Anatomy of a Deal: Studley Finds a New Space for MySpace
An inside look at how a leading broker found the perfect site in Los Angeles for Fox’s burgeoning Interactive Media unit.
It was a brisk set of challenges that News Corporation offered Studley, a broker that likes to market itself as being adept at “executing complexity”: find a large block of space in an overheated Los Angeles market for its burgeoning Fox Interactive Media (FIM) unit. But do it in a way that would not unbalance the delicate corporate culture of the unit’s recent addition, MySpace, which was viewed as key to the media conglomerate’s attack on the media-convergence world. Make it expandableâ€”though how much space would be needed in coming years was not at all clearâ€”and throw in plenty of extra parking spaces. And to keep the troops happy, try to keep it in west LA, not too far from its current location on the Fox studio lot in Beverly Hills.
Well, scratch west LA. Though several sites were considered in that area, the deal ultimately secured by Studley took FIM eight miles south of the Fox lot to a mixed-used development called Playa Vista going up south of Marina del Rey, a couple of miles in from the Pacific. At 418,000 square feet, it was one of the larger relocations in memory in Southern California. But what made it most notable was the structure Studley was able to negotiate as economic conditions began to weaken and the market began to cool off. With landlords beginning to betray the first signs of anxiety about filling their speculative projects, Studley was able to convince the winning bidder, Lincoln Property Co., to go with an open-book structureâ€”getting paid for the cost of construction plus a profitâ€”and then layered on a cap on those construction costs. Throw in a dramatically increased parking ratio, and it yielded a significantly below-market rent that helped justify a relocation to what, to many Fox executives, was a barely charted wilderness eight miles distant from the comforts and familiarity of their west LA epicenter.
“They were building when the market was white-hot, but then the pro formas suddenly didn’t look so hot,” recalled Peter Capuciati, national director of Studley’s Corporate Services Group. “So they decided to hit a single or sacrifice fly and try to make money on the balance of the project. At the end of the day, we ended up 15-25% below market, thanks to the structure, the cap and so on.”
Tailoring the Project to the Proposed Site
For the landlord, Lincoln Property, the open-book process allowed it to delete enough features from the project that were unneeded by Fox so that it could eke out a profit even after the extensive concessions it made to the tenant. “In my mind, Fox got a great deal,” said David Binswanger, executive vice president of Lincoln Property. “With smaller tenants I could have driven higher rents. But Fox helped us eliminate costs.” He was encouraged enough by the outcome to plan to break ground in early November on 300,000 square feet of additional space, both to accommodate FIM’s anticipated growth and to build on the leasing momentum within Horizon and the Playa Vista development as a whole.
Fox Interactive Media’s 12-year lease, signed in June, gave the company 418,000 out of the 460,000 square feet of available space in the two buildings comprising the initial phase of Horizon at Playa Vista. To meet FIM’s expansion needs, 145,000 square feet of contiguous space is available including 42,000 square feet at an open-book rate (that is, the remaining space in the first two buildings of Horizon) and three 33,000-square-foot tranches that will be available at an arbitrated market rent. If FIM opts to take all three tranches, the developer must build the space. FIM’s three-phase move will commence in May 2009 and proceed through Phase 2 later that year and Phase 3 in early 2010. (Construction has been running about a month late, so these targets may shift slightly.)
Among key features of the lease structure, the construction cap was particularly well timed for the client because it eliminated the risk of cost escalation at a time that prices of construction-related commodities were beginning to soar. Further millions were saved by a 50-basis-point reduction in the rent constant, an annual escalator of just 3.29% versus 4% at most of the alternatives, and the elimination of some carrying costs from the capital structure formula. Studley executives say that last concession alone is worth roughly $10 million, given the extended period some of the space will remain unoccupied during a phased occupancy stretching over more than an 18-month period. Not least, in an environment where parking space generally is at a premium, Studley managed to increase the on-site parking by more than 500 stalls to 4.34 spaces per 1,000 square feet versus a more standard ratio of 3 spaces per 1,000 feet. The net result to the client, Studley executives calculate, was a benefit of more than $85 million over the 12-year term of the lease. The effective annuity rent (including an equalized parking expense) nets out to $58.53 per square foot, compared with the $72.49 of Lincoln Property’s asking terms and the $64.60 negotiated by Belkin for space in another commercial project at Playa Vista, offered by Tishman Speyer Properties.
Fox Interactive Media was established in early 2005 as an interactive media play for News Corp., the media conglomerate controlled by Rupert Murdoch. It took a big step toward achieving critical mass later that year with its acquisition of Intermix Media, owner of MySpace.com, and two smaller companies. The combined entities were consolidated at a new headquarters on the Fox lot in LA. From employing about 500 early that year, the company had grown by mid-2008 to 1,600 full-time employees, about half of them on the MySpace side, occupying 275,000 square feet of space. As the company has matured from its startup status, though, the time had come to seek a new headquarters that could accommodate an anticipated expansion by 2011 to more than 2,500 employees occupying 435,000 square feet of space. But it had to be done without alienating hard-to-replace creative employees or undermining corporate esprit at a delicate time in the evolution of the once-freewheeling unit. From outside the company, Lincoln Property’s Binswanger said it was evident how much attention Murdoch himself lavished on this unit from the disproportionate amount of time he spent discussing its activities on the company’s quarterly earnings conference calls.
Project “Chameleon” Begins
The project began in March 2006 as a hush-hush initiative code-named Chameleon. The reason for the quiet: News Corp. executives didn’t want to spook employees who’d just moved into new space after several prior relocations with the prospect of another move, and one possibly far afield from their preferred habitat in the western reaches of LA. The company and its predecessors had been in six locations all told, including a couple of bridge locations found by Studley.
One challenge from the outset, said Capuciati, was an “ever-changing demand side,” with the company’s brisk growth making it difficult to peg how large the payroll would grow and how much space would be needed to accommodate it. By one internal estimate, by 2015 the unit may require 633,000 square feet to house 3,700 employees. That made flexibility a crucial consideration.
The external leasing environment posed another challenge. Although that may already seem far distant from current conditions, at the time the search started in early 2006 an already tight market saw upward pressure on rents ratchet further upward when Blackstone Group acquired Equity Office Properties. For a block of space of the magnitude FIM was seeking in the LA basin, the only viable options offering a single location with the opportunity for phased expansion were at new developments, some under way and others in the planning stage. Several of them were far afield from the area in west LA surrounding the Fox lot where most employees preferred to stay rooted.
The search took Studley “all over the map because of the size of the potential transaction,” including the parking requirement, said Studley’s LA-based executive vice president, David Gordon. The broker commenced its search close to the mother ship, Fox, looking at Pico Boulevard in West Los Angeles. The prospects there mainly comprised in-fill opportunities, whether new buildings or tenant relocations. With a solution appearing difficult in this immediate area, the search was expanded to Orange County, the San Fernando Valley (both east and west) and even Northern California. Given the creative nature of the business, FIM’s ability to recruit coveted employees was a key part of the mandate â€“ and most employees would have been perfectly happy to remain in the trendier precincts of west LA. “It was a big issue from Day 1,” said Capuciati. “MySpace wanted to stay in LA or Santa Monica, but there was an excruciating cost differential. That difference was north of $100 million.”
The engineering side of the business offered one opportunity for flexibility, since there was a pool of similarly credentialed engineers in Silicon Valley and some work had even been offloaded to the Seattle suburb of Bellevue after a Microsoft layoff created a pool of well-credentialed engineers there, noted Gordon. But to disperse the company among too many locations “would lose what MySpace was all about,” he said. With the risks to the corporate culture deemed too great, that approach was quickly ruled out.
Close to the Fox lot, a couple of options beckoned. Garnering great location and style points was the striking Cesar Pelli-designed Red Building being erected by New York developer Charles S. Cohen in West Hollywood. As one of the few alternatives on the west side, where it is part of the 14-acre Pelli-designed Pacific Design Center, the twin-towered speculative project held great appeal to Fox and MySpace executives who preferred to stay in the area. But the 400,000-square-foot planned project was priced more than $100 million higher than most of the other options that would receive consideration and was complicated by an obliquely-shaped footprint that, while making for a stylish addition to the landscape, would be fiendishly difficult to employ efficiently. For Fox’s intended use, the sharp-angled configuration would have required 15-20% more square footage for the same number of users than the more orthodox rectangular floorplates available at other complexes, Studley executives estimated. Other negatives included the owner’s insistence on a 20-year lease and the fact that construction was running several months behind schedule. Even the building’s sleek skin posed problems for attaining the environmental sustainability levels that were a requirement of the lease as part of News Corp.’s broader push to go green, said executive managing director Kelly Givens, who handles construction-related issues. Thus, despite lobbying by some key MySpace executives, it had to be ruled out. “It was inefficient and ludicrously expensive, and there was no way to solve our parking issue or to accommodate the expansion we needed,” said Capuciati.
Another option with great geographic appeal was a six-building complex in the heart of Santa Monica known as Yahoo Center, whose eponymous major tenant has announced its intention to exit, freeing up a block of more than 400,000 square feet of space. The owner of the complex, whose name will revert to Colorado Center once Yahoo leaves, is Equity Office Properties, whose acquisition by Blackstone had helped propel rents throughout the area on an upward spiral. The negotiation with EOP started out at a rent exceeding Lincoln Properties’ by several hundred million dollars, seemingly making it a non-starter. But as Studley got closer to its deal with Lincoln Property, things got more interesting around May when, at the eleventh hour, EOP “tried to steal the deal” with an unsolicited offer that slashed its request by more than $100 million, Capuciati recalled. Had it been accepted the offer would have given EOP a negative return, Capuciati surmises, but would have had the virtue of allowing the owner to unload a big block of space in a weakening market. But it was too little, too late, Studley execs said.
Ultimately, the broker settled on the speculative office development being built by Lincoln Property and ASB Capital Management in an emerging mixed-use area adjacent to Marina del Rey dubbed Playa Vista that includes the site where Howard Hughes built his Spruce Goose airplane. (Hughes’ office still stands as a landmarked building.) The broader 1,000-acre Playa Vista complex is situated on what is being called LA’s Lower Westside, close to Los Angeles International Airport and the CA-90 and I-405 freeways, and two miles from the Pacific beach. At Playa Vista the residential development eventually will comprise some 5,000 unitsâ€”primarily townhouses and condosâ€”with a first phase of 3,600 primarily rental units already occupied. Nearly 16 acres of active park space will include volleyball courts, a skatepark, soccer and baseball fields and a bandshell, just the sort of amenities, as companies like Google have proved, that can help bind employees to a workplace where they’re expected to spend long hours. The Los Angeles Clippers basketball team also is building a training facility in the area.
The area also seemed to be reaching critical mass on the commercial side, attracting the kinds of creatively focused companies that FIM would regard as peers. Game developer Electronic Arts had been the pioneer, relocating there in the wake of the dotcom implosion early in the decade, when it had its pick of locations in more established areas. At an adjacent development to Horizon called The Campus at Playa Vista, computer connectivity company Belkin International Inc. recently committed to 150,000 square feet for a relocation of its headquarters there in 2010. The Belkin commitment enabled the developer, Tishman Speyer Properties, to break ground on 325,000 square feet of on-spec space in the first phase of a project that’s eventually intended to encompass 1.2 million square feet. (As it happened, Studley had earlier approached Tishman on behalf of FIM, but discussions had quickly foundered when the developer refused to consider the kind of open-book deal to which Lincoln acquiesced. It later did change that stance, but as with EOP’s about-face, it was too late.) In another deal brokered by Studley, the largest independent advertising agency in LA, Ruben Postaer & Associates, has just committed to taking a substantial block of space across the street from the Horizon and Campus sites for its relocation from Santa Monica. “That adds up to 800,000 square feet along a half-mile stretch in a softening market,” Binswanger said. That was a clear signal to the market that momentum was building around Playa Vista.
Word that these deals were percolating helped Studley win the war on a key front: easing concerns among Fox executives about moving into a remote area that, to many of them, was terra incognita. Though only eight miles away from the Fox lot on the map, that amounts to a 45-minute drive time in heavy traffic. Site tours conducted by the developer helped melt away the skepticism. “There was some resistance from Fox to come down to Playa Vista from Beverly Hills and Santa Monica,” Lincoln Property’s Binswanger allowed. “But as more and more employees saw Playa Vista they started to have rumblings” in favor of the move. As Belkin and RPA advanced in their own negotiations to come aboard, that reinforced that this likely was a sound decision, he said. Fox’s move, of course, will add considerably to that momentum at Horizon and other nearby developments. “If the target is media and creative types, MySpace helps lure future development,” said Capuciati.
Of the amenity-laden lifestyle approach, Binswanger noted: “You can’t just win employees with stock options and salaries, you have to recruit them with other benefits.” He promised that “all the parks and site-specific retail amenities will be there when they move in.”
With tenants like Fox in mind, the Lincoln Property piece, dubbed Horizon at Playa Vista, has been marketed as a 15-acre “creative-style office campus” offering 950,000 square feet of class A office space. FIM had its eye on the first phase, two five-story buildings on Bluff Creek Drive totaling 460,000 square feetâ€”for an average floorplate of 46,000 square feetâ€”that was scheduled for completion by the end of this year. The office designed by noted tower design firm Johnson Fain Partners will offer 9 foot, 6 inch ceilings and full-height windows, and is near a stop for a planned e-tram system. The Horizon buildings offer views of pedestrian paths, recreation areas and, to the south, the Westchester Bluffs.
As it became clear that the location could be made to work, it was time to make the economics work, too. That’s where the open-book approach came in. By the time Horizon at Playa Vista came up on Studley’s radar, development was well under way, ruling out a build-to-suit structure that could be configured exactly to FIM’s requirements. However, with the once-booming economy weakening, the brokers were able to entice Lincoln Properties and its leasing agent Cushman & Wakefield into the open-book structure, allowing Lincoln to make a markup on the documented costs of construction. Then Studley insisted on a cap on the construction costs, too. Though that would put a definite crimp in Lincoln Properties’ return, the developer would benefit from having FIM aboard at a time when the economy was weakening and there were ample grounds for concern that landing a major tenant would get increasingly difficult.
Knowing Studley was keeping the door open to other alternatives, Lincoln and its leasing agent had to give serious consideration to Studley’s demands. Still, the negotiation easily could have gone off the tracks at many points. One spur to both sides’ putting their positions frankly on the table with a minimum of grandstanding was the identity of the negotiator on the other side of the table from the Studley team: Cushman & Wakefield executive director Steve Walbridge, a 20-year Studley veteran who had moved to Lincoln Properties in 2001 and, three years later, to Lincoln’s agent Cushman. The former colleagues knew one another’s negotiating styles all too well. With Walbridge involved, there was a strong impetus “to get right to the point,” as Capuciati put it.
Among members of the Studley team, Kelly Givens played a vital role, thanks to his diversified experience on the architecture and construction side, in converting the Lincoln deal from spec to open-book. As the partners worked together, Givens and his colleagues layered on several key requirements to Lincoln’s spec plan: more air conditioning capacity, additional power for the data center, upgrades of a pair of outdoor roof decks, a fitness center to be delivered within a year of occupancy, cafeteria doors that would open to the building courtyard. Because one user group within MySpace needed far more than the 46,000 square feet available on a single floor but wanted everyone in contiguous space, the developer was asked to build a bridge connecting the third floors of the two buildings, offering a more than 90,000-square-foot contiguous area on a single floor. “The building had been designed for broad-market speculative use, but we married it to our specific needs,” Givens said. “When they dug in their heels, David pushed them some more,” he said, referring to Gordon. Some of the changes benefited the developer. A more staidly corporate-looking granite lobby was swapped out for a less expensive industrial look better suited to an edgy company like FIM, at a savings to the developer. Finishes on the elevator cabs and other items also could be swapped out for less expensive options that were better-suited to FIM’s corporate personality.
Though there is no question that Studley executives used the changing economic climate to drive an unusually hard bargainâ€”capital costs already are believed to have exceeded the cap by well over $10 millionâ€”Lincoln Property was able to land a jewel of a client that should do much to ease the marketability of the rest of the Horizon project. On the day he bought the Horizon property, Binswanger recalled, a reporter from The Los Angeles Times asked him whom he had in mind when he talked of creatively oriented lessees. “Tenants like Fox,” was Binswanger’s response. Two-and-a-half years later, he noted with satisfaction, that’s exactly how it played out.