Did DWP approve a $40.8M DTLA lease that overcharges its ratepayers?

Figueroa Plaza (Google Earth), Christina Noonan (JLL) David Wright (LAMayor.org)
Figueroa Plaza (Google Earth), Christina Noonan (JLL) David Wright (LAMayor.org)

It’s rare that a commercial broker tries to stop a lease deal from closing. But that’s exactly what is happening in the case of a proposed 10-year, $40.8 million lease between a tenant, the L.A. Department of Water and Power, and a landlord, the city of Los Angeles, at Downtown’s Figueroa Plaza.

JLL broker and DWP Board Commissioner Christina Noonan has argued that the DWP, in trying to rush the lease’s approval, has skipped the due diligence that would ensure a fair deal for all parties — namely, an independent brokerage firm negotiating the lease and a well-vetted independent appraiser determining the property’s value by comparing it to other buildings of the same ilk.

At a DWP board meeting October 4, Noonan said DWP staff had asked her to outline a strategy for obtaining space for DWP to use while its current home gets retrofitted at the best price for DWP’s ratepayers. Her suggestions were ultimately dismissed, she said.

“A professional, well-versed commercial real estate brokerage firm was not retained to leverage and account for the cost-effectiveness of this transaction,” she said at the meeting. “There is no procurement history relating to the appraiser that was hired.”

Noonan was the sole voice of resistance when the DWP Board of Commissioners approved, by a 4-1 margin, the lease for 82,900 square feet across four floors at 221 North Figueroa Street, the 307,560-square-foot “north tower” in the two-building Downtown complex the city purchased in 2007 for $219 million.

Fig Plaza houses several other city departments, but has lacked a major tenant since a December 2014 fire at developer Geoffrey Palmer’s neighboring property forced law firm Lewis Brisbois Bisgaard & Smith to relocate. The move away from the roughly 169,000 square feet it rented at Fig Plaza was meant to be temporary — but the law firm opted last year to stay long-term at U.S. Bank Tower, rather than returning.

Now that DWP has approved the Fig Plaza lease, it faces a vote from two L.A. City Council subcommittees: the Entertainment and Facilities Committee and the Energy and Environment Committee. It might have passed through them swiftly if it wasn’t for the concerns of Noonan, a 20-year real estate veteran, as well as two non-board-members who demanded a more thorough process. Their questions led the Entertainment Committee to table the issue for further discussion at an unknown date.

The Energy and Environment Committee, meanwhile, is slated to hear the lease at its meeting on Wednesday.

No broker

Citing an immediate need for the space, DWP passed on obtaining a broker to negotiate a lease, opening discussions directly with the city in February.

After toying around with a larger space, the utility ended up with the current lease, which DWP can terminate after the eighth year. It would cost the utility’s ratepayers $29.76 per square foot annually, a figure that would rise to $48.47 per square foot once the cost of its 207 parking spaces are factored in. That total includes more than $8 million in tenant improvements, furniture purchases and building modifications.

While foregoing a broker to negotiate the rate, DWP hired Peregrine Realty Partners principal Bradley Lofgren to conduct an appraisal of the property. DWP General Manager David Wright said  there was a reason for the swift efforts to close the lease without involving parties beyond Lofgren. Speaking at an Entertainment and Facilities Committee meeting on October 4, he said he has more than 700 outstanding requests for office space from existing employees. Their needs cannot be met in the DWP’s current headquarters in the John Ferraro Building at 111 North Hope Street until it is retrofitted, he said.

“We do not have any space left in JFB. … You’ll notice in some places, we’ve converted space — like the lobby — to house staff,” he said, arguing that Fig Plaza’s proximity to the current headquarters would also save DWP money by reducing employee travel time and eliminating the need for a second fleet of vehicles at the site.

Wright said DWP also needs space for the 1,300 new employees it plans to hire. He said at the October 4 meeting that the hires are part of a “knowledge transfer” as DWP seeks to train workers to fill the gaps as its older employees retire. One third of its 9,200 employees are now eligible for retirement, he said.

Questionable building value and lease rate

Peregrine’s appraisal found DWP’s lease rate was comparable to agreements for similar properties in Downtown Los Angeles. That claim was disputed by both Noonan and Jack Humphreville, president of the DWP Advocacy Committee, an unaffiliated watchdog board.

Humphreville, who has published a series of scathing critiques of the deal on the website CityWatch Los Angeles, called the building a “poorly located, Class B property,” and added that it has “substandard amenities [and] has not been properly maintained” since the city purchased it.

“This screwing of the ratepayers is an example of voters don’t trust the mayor and city council,” Humphreville said, arguing that the city, as a landlord, is pushing a bad lease onto ratepayers to help close the budget deficit.

DWP, which declined four separate requests by The Real Deal to make a staff member available for an interview, cited CoStar’s 2016 report classifying the property as a Class A space at the October 4 meeting.

He said Goldman Sachs had conducted an unofficial assessment of the lease which found it to be in line with the market.

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“Our lease rate is competitive,” Wright said.

On its face, the $48.47 per square foot per year rate is higher than than the Greater Downtown average rent, which is $36.74, according to CoStar. However, the DWP rate includes parking, which isn’t always factored into asking rents. For example, Chase Plaza, which sold earlier this month for a record-breaking per-square-foot price, has an asking rent of $27 to $39 a square foot, according to CoStar. But lease information shows that parking spaces cost tenants an additional $205 to $300 a month. Asking rents at the historic Fine Arts Building are $36 to $44 a square foot, however that building does not have parking.

DWP ratepayer advocate Fred Pickel, who also spoke up at the meeting,  said in an interview with TRD that a brokerage firm should have been hired to negotiate these terms to ensure the ratepayers are given fair-market value. Failing that, he said, the lease should include a most-favored-nation clause, in which the agreed-upon pact would serve as a cost ceiling and the price would drop if an arm’s length deal for another building tenant comes in at a lower figure.

“The city is always looking for more revenue,” Pickel told TRD. “We understand why the city as a whole would like to get this lease at the highest possible price. As the ratepayer advocate, we would just like it to be a fair-market price.”

Questionable tenant improvement costs

Beyond criticizing the process, Noonan has raised concerns over several specific portions of the lease, including the inclusion of tenant-improvement costs and DWP’s requirement to begin making payments — starting with the $3.7 million payment for the already-completed improvements to the space — immediately upon mutual execution of the lease. Since DWP has already approved the lease, those costs would go into effect as soon as the two subcommittees give it the go-ahead.

“Normally, a tenant does not begin paying rent until construction has been completed [on] a schedule that has been mutually agreed to by the landlord and tenant,” Noonan said at the October 4 meeting. “To date, there is no space plan, no final space drawings have been contemplated, nor have permits [been] drawn, nor has construction been completed. So, [DWP] will be paying for space that the department will not occupy for many months.”

In an interview with The Real Deal, Commercial Realty Partners President Carol Roth, who is uninvolved with DWP, said that a typical agreement of this size could include an improvement-allowance provision, which can be crucial to attracting tenants. Landlords usually provide tenants with an improvement allowance based on the length of the lease term, she said.

“It’s typical in the market for the landlord to provide $7 per square foot per year, or $70 per square foot  for  a 10-year lease,” said Roth, who has represented properties including 700 S. Flower St. and 1055 Wilshire Blvd. “A tenant could be responsible for improvement costs that exceed that amount.”

Using Roth’s example, a hypothetical landlord leasing a property of a similar size and for the same term as the North Figueroa property—82,900 square feet over 10 years—could agree to to cover more than $5 million improvements.

However, speaking on behalf of L.A. Chief Administrative Officer Miguel A. Santana’s office at the Entertainment Committee meeting, municipal analyst Bernice Hollins said that tenants have been directly charged for these costs in similar city leases. For example, the  Department of Building and Safety, which like DWP also draws on revenue from outside the city’s general fund, had a similar agreement for its space in 221 N. Figueroa.

“This is consistent with the policy we have in place,” Hollins said.

Is the lease necessary?

Noonan, speaking at the meeting, also questioned if DWP needs to relocate for a full 10 full years in order to retrofit 15 floors at the John Ferraro Building. The 73-floor Wilshire Grand Tower, now the tallest tower in the West, will have been completed within four years if it hits its March 2017 target, she said, questioning why a retrofit of an existing building would take 6 years longer.

Pickel and Wright both spoke to the need for a bigger-pciture DWP space-utilization plan. Currently, despite the slated influx of employees, the department has yet to publicly consider a long-term strategy for its real estate needs, including the renovations necessary for its 50-year-old, 1.6 million-square-foot headquarters in the John Ferraro Building to house incoming staff.

DWP on a time crunch

As of Tuesday, October 18, the Entertainment and Facilities Committee had not yet scheduled a follow-up hearing on the lease.

The four DWP commissioners who voted in favor of the deal at the October 4 meeting praised Noonan for her work and expressed their own concerns with with the process. Ultimately, however, they said they voted for the lease because of a looming deadline. The proposed terms of the lease were set to expire in early October, DWP spokeswoman Amanda Parsons said in an email.

Commissioner Michael Fleming said at October 4 meeting that the board was in between “a rock and hard place.”

“We didn’t have to have so many questions, given that at the end of the day, we’re going to lease this from the city of Los Angeles, which, for all intents and purposes, is supposed to be our partner in this,” Fleming said.