July 6, 2009

L.A. Investor Holds Reins of Jackson Ranch  

By Joel Russell
Los Angeles Business Journal Staff

The acquisition last year was small by Colony Capital’s standards, but now it could end up reaping a windfall for the real estate investment firm.

The acquisition: Neverland Ranch.

Since Colony purchased Michael Jackson’s famed amusement park of a home in 2008 for $23 million, Colony has had its sights set on flipping the property. But with the pop star’s untimely June 25 death, experts are saying that the ranch could become a cash cow if it is converted into a Graceland-style attraction celebrating the career of the King of Pop.

“The attendance would easily triple Graceland,” said Mel Cecil, a principal at LEDO International Inc., a theme park consultancy in Newport Beach, referring to the former home of Elvis Presley in Memphis, Tenn. “The draw of that property is huge and it’s going to continue for a long time.”

Privately held Colony, based in Century City and headed by L.A. financier Tom Barrack, has received worldwide attention in the wake of Jackson’s death. That attention has come at a crucial time for the firm, which is preparing a $500 million initial public offering for a subsidiary.

Indeed, the IPO filing last week got lost in the shuffle amid all the interest in Neverland. Yet that attention could be a boon for the IPO, even though it has no direct relationship to the firm’s stake in the ranch.

“It’s a net positive because it increases awareness of the company,” said Lloyd Greif, principal of downtown L.A. investment firm Greif & Co. “It could cause people to open the prospectus. Then they won’t read anything about Neverland, but they’ll learn Tom Barrack is a very smart guy.”

Colony Capital ranks No. 11 on the Business Journal’s 2008 list of money management firms with $28.6 billion in assets and 200 employees in 14 offices worldwide. The public company, to be called Colony Financial Inc., would be a real estate investment trust that would specialize in buying and managing distressed commercial mortgages and properties.

Barrack, who founded the parent firm in 1991, did not respond to requests for comment for this article. But he posted a note on Colony’s Web site indirectly referencing Jackson’s death – and stating that he cannot speak with the media during a mandated quiet period after the prospectus filing.

“I realize this is a moment when you were probably hoping for loads of communications from me with regard to many of the current events that are transpiring around certain Colony investments,” wrote Barrack, who developed a personal relationship with Jackson since the Neverland acquisition. “I have been bound, gagged and ordered to not communicate in a public forum during this time. It has been an amazing few weeks and I promise to share many details of my reactions once I’m free to speak again.”

Evolving relationship

Colony came into the property after Jackson defaulted on a $24.5 million mortgage on it last year. Colony bought the note for $23 million. It formed a joint venture between Jackson and Barrack; the joint venture now owns the property.

Colony appears to control the property; it made the decision to open up the ranch to reporters last week.

The company invested $3 million to upgrade the dilapidated landscaping, and it sold off the amusement park rides and zoo animals, including elephants and an orangutan. Until Jackson’s death, Colony was planning to sell the 2,700 acres as a country estate with an asking price of $90 million.

In a letter last week to “the Santa Barbara community,” Barrack fueled rumors that Colony’s plans for the property had changed, saying, “The consideration of the future of the Neverland property will be addressed in due time through normal process and with appropriate deliberation.”

The possibility of Colony operating a Graceland-style attraction at Neverland is not a total stretch, said Greif, who noted the company owns and operates hotels and resort properties, among them the Las Vegas Hilton and the Meadowlands Xanadu theme park in East Rutherford, N.J.

But John Gerner, managing director of Leisure Business Advisors LLC in Richmond, Va., points out that Neverland’s location could limit its potential revenues.

Situated in the Santa Ynez Valley about 130 miles northwest of Los Angeles, Neverland would be a significant drive from Los Angeles. Gerner likened it to a museum project for Patsy Cline, who lived in western Virginia, a day trip from Washington, D.C. A non-profit group owns the deceased country singer’s former house, but the museum remains a dream.

In general, he said, the more travel time required to visit a site, the less its popularity.

However, Hearst Castle, the attraction built by legendary newspaper publisher George Randolph Hearst, is in a more isolated spot than Neverland, and it had 667,000 visitors in 2007. That’s more than Graceland, which attracts between 500,000 and 600,000 people a year.

Of course, Michael Jackson and his Neverland Ranch have a much higher name attraction today than Hearst, who died in 1951. But to convert the ranch into an attraction, the owners must return it to an authentic state, Gerner said, noting people will want to ride the exact same ride that Michael Jackson rode. However, since those rides were sold off recently, it may not be a simple matter to recover them.

Some of the estate’s attractions could be recoverable, though. L.A. auction house Julien’s Auctions, which had arranged to sell off many of the singer’s possessions, recently reached an agreement with Jackson’s representatives that would save the items from auction and instead set up a Jackson museum.

Cecil said a Neverland attraction could also include retail, hotels, a golf course, condominiums or even a Jackson-themed water park. Neither Gerner nor Cecil believes Jackson’s legal issues and sometimes bizarre personal life would negatively impact the popularity of Neverland.

“Elvis had controversy as well, but Graceland focuses on the positive aspects of his life,” said Gerner. “I expect Neverland would do the same for Michael Jackson.”

But he warned that Jackson’s high name recognition could fade in the future. He suggests Colony develop Neverland as a short-term attraction under the premise that if attendance diminishes, the company could sell it to a private fan as originally planned before Jackson’s death.

“It’s common that at some point, the real estate value becomes more than the attraction value and that’s a serious consideration here,” he said, though that hasn't happened yet to Graceland. “Someday it might be closed as an attraction and sold off as real estate.”

   
– Staff reporter Rick Clough contributed to this story.

Copyright © 2009, Los Angeles Business Journal.