Blue Cross eyes buying back its headquarters.

Blue Cross of California has quietly re-acquired the majority interest in the prime 25-acre development site surrounding its Warner Center headquarters, parties to the transaction confirmed. It sold the stake three years ago when mired in financial woes.

And now that the financially revitalized non-profit health insurer is once again the site's sole owner, it is also contemplating buying back the 12-story headquarters building -- sold in the bad days of 1987 -- a Blue Cross spokesman stated.

The September acquisition of the land and the contemplated re-purchase of the building -- both from affiliates of the huge Chicago-based JMB Realty organization -- illustrate the insurer's return to financial health as well as the local commercial real estate market's deteriorating condition. The Blue Cross spokesperson confirmed that the insurer is financially able to repurchase the building as well as the undeveloped surrounding property.

In 1987, Blue Cross reportedly was teetering on insolvency and desperate for capital, having lost nearly $100 million that year. That December, a JMB Realty-affiliated investment fund beat out several other suitors and acquired the building for about $90 million -- with Blue Cross financing a portion of the sale -- and leased it back to Blue Cross for 15 years.

When Blue Cross was still struggling two years later, a JMB/Urban Development affiliate established a complicated partnership with Blue Cross. The development firm had been making payments on the land acquisition to Blue Cross. This partnership owned the property and pursued permission, or "entitlements," to develop the strategically located site about the building, JMB/Urban Senior Vice President Steve Meixner explained.

Since then, however, demand for Warner Center office space has dwindled, and city planning officials are still trying to finalize details of a new Warner Center Specific Plan.

Under zoning regulations expected to remain in place under the new plan -- L.A. City Council approval is slated for early next year -- the Blue Cross site could see another 2.3 million feet of development. But traffic mitigation and other fees tied to future developments haven't been set.

So with the September sale of its interest in the Woodland Hills site for undisclosed terms, JMB/Urban Development seems to have conceded that it can no longer afford to wait for better market conditions and a more concrete Warner Center entitlements picture, analysts said.

JMB Realty's primary development arm will instead pursue entitlement and development of the property on Blue Cross' behalf on a fee basis, Meixner confirmed. But he also stressed that a JMB affiliate still owns the headquarters building "100 percent" and that JMB/Urban continues to view the scope of its responsibilities as a "co-development" of the existing building and the balance of the site.

While the soft market entails "tough times for everyone" and JMB/Urban will have to continue performing to retain the assignment, long-term development plans haven't changed, Meixner added.

Sources also suggested that considering the current development environment -- a 600,000-square-foot building in the adjacent Warner Center Plaza has sat nearly vacant for almost two years -- the developer's executives saw little benefit in continuing to make payments to Blue Cross on the debt facilitating JMB/Urban's 1989 acquisition of equity in the site.

Nor does continued funding of entitlement efforts make a lot of sense when local market conditions don't seem to warrant development of large office facilities for several years to come, they added.

One source also noted that JMB/Urban officials had been pushing Blue Cross executives to restructure the joint venture arrangement which allocated "well over 50 percent" ownership interest in the site to JMB/Urban.

According to this source, Blue Cross' eventual response was an offer to negotiate a "buyout" of JMB/Urban's equity in the property, along with the "fee development" agreement. Neither Meixner nor Blue Cross spokespeople would comment on the alleged scenario.

But a Blue Cross communications officer did confirm that JMB officials "approached" the insurer about re-acquiring its 450,000-square-foot headquarters building. While the parties are not currently negotiating a sale, Blue Cross is interested and the situation "is being discussed internally," he noted.