Arco Plaza Option Put Up for Sale
The Orange County investment group that recently obtained an option to purchase the landmark Arco Plaza high-rise complex in downtown Los Angeles has quietly put its position up for sale.
Kings Capital, a San Juan Capistrano-based company headed by investor Kenneth Picerne, announced in May that it had completed transactions involving Arco Plaza and assets in Japan held by affiliates of Arco Plaza owner Shuwa Investments Corp. The investment group is said to have secured an option to purchase the 52-story Arco Plaza complex at 5th and Flower streets for $255 million as part of its acquisition of about $900 million in distressed Shuwa debt.
Real estate investment sources say Picerne’s group now wants to sell its option to purchase the 40-year-old complex and has engaged Century City real estate investment banking firm Eastdil Realty to find a buyer.
Picerne spokesman Mitch Rosenberg declined to comment on the Arco Plaza transaction, as did Eastdil Managing Partner Kevin Dretzka.
The relative health of downtown L.A.’s office market and recent sales of high-rise office properties there suggest that Picerne will receive offers higher than the $255-million option price, which factors out to more than $100 per square foot, including the complex’s subterranean shopping mall.
Observers in the commercial real estate investment community say Kings Capital believes it can get $275 million or more for the option. Japan-based Shuwa, controlled by the Shigeru Kobayashi family, reportedly paid nearly $650 million for Arco Plaza during its aggressive mid-1980s U.S. property-buying binge.
Shuwa, reportedly burdened by debt, has sold several of its U.S. real estate holdings in recent years, including a pair of Century City high-rises. Arco Plaza had been offered for sale from time to time individually or as part of a portfolio.
Forbes magazine last month reported that Picerne’s group, with financing from global financial services company UBS Warburg, acquired about $900 million worth of Shuwa debt from several lenders. Sources with knowledge of the debt purchase said it was part of a wholesale recapitalization of Shuwa’s finances.
Shuwa’s cash flow challenges have stemmed to some degree from high vacancy rate at its buildings, including nearly 1 million square feet at Arco Plaza. The 515 Flower building is 69% leased, while the 555 Flower tower is 37% leased, according to real estate information provider CoStar Group Inc.
Arco Plaza’s namesake anchor tenant no longer maintains offices at the property, which long served as Arco’s corporate headquarters before the acquisition of the company by BP Amoco of Britain. Bank of America’s logo remains on the 555 Flower tower, and the name of law firm Paul Hastings Janofsky & Walker recently replaced Arco at the 515 Flower building.
Downtown landlords enjoyed rising rents and higher occupancies before the market stalled during the second quarter, according to brokerage Insignia/ESG. Rents flattened after steady increases over two years and downtown’s shrinking tenant base sent the overall vacancy rate back up to more than 20% after dipping below that mark early in 2002 for the first time in several years.
The market’s improvements spawned substantial interest from institutional and other investors in top-performing properties. Observers said Arco Plaza is unlike those relatively stable properties, however, and would be more probable to attract interest from investors comfortable with the risk of attempting to add value to the property through improvements.
“You couldn’t get much higher on the risk scale” than Arco Plaza, said Jeremy Fletcher, regional chief executive with Boston-based Beacon Capital, which recently agreed to pay a reported $270 million for the 55-story 333 Hope tower. Despite downtown’s general forward momentum and Arco Plaza’s favorable location, there is considerable risk inherent in its high vacancy rate and costly capital needs, Fletcher said.
Conservative investors such as individual pension funds and insurance companies probably wouldn’t be interested, Fletcher said. The most likely buyer would be a so-called opportunity fund that specializes in improving troubled properties.
