Creative tenant chooses purchase over lease
LABJ 8/17/17 http://myequityoffice.com/dailybrief//documents/sold-on-future-august-17-2015-1439825640.pdf
Scott Benson’s Big Block Media Holdings, a 50-person entertainment firm in Santa Monica, was getting squeezed for space.
But rather than renew and expand its 8,000-square-foot lease, Benson, its chief executive, took another path: He guided the company to the $4.5 million purchase of a 10,000-square-foot building at the Elevon development in El Segundo.
With Westside rents on the rise, Benson did the calculation that it was better for the company to own its building rather than be subject to the vagaries of the leasing market.
Such opportunities are not common.
Elevon is part of a 47-acre master-planned development called Campus El Segundo, and sits on a site large enough to accommodate a series of smaller buildings that could be sold off individually.
From a development standpoint, the cost of building the campus would necessitate higher rents than average in El Segundo, said Alex Rose, senior vice president of development at Continental Development Corp., which is building Elevon with Mar Ventures of Torrance.
“It was developed with an eye for sale, knowing that we wouldn’t be able to get the project to pencil (if it was leased),” Rose said.
Elevon is a 223,500-square-foot, 15-building creative campus built on a 13-acre portion of Campus El Segundo. The first Campus El Segundo phase included another for-sale development, called Edge, which Mar developed with San Francisco real estate investment trust AMB Development Corp. That phase hit the market in 2008 and sold out within 15 months.
Thus far, nine of the Elevon buildings have been sold.
While small businesses often buy the buildings housing their operations, buying is more common in outlying areas and typically done by companies that have a manufacturing component. But when the opportunity arises for a smaller service firm such as Big Block to buy its space, the same drivers come into play.
“One of the great advantages of owning is that your mortgage is tax deductible,” said Tim Kawahara, executive director of UCLA’s Ziman Center for Real Estate. “You also get a certain allocation on your taxes for the depreciation of your building that you can write down.”
But what if an owner-tenant needs to vacate, either because the firm expands or folds? It could make ownership a dangerous bet.
Still, Benson does not feel the purchase has constrained the company.
Even if Big Block were to outgrow the space, it could continue to use it for core operations and buy or lease another facility nearby, he said.
“(If we folded), we’d still have an asset here that would have grown in value, and with the way El Segundo is blowing up right now, the growth here is incredible and seems like a safe bet,” he said. “We know we’ve got a long-term model, so we think owning our property and building to our needs makes more sense.”
Benson said the firm was also drawn to ownership because it comes with the ability to customize. Big Box’s build-out will include a 12-person theater for color correction and screenings for clients. Leasing remains king
Buying also requires capital.
Space at Elevon costs an average of $450 a square foot to buy, said Rose, and owners generally spend about $150 a square foot to build it out. At $600 a foot by the time a company is ready to move in, the outlay for a 15,000-square-foot building at Elevon can hit $9 million.
Even with low interest rates, companies need to shell out a down payment and have to fund improvements that would, if they were leasing, might otherwise be part of a tenant improvement allowance.
Compared with leasing creative office space in El Segundo at an average of roughly $3.50 a square foot a month, a five-year lease for the same amount of space would cost a business $3.2 million.
Buying is usually not an option for venture-backed companies whose investors shy away from putting money into illiquid assets.
However, the success of the two office projects at Campus El Segundo, which also includes the Los Angeles Lakers’ new five-acre training facility, could influence other developers to follow suit with similar projects.
Rose, for his part, is ready for the next one.
“It would be nice to do the same thing on the Westside,” he said. “It would cost a fortune, but that doesn’t mean we’re not looking.”
*Shared by Jeff Vertun