Study of Telecommunications Buildings

within the
Central City Community Plan Area

Prepared for the Los Angeles Housing Department

May 2003

Prepared by Capital Investment Advisors

Los Angeles Capital
Housing Investment
Department Advisors
LOS ANGELES H OUSING DEPARTMENT

TABLE OF CONTENTS

STUDY OBJECTIVES ......................................................................................................... SECTION 1

TELECOM DEMAND .......................................................................................................... SECTION 2

INVENTORY OF T ELECOM B UILDINGS ............................................................................... SECTION 3

TELECOM ORDINANCE ..................................................................................................... SECTION 4

The information contained in this report has been collected from published data sources as well as interviews
with knowledgeable individuals within the telecommunications industry. This report has been prepared solely
for informational purposes. It is designed to assist the Los Angeles Housing Department in its evaluation of
infill housing development within the Central City Community Planning Area (“CCCPA”).

The information contained herein is from sources deemed reliable; however, Capital Investment Advisors has
not independently verified it. Therefore, Capital Investment Advisors makes no representations or warranties,
express or implied, with respect to this information. Any projections contained herein represent best estimates
based on assumptions considered reasonable under the circumstances. No representations or warranties,
expressed or implied are made that actual results will conform to such projections. The contents herein have
been prepared solely for the benefit of the Los Angeles Housing Department and members of governmental
agencies with whom it is working on this housing redevelopment assessment. Other than these agencies, any
copies or reprints of all or a portion of this study require the advance consent of Capital Investment Advisors.

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STUDY OBJECTIVES

BACKGROUND During the late 1990’s and through the early part of 2001, Los Angeles
experienced tremendous growth in telecommunications operations. As a result
of deregulation in 1996, the telecommunications industry benefited from a huge
influx of capital targeting the development of fiber optic networks and other high
bandwidth technologies. Sectors within the telecommunications umbrella were
growing at over 100% per year. With this explosive growth, venture capitalists
and Wall Street were funding massive investments into companies and
infrastructure. Firms like Level III and Qwest were investing billions into fiber
networks that crossed the US and connected to networks in developed countries
worldwide.

With its huge population base and billion dollar economy, Los Angeles was (and
remains) an attractive location in which to place much of this investment. A
massive end user environment combined with an existing and growing fiber optic
infrastructure in the downtown core, led to the development of over 3,000,000
square feet of telecom space by the 3rd quarter of 2000. For a market that
benefited from very little net absorption of space through the economic
prosperity of the 1990’s (Los Angeles had a vacancy rate near 20% while other
major markets around the country had vacancies of less than 5%), the sudden
influx of telecom operations was extremely noticeable. The influx of telecom
users, the rapid occupancy of space and the closing of streets daily to lay added
fiber optic loops almost created a feeling that the LA Central Business District
was being taken over by telecom.
This created challenges for city managers. While telecom and its sizeable
capital investment were beneficial to the regional economy, concerns mounted
that telecom would crowd-out normal business operations and multi-family
housing redevelopments. A vibrant city of people would be replaced by rows of
switching equipment and servers. Retailers would suffer because buildings that
could house traditional office space users or condominium conversions would no
longer be filled with people, but rather, machines.
The city became concerned about the use of ground floor retail space by
telecom tenants. This was particularly evident in the conversion of the Robinson
May building located at 600 West 7th Street into “Carrier Center - LA”. The
city believed the ground floor spaces in Carrier Center - LA would remain
available for future retail use. Instead, they became telecom floors. This
triggered a chain of events that led to development of an ordinance restricting
telecom development within the Los Angeles Central Business District and
within the downtown area’s Historic Core.
While the ordinance ultimately was not required due to the sudden and sharp
decline in demand for telecom that began in 2001, city managers remain
concerned about the potential impact of telecom in the CCCPA (please see a
map of the CCCPA on the following page). In order to better understand the
longer term influence of telecom in the CCCPA and how best to manage future
growth, the Los Angeles Housing Department has asked for a study that
evaluates telecom and its relationship to CCCPA properties, specifically those

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DOWNTOWN GRANT - CCCPA AREA

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that also have conversion potential into housing.

STUDY CONTENTS Specific components of this study requested by the Los Angeles Housing
Department include a review projected growth/demand in the
telecommunications industry, an inventory of existing telecom properties, the
possible conversion of additional buildings to telecom use and a review of the
proposed LA telecom ordinance relative to ordinances approved in other cities.
Telecom Demand A review of telecom’s future influence in the CCCPA must start with an
(Section 2) overview of current growth and trends in telecom and how these factors will
drive future utilization of telecom sites in Los Angeles. The dramatic changes in
technology, the use of technology, the variable availability of private capital, and
possible government subsidization of rural infrastructure growth make most
detailed projections of demand “guesses” at best. However, there are certain
trends in the industry that, when viewed collectively, provide a “big-picture”
assessment of the future of telecom in the CCCPA. We will provide a review
of these major trends in the market.
Inventory of Having managed transactions involving the conversion of telecom properties in
Telecom Buildings the past, Capital Investment Advisors has access to an inventory of assets that
(Section 3) had been converted to telecom assets during the initial telecommunication
expansion of the late 1990’s through mid 2000. We compare this inventory to
those assets that are currently active telecom properties highlighting the fact that
the universe of assets has dramatically diminished due to lack of demand for
space. We then provide an assessment of current vacancy among telecom
properties to determine how much absorption is possible before telecom needs
and housing needs might compete for existing properties.
Telecom Ordinance The final portion of this study will analyze key concepts from the proposed
(Section 4) ordinance that were heavily negotiated between business, community and
political leaders in the downtown core. We will review the discussion of topics
that led to the LA ordinance as many of the discussion points are consistent with
questions asked of this telecom study – structural limitation issues, employee
densities within telecom operations, diesel generator pollution concerns, parking
co-utilization prospects, mixed use housing/telecom possibilities, etc. We will
compare this ordinance against other limited growth initiatives that were passed
in other cities and provide an evaluation of the most effective and balanced
approach to managing telecom.

PRELIMINARY While the remainder of the report provides background and more detailed
SUMMARY thought as to our conclusions on the numerous telecom questions raised by the
Los Angeles Housing Department, a brief summary is as follows:

1. Demand for telecom will once again develop (actually, it has never really
subsided). Demand in the second phase of expansion will be of a different focus
than demand was during the explosive first phase of growth. This second phase
of telecommunications growth will not cause substantial demand for additional
telecom installations within the CCCPA.

2. The affects of demand on downtown Los Angeles will be minimal. We do

not believe there will be any conflicts between housing and telecom for a

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number of reasons – there is substantial available and unused supply of telecom

infrastructures; telecom equipment continues to downsize and utilize existing
capacity more efficiently; telecom does not desire to use the same types of
assets that housing redevelopers target; costs to convert real estate to telecom
use in rural “second tier” markets will be less expensive than in high density
markets like Los Angeles that were the focus of the first wave of telecom
infrastructure investment.

3. The opportunity to utilize excess parking from telecom buildings to support

housing developments is available , although there is no evidence and very little
chance that telecom and housing developments will coexist in mixed-use
developments.

4. Telecom installations have contributed to increases in air pollution due to the

increased presence of diesel generators in telecom properties. There are
alternatives that will limit future increases in emissions output and can minimize
emissions from existing properties.
5. The telecom ordinance negotiated and prepared in Los Angeles was very
practical for all parties involved balancing the opportunity and need for economic
growth with the desire to protect vital retail and housing uses - uses that create a
more vibrant city. The Los Angeles ordinance, with inclusions to regulate diesel
generator emissions similar to the San Francisco restrictive measure, provides
the best overall model to manage telecom expansion in the future, if needed.

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TELECOM DEMAND

TELECOM Critical to understanding the future of telecom in Los Angeles is to understand

DEMAND the projected growth in telecom, and more importantly, where that growth will
occur. Demand projections vary drastically for telecommunications. Projections
in the past were over exaggerated and provided the basis for over-funding
growth in telecommunications infrastructure.

The situation has changed dramatically. Major telecommunications companies

like 360 Networks and Willia ms Communications having file d for Chapter 11
protection and industry giants like Qwest and Level III are not projecting profits
any time soon.

Within this section of the telecom study we provide a variety of perspectives on

future growth within the industry. We also review trends within the industry that
provide a basis for understanding where future growth is most likely to occur.

TELECOM Telecommunications has experienced a period in which projections called for

DEMAND - explosive growth, followed by a period in which the crash of the market brought
BACKGROUND talk of growth never occupying available supply. Current projections are more
realistic, and project a fairly solid level of overall growth within the industry.

Explosive Growth n Explosive growth was realized after the deregulation of telecommunications
in 1996 and the rapid rise of “dot.coms.”
n A November 2000 report by industry consultant Gartner Dataquest provided
the following growth estimates for the U.S. Hosting market: 1999 = $2.1
billion; 2000 = $2.8 billion; 2004 = $9.3 billion. This projection calls for a
35% compounded annual growth in hosting revenues.
n Gartner Dataquest also reported on business-to-business e-commerce.
Growth projections grow from $145 billion in 1999 to $7.29 trillion in 2004.
They project that business-to-business e-commerce will account for 7% of
global sales by 2004.
n Industry leaders installed approximately 39 million miles of fiber-optic cable
beneath railroad beds, corn fields, natural gas lines and roads. This is
enough fiber to circle the globe 1,566 times.
n Investco Capital Management, Inc. stated that during the 1998-1999
timeframe, they were receiving 5 investment offerings per day related to
telecommunications investments.
Market Crash The market crash was largely driven by private capital drying up. After the
projected growth rates were not met and profitability fell due to pricing
pressures, the private capital pulled out of the market. This caused the dot.com
fallout and a dramatic shakeup within the telecommunications industry.
n Merrill Lynch & Co. estimates that only 2.6% of fiber capacity is actually in
use. They estimate that much of the fiber will remain dark forever.
n The market report Colocation 2002 surveyed 287 colocation facilities in

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2001. At mid-year, 55% of these facilities were empty.

n Billions of dollars in shareholder value were lost at firms like Global
Crossings, Williams Communications Group and Genuity Inc. Nortel
Networks predicted a loss of $19.2 billion in the second quarter of 2001 and
closed 200 telecom sites.
n Level III’s stock price is off 94% from its high mark and the company has
experienced massive layoffs.
n Telecom firms amassed nearly $650 billion in debt. The lost value to debt
holders is larger than the $150 billion government cleanup of the savings and
loan industry 10 years ago.
Fundamentals The decline of the telecom business was not really a decline in the fundamentals
Remain Strong of the business, but a retrenchment of the over exuberance of the capital
markets. The capital markets initiated a sort of feeding frenzy that had to stop.
The fundamentals driving telecom use and bandwidth use remain.
n In a presentation to the United States Senate Committee on Commerce,
Science and Transportation, Reed E. Hundt. - senior advisor on information
industries to the consulting firm McKinsey & Company and member of the
board of directors for Intel, Expedia and Allegiance Telecom, Inc. -
projected continued rapid growth within the telecom sector. His forecast
calls for U.S. telecommunications revenue to grow from $277 billion in 2002
to $383 billion in 2006. This represents an 11.4% compounded annual
growth rate.
n Compared to other international markets, the U.S. is behind in connecting
homes to high speed bandwidth. Approximately 15 million of the 77 million
homes in the U.S. are connected. This market penetration of less than 20%
pales in comparison to households in Korea at 40%.
n The push for housing connectivity can be seen in aggressive projections for
cable and DSL. In Stat/MDR, a market research firm located in Scottsdale,
AZ provides estimates that cable installations in 1999 of 2.5 million grew to 8
million by 2002. DSL grew from 1 million installations to 5.6 million over the
same period. Their research shows projections for 40% growth in 2003, 30
percent in 2004, 15 percent in 2005 and 10% thereafter.
n Fundamentally, the need for bandwidth will continue to grow. We will
continue to have additional websites, there will be increased demand for
more functionally robust websites, there will be more applications using
advanced connectivity features (like streaming video), and market
penetration continues to increase. All of these factors provide a solid basis
for a healthy growing industry.
n Eric Yopes, principal of Foursquare Capital and former Vice Chairman of
Shorenstein Company located in San Francisco summarizes the fundamental
role of “connectivity” within real estate properties in the future: “Access to
fast flexible data networks has become as essential to many businesses as
proximity to customers, transportation and skilled labor.”

TARGETED While there is no doubt that fundamental growth will continue to occur within the
telecommunications industry, the key to understanding the influence of this
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GROWTH telecommunications industry, the key to understanding the influence of this

growth within Los Angeles requires an understanding of where a significant
portion of future growth will occur. It is our assessment that much of this
growth will occur outside of major cities and first tier markets.
Local Initiatives A number of second and third tier markets are using their existing installations of
technology as major selling points in attracting new industry to their cities.
n With over 4,000 miles of fiber optic cable and 60 SONET based inter-office
fiber rings in place, San Antonio is using its infrastructure to attract new
firms to its market.
n In Columbus Ohio, despite the decline of local telecom firms Winstar and
Spata, the city is investing in a 70 mile $36 million network. Such initiatives
have helped the city bring in $273 million in new business investment dollars.
Tier 2 and Tier 3 Significant growth is occurring in tier 2 and tier 3 cities currently. This is the
Cities result of investment by these cities into telecom infrastructure along with the
telecommunications industry logically moving into its second phase of expansion.
n The 7 tier 1 markets include San Francisco/San Jose, Washington DC,
Chicago, New York, Dallas, Atlanta and Los Angeles.
n Second tier markets include St. Louis, Kansas City, Indianapolis, Houston,
Salt Lake City, Denver, Boston and Seattle. Others like Columbus Ohio and
San Antonio Texas, (noted above) are becoming second tier markets as a
result of added capital investment.
n Yankee Group reports that around two-thirds of the companies they
interviewed are planning significant bandwidth increases. Much of this
increase is extending network bandwidth to tier 2 and tier 3 markets such as
St. Petersburg Florida or Richmond, VA.
n Yankee Group projects that while sectors of bandwidth in the U.S. grew at
rates ranging from 11-23%, growth in tier 2 and 3 markets was 26-30%.
n It is a normal phenomenon that the first wave of growth typically occurs in
markets where the greatest potential for profit lies. For telecom, this meant
the major tier 1 markets with large concentrated population centers. As
Stephen Young of Ovum - a United Kingdom research and consulting
company - states, “…as the market develops, and bandwidth becomes
cheaper, telecom hotels will become increasingly numerous and move away
from metro areas.”
n Once infrastructure is in place leading to second and third tier markets, it will
make sense for telecom companies and users to locate to these markets. In
these markets they can build data centers and telecom hotels for far less
cost and end up with properties that are more efficient than the redeveloped
high rise properties found in major tier 1 markets.
Government State and federal incentives are coming into play in the push to extend high
Support of Tier 2, bandwidth communication to rural markets. This will be a primary trend over
3 and 4 Markets the coming years as market penetration and “inclusive connectivity” become
selling points for state politicians.
n In New York, bills A9664/A9665 were presented with the intention of

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expanding access to high speed telecommunications throughout New York

State. Brian McMahon – Executive Director of the Ways and Means
Committee – stated, “But, one thing is for certain, for any growth to be
sustained – no matter where it is located – it must be supported by a
foundation of quality infrastructure services. Ten years ago, those services
included sewer, water, electric and telephone lines, roads, and sometimes rail
access. Today, bandwidth is just as critical to the competitiveness of any
business/organization enterprise as any other infrastructure component…
both of these measures are needed in order to make high speed access to
the internet available to businesses and individuals where ever they reside…
This is the first step that must be undertaken to close the ‘digital divide.’”
n Similar sentiments were voiced by Reed Hundt (introduced above). In
analyzing the participation of private capital in the telecommunications
market, he stated, “…certain essential elements of a modern
telecommunications network [access to rural areas] are not likely soon to be
constructed by the operation of competitive private markets. Therefore, to
some degree public monies should be spent to provide a base or floor for
private sector capital investment…[and to] identify as well the extent to
which public money must be spent to make essential communications
services available and affordable to all Americans.”
It is clear that the concepts of inclusion and of telecom being a core part of
American infrastructure will lead to added telecom development in tier 2, 3 and 4
markets; those markets with lower population densities that did not attract the
huge amounts of private capital and venture funding in the initial phase of the
post 1996 telecom expansion.

TELECOM A number of elements come into play when analyzing the future need for
M ARKET - telecom space in the CCCPA. A summary of factors leading to increased or
CONCLUSIONS decreased space needs in the Los Angeles core follow:

Increased Space Needs:

n Strong growth in bandwidth requirements.
n Solid fundamentals, business and customer demand support increased
telecom use.
Decreased or Neutral Space Needs:
n Tremendous oversupply built in tier 1 markets.
n Low utilization rates in existing infrastructure.
n Strong drive to connect tier 2, 3 and 4 markets by government agencies
n Once connected to primary fiber routes, tier 2, 3 and 4 markets offer cost
advantages and operating advantages to telecom providers and users.
n Increased efficiency in current networks and reduced size requirements for
equipment lessen the need for expanding floor area under lease.
n Demand growth in tier 2, 3 and 4 markets along with minimal in-place
infrastructure will lure capital to those markets and away from overbuilt and
highly competitive tier 1 markets. Tier 1 markets will compete by adding

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additional services to existing installations.

Conclusions We do not believe that within the CCCPA the City of Los Angeles will
experience an increase in space needs attributable to telecom over the next 5
years. Further, it is highly unlikely that additional space (beyond that already
available in existing telecom properties) will be required over the next 10 years.
Overcapacity and increases in the efficiency of existing installations will combine
to absorb the growth that is projected for tier 1 markets. The push to expand
connectivity in tier 2, 3 and 4 markets will ultimately make these markets
increasingly attractive to telecom companies from a cost and productivity
viewpoint. Therefore, we see little cause for concern that continued growth in
telecom will in any way inhibit the desired growth of urban housing within the
CCCPA.

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INVENTORY OF TELECOM BUILDINGS

TELECOM INVENTORY The inventory of telecom properties in Los Angeles has changed dramatically
– from late 2000 through the first quarter of 2003. In 2000 the concern was that
LOS ANGELES every building with vacancy was targeting telecom operators as their next
tenant. This was logical as they were the source of over 1,000,000 square feet
of positive net absorption in 2000 and 2001. In a market that had suffered the
continued downsizing of large tenants due to departure or takeover (examples
include First Interstate Bank, Arco, and Security Pacific Bank) and was stuck in
a holding pattern of 20% vacancies, telecom was viewed as a savior. Everyone
landlord wanted to develop the next One Wilshire.

In 2000 we identified 18 properties that had converted some space to telecom

uses. Additional properties such as the Broadway Building (a portion of the
recently sold Transamerica Center complex) were considering the change but
had not yet implemented a telecom conversion strategy. The current inventory
of active telecom buildings according to Insignia ESG includes only 12
properties. We believe the best source of current telecom data is provided by
Insignia ESG as they are the managers for One Wilshire, the most important
telecom asset in the downtown core and a focal point of telecom activity over
the last few years. One Wilshire is arguably one of the most important telecom
properties in the United States along with 60 Hudson Street (New York), the
Westin Building (Seattle), Bryant Street (Dallas), Brannan Street (San
Francisco), the MAE West Building (San Jose), and New World Tower
(Miami). These buildings provide an important part of the communication
network that gives us instant access to the world wide web, web hosting
services, telephone services, government databases, access to educational
databases, and other data connections whether consumer-to-business or
business-to-business in nature.

Summary - Within this section of the study, we will review properties once
considered telecom assets, the current inventory of telecom assets and the most
likely scenario for future telecom expansion in Los Angeles based properties.
As a summary to our views on the need for additional telecom space, we believe
that the exiting supply of telecom ready properties will be able to accommodate
any expansion in telecom space requirements over the next 10 years and that
additional telecom conversions will not be necessary.

TELECOM INVENTORYThe following section provides an inventory of assets that had developed the
necessary infrastructure to house telecom tenants. We provide both the total
size of the asset as well as that portion of the asset that we estimate can
accommodate telecom occupancy. The later portion of this section provides
estimates for current occupancy of active telecom properties.

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Inventory in PROPERTY TOTAL RSF* TELECOM RSF*

Year 2000
One Wilshire 650,000 450,000
624 South Grand Ave.

611 Wilshire Blvd. 147,000 10,000

Telecom Center LA 155,000 155,000
530 West 6th Street

600 Wilshire Blvd. 274,048 140,000

626 Wilshire Blvd. 142,451 75,000
609 S. Grand Ave. 100,000 100,000
Quinby Building 75,2410 75,241
650 S. Grand Ave.

Giannini Place 142,000 142,000

649 S. Olive Street

AT&T Center 715,463 157,000

611 W. 6th Street

707 Wilshire Blvd. 1,029,000 53,000

700 Wilshire Blvd. 71,000 71,000
MCI Center 678,500 60,000
700 S. Flower

Carrier Center – LA 470,702 390,000

600 W. 7th street

800 S. Hope Street 240,000 240,000

818 W. 7th Street 360,000 288,000
1200 W. 7 th Street 719,113 320,000
th
617 W. 7 Street 600,000 600,000
3434 Grand Ave. 354,500 354,500
Totals: 6,924,018 3,680,500
* RSF = Rentable Square
Feet

As the table shows, there was initially over 3.6 million square feet of telecom
space either available or planned in downtown properties totaling nearly 7 million
square feet in aggregate size.
Active Telecom The current occupancy of active telecom properties is approximately 74%.
Inventory Considering the total square footage of properties that are either 100% telecom
or have a large portion of the building devoted to telecom, a total of 1.2 million
square feet of space is available. These properties and their current occupancy
levels as of Q1 2003 are as follows:

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PROPERTY TOTAL RSF* VACANT RSF* VACANCY %

1200 W. 7th Street 719,113 244,048 33.9%
523 W. 6th Street 471,777 90,415 19.2%
530 W. 6th Street 155,000 25,369 16.4%
611 W. 6th Street 715,463 338,914 47.4%
600 W 7th Street 470,702 133,000 28.3%
600 Wilshire Blvd. 274,048 135,710 49.5%
626 Wilshire Blvd. 142,451 59,741 41.9%
624 S. Grand Ave. 650,000 66,919 10.3%
650 S. Grand Ave. 75,241 0 0.0%
800 S. Hope Street 240,000 28,392 11.8%
818 W. 7th Street 360,000 76,586 21.3%
900 N Alameda St. 377,136 0 0.0%

Totals: 4,650,931 1,199,094 25.8%

* RSF = Rentable Square Source: Insignia ESG 2nd Quarter Report
Feet

There are two pieces of data significant from this list. The first is that there is
1.2 million square feet of vacancy in buildings already engineered for telecom
uses. Consistent with our market demand data provided in Section 2 of this
report, over the last 12 months these tier 1 assets lost a total of 263,000 square
feet of occupancy. The second is that there are a number of buildings available
for telecom that due to market conditions are not currently active. These include
large properties like 617 W. 7th Street, 3434 S. Grand Ave. Then, there are
properties that are very well suited for telecom that never converted and are not
part of the existing inventory. The best example of this is the Broadway
Building. This asset has the necessary floor loads, a large rectangular footprint,
connectivity to existing fiber, and available room for generators. This asset was
recently sold as part of Transamerica Center to a joint venture between Canyon
Partners and Magic Johnson. Just considering properties that were part of the
telecom inventory in 2000 and not included in the 2003 inventory, there is an
estimated 1.4 million square feet of telecom space in buildings totaling over 3.1
million square feet in size. Adding buildings like the Broadway Building to this
inventory of probably telecom assets yields nearly 2 million square feet of
suitable telecom space. Adding the 1.2 million square feet of vacancy in active
telecom assets yields the following conclusion: Our research shows that there is
3.0 million square feet of vacant and highly suitable telecom space in buildings
that are currently active or at one time were considered high quality telecom
assets. None of these assets were considered likely targets for housing
conversion.

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Conversion Costs A final factor that will limit the number of downtown properties converted to
telecom in the future (if any) is the cost of conversion. While costs to convert
older downtown assets to telecom differ depending on the necessary
modifications required for each individual asset, a very basic rule of thumb is that
conversion costs run $60 per square foot. This investment may provide some
structural upgrades, vertical runs for fiber and other conduit, switching rooms,
upgraded fire and life safety equipment, and pads for generators. Telecom
tenants themselves will add additional dollars as they install generators,
Uninterruptible Power Supply (“UPS”) systems and cooling systems. The total
cost per square foot for a sophisticated telecom installation can run as high as
$500 per square foot.
As long as existing product is available, the first assets to be occupied in the
event of future growth in telecom space needs will be existing vacant product
and assets that already invested substantial capital on telecom but sit empty.
Also, assuming that these past real estate developers were somewhat efficient, it
is likely that they chose the best candidates for early conversion during the last
expansion phase. Thus, these should be the same assets that will be deemed
most suitable if another expansion phase triggers telecom space absorption in
downtown Los Angeles.
Mixed Use One of the questions asked of this study is the potential for mixed use
Opportunities telecom/housing properties. In theory there could be some compatibility
between housing, which needs parking, and telecom, which doesn’t need
parking. However, there are a number of factors that minimize this opportunity.
In our interviews with real estate professionals on the west coast, we were not
able to identify a single property that was a combination of telecom and
residential uses. Key reasons identified follow:
§ The first issue is that available parking areas are frequently utilized by
telecom properties as a location for generators, air conditioning equipment
and transformers. The lack of necessary parking for employees in telecom
structures makes this area available for other telecom uses.
§ Second is the fire and life safety aspect of combining these two asset types.
Telecom hotels have generators with significant quantities of fuel available
for power outages. Adding to the hazard is the huge concentration of
electrical equipment in these facilities. Even though the fire and life safety
equipment in telecom facilities is some of the most technically advanced, it is
difficult to consider housing as complimentary to telecom. Developers do
not believe renters and condominium owners would want these large fuel
reserves nearby.
§ The physical structure of the assets preferred for housing is dramatically
different than that required for telecom (this concept is explained further in
Section 4). Thus, even though a telecom installation might have excess
parking, it is unlikely to be a building that housing developers would desire.
The most likely complimentary approach to housing and telecom is to have
buildings in close proximity to one another. Parking that is not converted to
telecom support could be available for housing. This parking could be near to a
housing development, but would not be located within the same physical

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property. To the extent renters and condominium owners are willing to accept
offsite parking, there is some minimal potential for these uses to compliment one
another.

INVENTORY Conclusions reached from a review of Los Angeles CCCPA telecom inventory
CONCLUSION are the following: 1. There is substantial supply of vacancy in existing active
telecom properties available (over 1 million square feet of supply). 2. There is
substantial supply of vacant or dark telecom assets available (an additional 2
million square of supply). 3. There is no cost advantage to converting additional
assets until existing telecom ready assets are occupied. 4. The conclusions of
Section 2 raise questions regarding a substantial increase in demand for telecom
square footage within the CCCPA. 5. The conclusions reached in Section 4 (to
follow) strongly suggest that telecom will not compete for assets considered
viable for housing. Our opinion is that there is little threat of telecom taking any
desirable housing assets in the next 10 years. Further, it is not very likely that
telecom will even fill existing and available telecom square footage in the next 5
to 10 years.

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LOS ANGELES H OUSING DEPARTMEN T S ECTION 4 – P. 1

TELECOM ORDINANCE

ORDINANCE The draft language for the ordinance that would have protected buildings within
OVERVIEW the core of Los Angeles’ Central Business District is provided as an exhibit at
the end of this section. The key elements of the ordinance are:

§ No more than 80% of a building may be occupied by “Telecom.”

§ The first 50 feet of building depth on the building’s first floor or ground floor,
as measured from the front of the building, must be devoted to active
commercial uses and may not be occupied by Telecom.
§ Within the historic core, no more than 25% of a building may be occupied by
Telecom.

A reading of the ordinance shows that other specific exceptions are also a part
of the ordinance, however, the three components noted above provide the most
important and meaningful aspects of the ordinance as it might be used in the
future to manage Telecom within the CCCPA.

This section of the telecom study provides some background as to how these
key tenets of the ordinance were derived. We also provide a brief analysis of
ordinances in other cities and how these ordinances affect telecommunications
firms within their CBD properties.

Summary – The ordinance as developed by the City of Los Angeles after

extensive deliberation by the 9th District Councilmember Rita Walters and her
designees, the Mayor’s office, representatives for the Los Angeles
Conservancy, business and community leaders, and representatives for the
Central City Association (collectively the “Ordinance Authors”) is the best
ordinance identified by writers of this report. The reasons are as follows:

§ The ordinance protects historic properties, many of which are deemed

suitable for housing conversion.
§ The ordinance provides opportunity for telecom to be developed in a
controlled fashion providing much needed capital and employment to the
CBD.
§ The ordinance establishes specific guidelines that allow real estate
developers to plan for these requirements as they evaluate telecom and
housing opportunities, rather than being subjected to undisclosed
requirements that might arise only at the time of attaining a permit.

Note: In order to provide full disclosure, it should be noted that the writers of this
report worked for Jones Lang LaSalle at the time of deliberations between the members
of the business and government community noted above, and were involved in
providing data and consultation to these parties as they developed the k ey provisions
of the ordinance.

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LOS ANGELES H OUSING DEPARTMENT S ECTION 4 – P. 2

ANALYSIS OF KEY The Ordinance Authors considered numerous findings with respect to telecom
ORDINANCE and its influence on Los Angeles CBD properties when they drafted the
PROVISIONS language of the ordinance. Below, we will review the key provisions of the
ordinance and some of the data utilized by the Ordinance Authors at the time the
ordinance was developed. Much of this data remains applicable to telecom and
will be relevant to members of the Los Angeles Housing Department as it deals
with the subject of telecom in the future.

80% Occupancy The 80% occupancy ilmit was the result of considering three goals of the
Limit Ordinance Authors.
n First, they did not want telecom to occupy 100% of an asset, or a large
number of downtown assets. This would create a city of electronic
warehouses leaving our streets devoid of any activity or vibrant life. The
source of concern is the fact that telecom installations utilize far less labor
than typical office uses. Interviews with telecom tenants, landlords in
telecom buildings and actual headcounts conducted in telecom spaces results
in a density estimate of 4 employees per 10,000 square feet of telecom
space. This is a combination of 2 permanent employees per 10,000 square
feet and an average of two visiting technicians on site. This compares to a
typical density of employees in office space of 40 employees per 10,000
square feet. Thus, there is roughly a 10:1 ratio of employment in “active
uses” vs. telecom uses.
n Second, the Ordinance Authors simultaneously valued the positive impact
telecom was having on the downtown core. Despite bringing lower
employment densities to LA office buildings, telecom was taking space in
mostly empty buildings. Over 3,000,000 square feet of space targeted at
telecom users was empty before the explosive expansion of telecom. Some
of the properties were not even considered part of the Los Angeles CBD
property inventory because they had been dark for such an extended period.
They were no longer considered viable properties. Jones Lang LaSalle
estimated that direct employment of once empty spaces correlated with
1,214 new jobs. Further, it was determined that after adjusting for the 24/7
nature of telecom operations and considering the uses frequently arriving in
properties along with telecom installations (for example - call centers, data
centers, programming services, back office processing operations, etc.)
telecom adjacent employment provides nearly 4,000 new jobs. Thus, it was
important to the Ordinance Authors to not destroy the positive impact of
telecom on net employment growth.
n Third, the Ordinance Authors correctly assessed that many high rise office
buildings could not become 100% occupied by telecom switching centers.
Telecom equipment creates a tremendous physical load on a property. The
electronic gear, on-site air conditioning systems, UPS systems largely made
up of rows of battery packs creates a large structural load within a building.
Most high rise properties are not designed with these loads in mind. While
the asset can maintain structural integrity in a vertical plane, this is not the
case in the event of horizontal motion. Because of the risk of earthquakes in
Los Angeles, a multistory office property can typically not be loaded with

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LOS ANGELES H OUSING DEPARTMENT S ECTION 4 – P. 3

more than 60% to 80% telecom. If it were, the lateral loads placed on the
structure during an earthquake could cause structural damage. In a detailed
telecom conversion study prepared for Toyo Real Estate by Jones Lang
LaSalle, it was determined that two telecom properties (once office
properties) could convert 60% to 65% of total space to telecom without risk
to each property’s physical structure.
Retail Frontage – A second key provision of the ordinance manages the placement of telecom in
First 50 Feet retail areas. This is an important provision in assuring that retail spaces remain
available for active uses. These are spaces that help support a larger
community, including housing developments, and not just the employees within a
certain building. From a community standpoint, the Ordinance Authors felt
protection of retail was crucial.
n The Ordinance protects the first 50 feet of ground floor frontage in a
property. The analysis behind this is that most effective retail requires good
frontage and a higher ratio of windowed space to non-windowed space.
Long, narrow and dark retail spaces are difficult to lease and do not
generate strong foot traffic. Thus, the Ordinance Authors felt that the key
to maintaining a vibrant street ambiance was to protect the vital retail space
that is along the window line of a building, not in the depths of a building.
n Allowing the non-retail portions of first floor space to be used for telecom
uses benefits those tenants that require the installation of telecom
infrastructure. First floor spaces are beneficial in that they frequently have
higher load limits than upper floors in a high-rise building. Thus, using
“deep” interior ground floor space allows landlords to upgrade their buildings
to telecom specifications at lower cost.
25% Occupancy The third key provision relates to the conversion of telecom in the Historic Core
Limit in Historic of Los Angeles. The Historic Core is considered to be the area bordered by 2nd
Core street to the north, Hill Street to the west, 9th and Olympic to the south, and Los
Angeles Street to the east. The Ordinance Authors took a much more
aggressive stance in limiting telecom within the Historic Core to no more than
25% of a building.
n A key force driving this more aggressive limitation on telecom is the
recognition that a number of building within the Historic Core are well suited
for housing conversion and redevelopment. A study prepared for the Los
Angeles Conservancy by Killefer Flammang Purtill Architects reviewed
more than 220 properties within the Historic Core for their potential
application as housing. They identified 50 properties that appeared most
suitable for housing conversion. Chuck Barns of Killefer Flammang Purtill
Architects indicated that they attempted to identify properties that could be
converted at minimal cost, had a high ratio of window space to total floor
area, appropriate bay depths for apartment use, architectural appeal, and
access to parking. Many of the buildings selected have smaller footprints,
benefit from a high ratio of window to floor area and exhibit a “U” or “E”
shape common to properties built in the late 1800’s and early 1900’s. (A
photo is included on the following page that shows this “U” and “E” building
shape common to many of the Historic Core assets.)

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LOS ANGELES H OUSING DEPARTMENT S ECTION 4 – P. 4

n Contrasting these properties to those desired by telecom shows major

differences in appetite. Telecom requires floor load capability of 125 to 150
pounds per square foot, much more than the 75 to 100 pounds required for
housing. Many older properties have low clear heights. Telecom properties
prefer no less than 14 feet of clear height to provide space for their runs of
cable and fiber. Telecom properties prefer square or rectangular footprints
that are not obstructed by columns or other intrusions. Housing prefers the
higher window area obtainable in the “U” and “E” shaped buildings
described above. Telecom requires available space around the property to
place generators, transformers, and added cooling equipment. Housing
properties do not. Housing properties require parking. Telecom properties
do not. The differences in desired physical structure are virtually polar
opposites. In October of 2000, Jones Lang LaSalle toured 32 of the 50
assets identified by Killefer Flammang Purtill Architects. Of the 32, only 5
were viewed as suitable for telecom. And, it is likely that the review of
additional structural information, if available, would have rendered most, if
not all, of these 5 properties unsuitable for telecom.
n The conclusion within the Historic Core is that there is very little competition
between telecom properties and housing properties. Thus, the tighter
restriction within the core provided potential housing assets protection from
illogical or inefficient development of telecom. The more relaxed restriction
outside of the Historic Core allowed economic growth to occur through
assets that are less hospitable to housing and favored by telecom users.
Provisions The willingness of the Ordinance Authors to consider the needs for a vibrant
Summary city, the needs for additional housing and also the need to accept job growth and
capital investment within the core of Los Angeles resulted in a very balanced
and pragmatic ordinance. The need to enhance the LA Central Business District
with active uses was balanced with the need to bring new capital investment and
core services to the market. These technologies will serve as an attraction to
keep existing tenants in the submarket and potentially bring tenants currently
residing in other submarkets to the downtown core.

OTHER CITIES A search of restrictive ordinances in other cities did not identify many anti
telecom measures. (Note: this search did not include restrictive ordinances
related to cell towers, of which there are hundreds.) The two most notable were
found here in the state of California. A restrictive measure was adopted in
Sacramento and a measure primarily aimed at diesel pollution was adopted in
San Francisco.
Sacramento n The restrictive measure in Sacramento was adopted in August 2000. Any
(Conditional Use telecom installation within the downtown core that would consume more
Permit) than 25% of a property’s space requires a Conditional Use Permit (“CUP”).
Pressure for this restrictive measure came from those wanting to protect
downtown retail establishments.
n The difficulty of an ordinance of this nature is that it subjects a property to a
review process that is largely subjective – a CUP approval process. This
effectively is a death blow to any telecom development. The reason is that
the costs to develop plans for a telecom conversion are very expensive.

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LOS ANGELES H OUSING DEPARTMENT S ECTION 4 – P. 5

Before a property can be converted extensive and costly engineering,

architectural, structural and other consulting studies must be completed. The
measure in Sacramento requires a substantial amount of expense to be
incurred prior to knowing whether or not a project will be approved. And,
without clear articulation of the criteria that will be reviewed during the CUP
process, there are few developers that will take this risk.
San Francisco n The San Francisco restriction is not concerned with the concept of dark
(Diesel Generators) streets and electronic warehouses, but rather, with health risks associated
with telecom conversion. The focus in San Francisco is the large quantities
of back-up power generators that accompany telecom. And, with these
generators comes a large increase in the generation of air pollutants.
n There is no typical amount of generator capacity that accompanies a
telecom installation. Usually, a telecom site will have enough kilowatts in
power to back up the equipment’s electrical needs 100%. Then, the building
will add one additional generator to back up the back-up generators in case
one of these was to fail. This is the “100% plus 1” rule of thumb.
n Pollutants created from operating a diesel generator include nitrogen oxides
(NOx) and carbon dioxide (CO2). Nitrogen oxides are a major source of
low level air pollution and, according to a report published by the Santa
Barbara County Air Pollution Control District, diesel soot is the number one
airborne carcinogen in the State of California. The report states that a diesel
generator producing one megawatt of power for one hour produces 25 to 30
pounds of NOx. This level is 50 to 60 times the amount of NOx produced if
the same amount of power was generated by the “typical mix of California
gas-fired power plants.”
n An example of additional power required by a telecom installation is
available in reviewing a 519,000 square foot building located in Honolulu,
Hawaii. The building houses ATT’s primary connection between the US
and Asia. The building’s generator is a 200KW unit. This provides enough
power to keep critical building systems operational in the event of a power
outage. To supply power for a 20,000 square foot (approximate) switching
center, an additional 500KW generator was installed. To back up the back-
up generators, a third 750KW generator was also installed.
n Interviews with landlords at three different properties who manage dozens
of properties provided the following guidelines for generator usage. Each
generator is run under load for approximately 1 hour per month as part of
normal maintenance. Interviewees provided a range of running generators
once per week (highest frequency) to once per year (lowest frequency).
However, the norm was once per month, under load.
n We anticipate that additional regulations will be approved governing the use
of generators for electrical backup power. Like the San Francisco based
ordinance these restrictions will limit the number of hours such generators
can be run, require the use of a diesel unit manufactured after January 1996
that is certified to meet EPA and CARB Tier 1 Emission Standards, is
equipped with an exhaust particulate filter, and/or require the use of “clean”
UPS systems that can provide longer periods of protection in the event of

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LOS ANGELES H OUSING DEPARTMENT S ECTION 4 – P. 6

multi-grid power outages.

ORDINANCES The current state of the telecommunications market is such that many
SUMMARY ordinances that were once planned (like that in Los Angeles) were put on hold
and viewed as unnecessary. We believe that the overall demand for telecom
spaces and the availability of existing spaces will probably not change this sense
of need for restrictive measures. However, we also believe that measures
similar to that put in place in the Bay Area will become more common. Whether
it is a telecommunications building, a data center, or a call center, our collective
use of electronic equipment is growing rapidly. This will continue to give rise to
the need for UPS systems and other back-up power systems. This heavy
electrical use will sustain a spotlight on backup generators vs. other methods to
guarantee uninterrupted power delivery.

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LOS ANGELES H OUSING DEPARTMENT

EXHIBIT - TELECOMMUNICATIONS ORDINANCE

________________________________________________________CAPITAL INVESTMENT ADVISORS