An analysis of rent rolls at Hollywood & Highland

Tenants at Gaw and DJM’s property include Wolfgang Puck Catering and part of the TCL Chinese Theatre, home to the Oscars

Los Angeles /
Aug.August 07, 2020 12:54 PM
Gaw Capital Chairman Goodwin Gaw and DJM founder John Miller with a rendering of the project
Gaw Capital Chairman Goodwin Gaw and DJM founder John Miller with a rendering of the project

When the famed Hollywood & Highland shopping center traded for $325 million last year, it was the largest single-address retail deal outside of New York City in years.

At the time, buyers Gaw Capital Partners and DJM Capital said they planned to “reimagine” the 7.6-acre site, introducing “new concepts and uses” to keep up with a shifting retail landscape. This week, they unveiled more details of those plans.

The $100 million makeover will convert as much as half of the property’s retail space into offices, the Los Angeles Times reported. The complex, rebranded as Ovation Hollywood, will include nearly 100,000 square feet of creative office space across the top two floors, 135,000 square feet of retail, and 190,000 square feet for dining, entertainment and events.

“Its original design features don’t work in today’s world and certainly not in tomorrow’s world,” co-owner Goodwin Gaw told the Times, noting that the property, built in 2001 by Chicago-based Trizec Properties, is “essentially built like a fortress that is uninviting.”

Gaw and DJM’s acquisition of the property was financed with a $264 million CMBS loan from Natixis, which includes a $52.5 million future funding note for their renovation plans. As is often the case with securitized deals, a ratings report from Moody’s provides an in-depth look at the property’s finances, and a glimpse of what’s to come.

The 463,000-square-foot property at 6801 Hollywood Boulevard currently has 328,000 square feet of retail space and 22,000 square feet of office space, according to Moody’s.

A fifth-floor event space spanning 77,000 square feet, occupied by Wolfgang Puck Catering, was expected to be partially converted to office space as of last August. Wolfgang Puck’s lease expires in 2022, soon after the renovations are set to be completed.

“The potential office conversion spaces have floor to ceiling window access, and suites with strong views of the Hollywood hills,” the report says.

The partners expect to be able to achieve gross rents of $50 to $60 per square foot in the renovated Wolfgang Puck space, according to Moody’s. That would be above average for the Hollywood office market but somewhat lower than what Netflix is paying for office space in the neighborhood.

The mall also includes a 36,000-square-foot, six-screen movie theatre that is a part of the neighboring TCL Chinese Theatre, where the Academy Awards ceremonies are held. In a curious arrangement, the mall pays the Chinese Theatre just $1 per year in ground rent, in exchange for charging the theatre below-market rents for the use of the space.

A “strategic tenant default” on the Chinese Theatre’s sublease could trigger the ground lease rent to reset to a couple of million dollars from $1, according to Moody’s. But the situation is rather unlikely, given other mitigating factors such as a $5 million naming rights deal and the potential for a lawsuit.

The mall also has another ground lease with L.A.’s Metropolitan Transit Authority in connection with a subway station at the property, which is set to triple from $760,000 a year to $2.4 million a year in 2024.

The mall takes in about $20 million in annual base rent income, 10 percent of which comes from 16 tenants with gross leases or leases structured with percentage sales instead of base rent. Gaw and DJM plan to “allow underperforming tenants to continue to operate and to collect income from them until the repositioning is complete,” the report says.

Additionally, the mall receives more than $4 million a year from its 18 billboards and media displays, most of which comes from a long-term lease with Outfront Media. The mall’s Ray Dolby Ballroom provides another $700,000 in naming rights revenue per year, and $300,000 in connection with exclusive use for the Oscars for a month every year.

The coronavirus has predictably had a negative impact on the mall, and the L.A. Times reports that about one-third of the center’s businesses are closed. In May, the partners notified the master loan servicer of “potential cash flow concerns caused by the Covid-19 Pandemic,” and a forbearance agreement went into effect in mid-June. The loan has remained current on monthly payments throughout, according to Trepp.

Although the CMBS loan does not include a completion guarantee, Gaw and DJM will be required to deposit 50 percent of remaining renovation costs with Natixis if the project is not completed by July 2022.

Contact Kevin Sun at [email protected]


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