DOWNTOWN LOS ANGELES — In the Downtown office market, Brookfield Properties has spent more than six years as somewhat of a younger brother to MPG Office Trust, the giant that has long owned more of the skyline than any other player. That balance of power is about to change radically.
New York-based Brookfield has reached a deal to acquire the struggling MPG, which has been selling off its properties over the past few years to get out of debt. As a result of the deal, Brookfield will add four new buildings to its Downtown portfolio: Wells Fargo Tower, Gas Company Tower, KPMG Tower and 777 Tower.
Brookfield is partnering with unnamed investors to create a new fund called DTLA Holdings that will own the four buildings, along with Brookfield’s three existing Downtown properties — Bank of America Plaza, 601 S. Figueroa and Ernst & Young Tower. Brookfield, which owns 47% of the fund, will manage the properties, the firm said in a statement.
“This proposed transaction provides the opportunity to combine and operate a sizeable portfolio of the highest quality assets in a major U.S. gateway city,” said Dennis Friedrich, CEO of Brookfield Office Properties, in a statement. “Downtown Los Angeles has all the attributes of a dynamic urban market, including modern transportation infrastructure, a growing residential population and access to a diverse labor pool.”
Brookfield moved into Downtown in late 2006 when it spent $4.8 billion to acquire the firm Trizec Properties. It values the new fund at about $1.15 billion, which includes the company’s $410 million in equity in its three existing Downtown office towers, according to the statement.
The firm said the fund provides “sufficient cash to cover anticipated future capital required” for leasing costs and refinancing needs — costs that MPG was unable to meet.
The move comes just one month after MPG reached a separate deal to sell U.S. Bank Tower, the tallest building in the West, to affiliate of Singapore-based Overseas Union Enterprise Limited.
The deal comes at a time when the Downtown class A office vacancy rate is at 21.3% “and rising,” said office broker Steve Marcussen, executive director of Cushman & Wakefield.
But Marcussen said the proposed transaction could jolt the market in a good way. Office building owners have worried that an outside investor could buy MPG’s assets, then lower prices to lure tenants. That strategy wouldn’t line up with the goals of Brookfield, which as a Downtown owner is just looking to build value, Marcussen said.
“This is the best outcome that ever could have happened,” he said. “It’s great news for the service providers, because Brookfield is going to be hiring architects and engineers and buying carpets and hiring art consultants — the whole panoply of service providers that MPG couldn’t hire.”
Under the terms of the merger, Brookfield will pay $3.15 per MPG common share, which represents a 21% premium on the stock’s April 24 closing price. The Brookfield fund will pay $25 per preferred share. The merger is expected to close in the third quarter of this year.
Contact Ryan Vaillancourt at email@example.com.