Brookfield blames Measure ULA for Wells Fargo tower writedown

Brookfield has admitted one of its trophy office towers in Downtown L.A. has lost a quarter of its value, thanks to L.A.’s new transfer taxes. 

The investment firm wrote down the value of its 45-story office tower at 355 South Grand Avenue — the South Tower of the Wells Fargo Center — by $111 million, according to an annual report released by Brookfield’s entity that owns six office buildings and one retail center in Downtown L.A. 

The publicly traded fund, called Brookfield DTLA Fund Office Trust Investor, blamed the writedown on Measure ULA — the City of L.A.’s new transfer tax that will take 5.5 percent from all commercial and residential sales that trade for more than $10 million, according to its report. 

The writedown marks the first time Brookfield has drastically cut the value of one of its Downtown L.A. holdings, which have been affected by the dual triggers of high vacancy rates and high interest rates. 

Brookfield said the tower was valued at about $421 million, when taking depreciation costs into account, at the end of 2021, according to an annual report. By the end of 2022, that value was slashed to $311 million — a roughly 26 percent reduction. 

The company’s issues in Downtown L.A. don’t end there. 

The DTLA fund said the cash generated by its portfolio “is not sufficient to cover its investing and financing activities, including upcoming debt obligations, leasing costs and capital expenditures.” 

Most of the liquidity issue stems from Brookfield’s large pool of debt attached to the portfolio, the firm disclosed. When interest rates started soaring in the last half of 2022, its debt service soared in parallel, given most of its debt carries a floating rate. 

At the end of 2022, the firm held $2.3 billion in debt — 49 percent of which is maturing by the end of this year, according to its report. 

“Our substantial indebtedness requires us to use a material portion of our cash flow to service interest on our debt,” Brookfield’s DTLA entity said. 

The firm has already defaulted on $784 million in debt connected to two of its DTLA towers — 777 South Figueroa Street and 555 West 5th Street. 

To increase cash flow, the firm needs to lease more vacant space and hold onto tenants. But that’s a struggle, given the desire for in-person office work has been lackluster since the start of the pandemic. 

Brookfield “will need to spend a substantial amount on capital leasing costs (such as tenant improvements)” to attract new tenants and retain existing ones, but “has limited amounts of liquidity” to do this, the firm said.

The firm also disclosed it would initiate a process to voluntarily delist its DTLA stock from the New York Stock Exchange. Earlier this month, the fund was trading below $2 for the first time and has teetered around just above $1 per share listing threshold since then.

Brookfield Asset Management CEO Bruce Flatt dismissed the two debt defaults in L.A., calling it “regular business” in an interview with Bloomberg in February. 

“It’s small and not relevant to the overall business,” he said.