In real estate, it’s a man-bites-dog story.
Trophy office towers have been selling in record numbers at ever-increasing prices. But The Irvine Company has succeeded in lowering the assessed value of its Fox Plaza in Century City.
The Newport Beach-based real estate owner convinced the Los Angeles County Assessor’s office to reduce the assessed value of the 710,000-square-foot building by $95 million, to $260 million.
The move followed an earlier $38 million reduction in the assessed value of Chicago-based Equity Office Properties Trust’s SunAmerica tower, also in Century City.
The Irvine Co. argued the high price paid for Fox Plaza and a declining rent roll justified bringing values more in line on a per-square-foot basis with the assessed value of other Century City office buildings.
Together, the revised numbers reduced the amount of property taxes collected by the county by more than $1.5 million.
The reductions also point up a vagary in the Los Angeles real estate market: While low-interest rates have fed an increasing churn elsewhere, few Century City buildings have traded hands in the past few years. That chill may have been caused, in part, by the construction of two massive office projects that cast uncertainty on the ability of existing towers to retain tenants.
So while the market values of Century City trophy buildings are sure to have risen in the intervening years, the lack of sales has enabled landlords to argue against the increase in real values.
The Irvine Co. bought Fox Plaza in 2000 for $350 million. Officials at the company declined to comment on the assessment.
The Fox Plaza and SunAmerica reductions were sought under an appeals process set up under 1978’s Proposition 8, which allows property owners to seek lower assessments if they believe their property’s true market value has been overstated, or if there has been a material loss of income from the property.
Property owners make their case before a three-person panel appointed by the Los Angeles County Board of Supervisors, which then decides how much to adjust the assessed value.
“Proposition 8 reductions have been quite common on office buildings over the last couple of years, especially on the Westside, where the market hit a soft patch a couple of years ago,” said Steve Buck, director of the tax division in the L.A. office of Deloitte & Touche LLP.
Buck said he recently won an assessment reduction on behalf of a client he declined to identify that was larger on a percentage basis than that received by the Irvine Co.
While Proposition 8 created a way for property owners to petition the assessor, it also provided the county a means to reverse those decisions. If market conditions recover sufficiently, the assessor can jump the value back to where it would have been without the reduction as part of an annual review of all assessments.
The $95 million cut at Fox Plaza represents one of the largest downward assessments in absolute dollar terms in recent years, according to property tax experts familiar with the L.A. market.
Even so, the reduction pales next to some granted after the commercial property market collapse of the early 1990s.
Some downtown trophy properties saw their assessed values reduced by more than $100 million in that period, according to Buck.
Marcus Delaat, the assessor’s representative assigned to the case, said the Irvine Co. cited three reasons in its request for refunds on Fox Plaza’s 2002 and 2003 tax bills: the loss of major tenants, falling lease rates and the opening of the MGM Tower a few blocks away.
In late 2002 and mid-2003, two major law firms left Fox Plaza: Christensen Miller Fink Jacobs Glasser Weil & Shapiro LLP, which relocated to the MGM Tower, and Jeffer Mangels Butler & Marmaro LLP, which relocated to 1900 Avenue of the Stars.
Together, the two firms took a quarter of Fox Plaza.
“A sophisticated property owner will make the case that a loss of a major tenant reduces the income and thus lowers the value of the building,” Buck said.
Things may soon rebound for Fox Plaza. Century City real estate sources said News Corp. had been talking about taking as much as 100,000 square feet in the building, taking up most of the space vacated by the law firms.
Carrying that much empty space was a burden for the Irvine Co., which paid $490 per foot for the building five years ago.
“Purchasing at the top of the market and then losing major tenants certainly can be grounds for seeking a lower assessment,” said Ben Reznik, a land use attorney at Jeffer Mangels not involved in the Fox Plaza reassessment. “The key question is whether the new assessed value is in line with per-square-foot values of other buildings.”
Delaat said that is the case with Fox Plaza.
“The reduction we did on this property brings it to about $366 per square foot. On the SunAmerica property, which we had already granted a reduction, the assessed value is at $358 per square foot,” he said.
The reason the Fox Plaza reduction was so much greater in dollar terms, he said, was that it last changed hands only in 2000. The SunAmerica tower last changed hands in 1990.
(Under Proposition 13, properties are reassessed to market value when they change hands, then increase 2% per year.)
“One of the unique things about Fox Plaza is that the base vyalue for the assessments was set during the peak of the market in 2000,” Delaat said.
Fine is a staff writer with the Los Angeles Business Journal. Researcher David Nusbaum contributed to this story.
