaced tenants, by acquiring temporary space, have tightened the short-term leasing market for office space in downtown Los Angeles.
Competitive Aspect
But the fire-damaged tower’s largest tenant--First Interstate Bank, which is also a co-owner of the building--plans to return, according to Kenneth Preston, a First Interstate spokesman. The bank reserves 62% of the building.
Before the fire, the building also accommodated 40 other tenants--business and professional operations that occupied another 21% of the space; the other 17% was vacant. The other co-owner, the Equitable Life Assurance Society of the United States, is the leasing manager for the tower, where about 3,500 people worked.
Brad Koppel, a specialist in downtown-area leasing for the Grubb & Ellis real estate firm, pointed out the competitive aspect of the situation. “Let’s assume that after six months . . . the service is not restored, and the tenancy of the building is gone,” he said. “Let’s say they fix the building and come back into the market, (in effect) with a new building. All of a sudden, buildings under construction would suddenly have competition from a new 1-million-square-foot building.”
Uncertainty about the availability of any large building creates questions about the amount of office space in a market area and about the prices that will be charged for the available space, according to Robert Schwab, vice president and director of real estate for Helmsley-Speer of California, a division of Helmsley-Speer Inc., one of the nation’s largest owners and managers of rental property.
Generally, the cost of leases rises and falls in inverse ratio to the amount of available space. Property owners in the immediate vicinity of the First Interstate building were getting about 85% of the “fair market value” before the fire, Schwab said, but at least for now are getting close to 100% because of the sudden increased demand for space. Just before the fire, local real estate specialists said, the downtown vacancy rate was 15% to 17%.
Restoration projects normally breed restlessness among tenants, Schwab said. Usually, he added, the longer they are displaced, the greater the chance that many will not return. “Any landlord would be very concerned,” he said. “I’m sure Equitable is doing its best to meet their tenants’ needs.”
First Concern Is Safety
Equitable is aware of the dilemma and is addressing tenant concerns, said Jerry Poppink, a spokesman for the tower partnership. Under terms of the building’s leases, he said, tenants are not required to make rent payments while they are displaced.
“We’re obviously doing everything we can to work with the tenants,” Poppink said. “It’s a matter of concern because we want to make sure they (tenants) continue to operate with a minimum of inconvenience.”
However, meeting Equitable’s restoration standards and satisfying the city’s inspectors are the top priorities, he said.
“We intend to come back to full operational status as soon as possible, but we are not going to compromise quality and safety in doing that,” he said. “A lot of outside agencies will be looking carefully at what we’re doing. . . . While (the) time (factor) is significant, there are other issues that are even more significant.”
Inspectors from the city’s building and safety department are still examining the tower for any possible structural damage from the fire, which began on the 12th floor. And major restoration work will be conducted on the 12th through 16th floors, where most of the damage was done. That work could take up to 12 months, according to First Interstate.
There was also water damage to lower floors, where, among other things, soaked carpeting must be replaced, and smoke damage to higher floors, necessitating the replacement of some ceiling tiles, cleanup and major redecorating.
Equitable plans to complete work in July on the floors above the 16th floor and below the 12th, according to Poppink. However, it is city officials who will decide the timetable for the reopening of that space after they inspect the completed work.
Plans to Return
As the First Interstate renovation continues, so does construction on Arco Center, which is scheduled for completion this autumn. The 33-story building--at Seventh Street, Bixel Street and the Harbor Freeway--will provide 660,000 square feet. Meanwhile, three other new downtown buildings designed to provide a total of about 2.4 million square feet of commercial space are at various stages of construction.
But the coming availability of the new space is no lure to some First Interstate tenants. For example, Cassy Leeds, a branch service manager for Talent Tree Personnel, which provides accountants, secretaries, data processors and other short-term office help, plans to return to the tower when work is complete.
“Throughout the restoration, they (Equitable) have done a good job of keeping us informed of what is going on,” Leeds said. “In what was the worst possible situation, we were inconvenienced very little.”
However, some tenants have not committed themselves to resuming operations in the tower. Among the undecided is a branch of the Bank of Seoul. Some employees were “shaken up” by the fire, according to Anissa Perez, secretary and spokeswoman for the branch general manager.
The branch managers are “thinking about moving somewhere else,” Perez said. “I like the (First Interstate) space. If they move, that would be too bad.”
Another tenant, Gene Gregg of the Gregg & Armour law firm, is also considering the possibility of a move.
“I haven’t made up my mind yet,” he said. “They say the quarters will be ready in July, but I don’t know whether that’s a guesstimate or not. Everyone is hanging loose.”
Freed From Lease
Under the doctrine of “commercial frustration,” tenants can terminate leases with the consent of courts under certain circumstances, according to Dagmar Halamka, a business law professor in the department of finance and business economics at USC.
The doctrine “allows tenants to leave when there is damage, and if the purpose of the contract is frustrated through no fault of the tenant,” Halamka said.
Law and economic factors unbind Rebecca Mocciaro’s law firm--Leff, Katz, Rees & Mocciaro--from its First Interstate lease, she said. The partnership had fire insurance, but no business interruption insurance, she said.
The firm is doing its best to limit its losses by moving to a new location because the cost of waiting and returning to First Interstate is greater than that of moving, she said. The firm, if it is to attract and retain clients, she said, must quickly settle permanently.
In their present temporary quarters not far from the damaged tower the partners “can’t get our work done because there’s not enough space,” she said. Mocciaro said Equitable may not want to let the law firm terminate the lease because it might set a precedent for other clients. “But they also know I have to limit my damages,” she said.
“I should get money for emotional distress. This has disrupted my life.”
