Los Angeles real estate developer and investor James A. Thomas is set to buy Arco Plaza, an anchor of the downtown business district, for about $270 million, less than half what its Japanese owners paid 16 years ago.
The deal, expected to be completed by month's end, marks the end of a long struggle for control of the twin 52-story office towers, once considered by many the best corporate address in the city.
"Every real estate operator of any standing has gone after this project," Thomas said. "We all lust after it."
The 31-year-old structures need extensive renovation, real estate industry sources say, and Thomas may have to spend as much as $50 million to restore the property's luster and make it competitive with trophy buildings erected in the 1980s and early '90s.
Japanese real estate giant Shuwa Investment Corp. shocked the U.S. commercial real estate industry in 1986 when it paid $640 million for the 2.7-million-square-foot complex, which fills a city block and has an underground shopping center. It was the largest real estate transaction ever in Southern California and one of the biggest prizes of the Japanese acquisition binge of high-profile U.S. properties during the mid-1980s.
Shuwa faced a cash crunch after the Japanese economy collapsed in the early '90s and began selling properties in Southern California later in the decade. Some of the biggest public and private investors in the U.S. expressed interest in Arco Plaza as Shuwa's fortunes waned, but all were beaten to the punch by Kenneth Picerne.
Kings Capital, Picerne's San Juan Capistrano-based investment company, acquired about $900 million in Shuwa debt last summer as part of the Japanese company's restructuring effort, according to published reports. The purchase came with a $255-million option to buy Arco Plaza, and Picerne was soon seeking bidders.
Among the finalists, according to industry sources, were Lowe Enterprises and CommonWealth Partners, both based in Los Angeles, Houston-based Hines and Chicago-based Walton Street Capital. All have substantial real estate holdings in L.A.
Representing Kings Capital in the bargaining was Eastdil Realty, which required all the competitors to perform their due-diligence research before making a final bid. Customarily, only the winning bidder pays for due diligence -- after an offer is accepted.
Kevin Dretzka, senior managing director of Eastdil, said a confidentiality agreement prohibited him from commenting on the deal.
The winner was Thomas Properties Group, headed by Thomas, who came to prominence as a partner in Maguire Thomas Partners, which developed some of downtown's biggest offices, including Library Tower, Wells Fargo Center and Gas Co. Tower. Thomas left in the mid-1990s as the company contracted in the recession.
As a competing landlord, Thomas said, "I spent 10 or 15 years moving people out of Arco Plaza, and now the challenge is to move them back."
The plaza is about 40% vacant, even though it has landed some large tenants in the last 18 months, including architecture and engineering firm Daniel Mann Johnson & Mendenhall. Law firm Paul Hastings Janofsky & Walker also agreed to an $80-million lease renewal and placed its logo atop the tower at the northwest corner of 4th and Flower streets, replacing the word "Arco."
The tower once was the headquarters of Fortune 500 petroleum company Arco, which owned the property with Bank of America before selling to Shuwa. Arco was acquired by BP Amoco in 2000. The new owners may rename the property.
Thomas would not reveal what renovations he has in mind for the plaza, but he said there is "tremendous upside potential" for improvements.
"It's a very challenging project," he said, "but probably the most exciting real estate opportunity on the West Coast."
One of the biggest challenges will be figuring out what to do with the two levels of underground retail space, which draw little foot traffic and have been a graveyard for several small businesses through the years. One problem for shopkeepers is a lack of tenants in the buildings upstairs, where more than 1 million square feet of offices remain empty. Meanwhile, the decor in the public spaces is a bit arresting, with colors, materials and design flourishes last popular in the 1970s.
"It's very passe," said Jack Kyser, chief economist at the Los Angeles County Economic Development Corp. and a tenant in the plaza. "And people walking down the street aren't aware what's down there."
However, the dark-green granite office towers designed by Los Angeles architecture firm AC Martin Partners are "timeless," Kyser added.
"Arco Plaza has great bones and a great location," he said, "but definitely the public spaces, the elevators and the ventilation system all need to be brought up to modern standards."
Partnering with Thomas as a major investor is the California State Teachers' Retirement System. Kings Capital will retain some interest as a limited partner. "We believe in the resurgence of downtown Los Angeles and are proud to be an investor in this signature asset," Picerne said.
Thomas Properties was founded by Thomas, a former co-owner of the Sacramento Kings professional basketball team, in 1996. With the acquisition of Arco Plaza, his company will own or manage 8 million square feet of office and retail space with an additional 6 million square feet under construction or in early phases of development, mostly in Philadelphia and Los Angeles.