DOWNTOWN LOS ANGELES - Downtown Los Angeles has been home to numerous rise and fall stories, but few drew as much attention or saw as rapid a plummet as that of Meruelo Maddux Properties, Inc. and its politically connected co-founder Richard Meruelo.
From the mid-1990s through the latter part of the last decade, the firm acquired an empire of Downtown development sites and industrial properties, from produce distribution complexes to apparel factories. It became the largest landowner in the Central City.
The potential seemed limitless, and after raising $400 million by going public in 2007, Meruelo, well known as a backer and friend of Mayor Antonio Villaraigosa, and co-founder John Maddux turned their sights to residential development. They spent $28.6 million to build out the Union Lofts, a 92-unit adaptive reuse project at Eighth and Hill streets. Then, they began work on a $110 million, 35-story South Park apartment tower, the tallest purely residential edifice in Downtown.
They would never see the opening. By late 2008, MMPI was suffocating under a mountain of loans it had used to buy property. Facing $368 million in debt as the real estate market settled into an unprecedented paralysis, the firm filed for bankruptcy in March 2009. The tower went bankrupt too; it would later be sold to Watermarke Properties.
After a two-year court process, Meruelo and Maddux were ousted as part of a reorganization plan that allowed an outside investment group armed with $23.6 million in private equity to take a majority share of the company. New management was implemented, with Martin Caverly, who previously ran a real estate consulting firm, taking over as CEO.
Now the new team, which last year rechristened the company Evoq Properties, is tasked with turning around what’s left of MMPI. More precisely, they have to dig the company out of its debt hole. So far, their strategy has been pretty simple: Sell the non-core assets, and when the price is right, part with some of the portfolio gems too.
Caverly said the vision for the company is of a real estate entity focused strictly within the freeways that wrap around Downtown and, on the east side, the Los Angeles River. The company’s core holdings include properties in South Park, Chinatown and the Industrial and Arts districts, among them Alameda Square, the massive four-building warehouse complex at Seventh and Alameda streets that houses American Apparel.
“We’ve refocused the company on those areas,” said Caverly, “and in the process are going through a, liquidation is too strong a word because it’s not a forced sale, but strategically we’re getting rid of assets that don’t fit the core market.”
The Cash Cow
According to the company’s 2011 annual report — its most recent public filing with the Securities and Exchange Commission — Evoq trimmed its loan debt by nearly $130 million to $238.3 million by selling an array of properties in the latter half of the year.
Under the still heavy debt load, the firm posted a net loss of $60.3 million last year. So far in 2012, Evoq has sold seven more properties for a total of $54.1 million, Caverly said. They included holdings in Vernon, Sylmar and Covina.
The stark debt reality has prompted the company to part not only with geographic outliers in its portfolio, but also with some properties that would otherwise fit perfectly in the Downtown long-term vision. For example, one of Evoq’s first plays was to jack up rents at the Union Lofts, doubling its net operating income, then selling it for $34 million — $5.4 more than it owed on the building.
After pledging to renovate the Desmond Building at 11th and Hope streets and turn it into creative office space, the firm recently put the edifice two blocks from Staples Center on the market. It is being packaged with an adjacent parking lot where Meruelo had pulled permits to build a 19-story apartment tower.
Evoq is also in escrow on the sale of a parking lot at Olympic Boulevard and Hill Street. The buyer is the Hanover Company, which is in the process of securing approvals for a 281-unit apartment complex on the site.
Cash generated from those sales, Caverly said, will be more valuable invested in what the firm has identified as its top priority: a major renovation of Alameda Square.
Although American Apparel occupies two buildings and 700,000 square feet of space, the other two structures in the 1.4 million-square-foot complex have long been mostly vacant. The most significant move Evoq has made so far on the property is a deal with VF Corp. The Fortune 500 clothing company plans to move the headquarters of two of its brands into a whole floor, or 80,000 square feet, of one of the empty buildings.
From a real estate perspective, the 10-year, roughly $18 million deal is crucial because, with the promise of future revenue from a second anchor tenant, it now makes financial sense to upgrade the rest of the building and ready the other floors for additional tenants.
If all goes as planned, more fashion-related creative office users will flock to the complex. It may already be working. Last month, up-and-coming garment maker Groceries, which has been compared to a young American Apparel because it manufacturers its clothes in L.A., signed a deal for 35,000 square feet at Alameda Square, Caverly said.
The ground floors will be reserved for restaurants and stores to serve the employee base, in theory converting the sprawling complex into an active mixed-use hub. It’s a five-year vision, said Caverly, and if successful it would allow Alameda Square to function as a cash cow that feeds other Evoq projects.
Broker Iqbal Hassan, a principal with Quantum Associates who specializes in the Fashion District, said building out creative office space makes sense. More and more apparel companies are interested in old buildings because of their large windows and the historic aesthetic, he said.
“If there were a stronger push to get designers or manufacturers or the creative end of the industry into those buildings, I’d be all for it,” Hassan said. “There hasn’t been that strong of a play yet for people to come into that environment.”
It is unclear when Evoq will have the money to invest in other projects, though it has several concepts in place. One involves converting a patchwork of cold storage, parking and light industrial parcels at Center and Jackson streets in the Arts District into 88 residential units and 68,000 square feet of creative office space. The firm has partnered on the project with developer Jeff Lee. Caverly said work could begin by late 2013.
Evoq also envisions a 614-unit residential complex on a parking lot at Spring and College streets, near the southern entrance to the Los Angeles State Historic Park. The project would require a zone change of the 4.9-acre site.
Concepts and future plans, however, will remain on hold until Evoq can generate the revenue needed to launch new projects, said Surj Soni, managing member at Legendary Developments. Legendary acquired the debt on a package of MMPI properties during the bankruptcy process, including the parking lot adjacent to SCI-Arc, which the company then sold to the architectural school.
“I think they are still bleeding very heavily and there’s a limit on how long an organization can do that, but I think they’re going to find their mojo,” Soni said. “The assets that they have are game-changer assets.”
What Soni considers game-changer parcels, however, come with a downside — to realize their value, the company needs cash.
“Money is something that’s in short supply for them,” Soni said. “I don’t think they have come out of the tunnel yet.”
The firm is also not entirely free from legal matters. Evoq remains in litigation with Meruelo over terms of the bankruptcy. Caverly, who declined to comment on the case, said it will not interfere with the company moving forward with its new strategy.
Contact Ryan Vaillancourt at firstname.lastname@example.org.
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