It started with a vision: to turn around a historic block at Broadway and Third Street in downtown L.A. and bring back the long-lost glory of the early 1900s, when huge department stores beckoned shoppers to the area known as Grand Central Square.

Developer Ira Yellin seemed just the man for the job, with help from the L.A. Community Redevelopment Agency and the Metropolitan Transportation Authority. After all, Yellin had been the one who successfully redeveloped the landmark Bradbury Building in that very neighborhood.

But Yellin, the CRA and MTA all eventually learned that redeveloping a declining urban area like Grand Central Square is full of unexpected potholes.

The project called for rehabilitating the 100-year-old Grand Central Market building, constructing a parking structure, renovating the adjacent Million Dollar Theater and Homer Laughlin buildings, and developing 121 affordable apartment units on the upper floors of those buildings.

The Grand Central Market, the parking structure and the housing component were completed in 1995; the Million Dollar Theater reopened just two weeks ago.

In the 14 years since the project was first undertaken, nearly $70 million in public and private funds have been invested: $22 million from a Yellin-led group and $48 million in public bond proceeds and grants. And while Grand Central Market the project's centerpiece has been rehabilitated and remains a bustling attraction for local shoppers, much of the surrounding area has yet to see any significant revitalization.

Empty storefronts in old, rundown buildings are not uncommon in the area.

"This project hasn't had the spillover effect that was hoped for," said Don Spivack, CRA deputy administrator of planning.

What's more, rents at the Grand Central Market plummeted during the recession of the early '90s, meaning that revenues generated by the project were insufficient to cover a $2.2 million bond payment due in late 1997. That forced the CRA and MTA to restructure the bond package, in effect bailing out Yellin's management company. What followed was widespread criticism of the project. Since then, some Grand Central Market tenants have complained that their rents are too high.

Just last month, a study by the UCLA Center for Labor Research and Education and the Los Angeles Alliance for a New Economy called the project a financial drain, saying it will only return $5 million over 30 years, a fraction of the $70 million investment. What's more, according to the report, the financial stress of the project caused hardship for both tenants and employees, "hardly the type of social outcome that public investments should engender."

But Yellin maintains that his project is a success as judged by the original goals of stabilizing the area and eventually revitalizing it.

"By the late 1980s, this area was entering a very rapid slide," Yellin said. "Three major department stores had left, theaters were closing and vacancies were starting to appear in the Grand Central Market for the first time in its 75-plus years of continuous operations. The marketplace itself which was built in 1898 was falling into disrepair. With this project, I can now say we did halt the slide."

By 1989, Yellin and his group had invested $22 million to buy up several properties in the area, including the Grand Central Market, the Million Dollar Theater and the historic Bradbury Building, across Broadway from the marketplace.

"I have a passion for historic parts of cities," Yellin said in explaining his decision. "I grew up in L.A. and had gone to Grand Central Market as a kid. So when I saw what kind of shape it was in, it became a challenge for me to see if I could restore it to the glory I had remembered."

Yellin and his Grand Central Square Joint Venture then approached the CRA, seeking an infusion of public dollars. At the time, the CRA was looking for ways to restore the city's historic core, and here was a developer with the same mission and who had already put in $22 million in private money.

Yellin's negotiations went on for four years with both the CRA and MTA, which also had an interest in developing areas around its Metro Red Line stations. (Grand Central Square sits one block east and north of the Pershing Square Metro station.) The MTA and CRA agreed to issue $44 million in bonds.

The deal was especially complex, not only because of the bond sales, but because included in the subsidies was the sale of $7 million worth of unused "air rights" that were transferred to other downtown developers.

By the time the financial maneuvering had been accomplished, the region was in its third year of the worst real estate recession since the 1930s. Downtown was among the hardest-hit areas. Rents were tumbling and vacancies soared.

Concern is evidenced by the remarks of CRA Commissioner Dennis Luna, just before he voted to approve the Grand Central Square project in May 1993. "The CRA is taking the risk in this transaction," said Luna, as quoted in the UCLA study. "If something goes wrong, the bankers are made whole, the MTA is made whole, and the CRA is left like a cat in a bag struggling to get out."

Luna's words were prophetic. Even though the project was completed on time and within budget, rents hit rock bottom and stayed there for years.

"The depressed conditions were worse than expected and lasted longer than we expected," Yellin said. "We could not raise rental rates as much as we needed to make the bond payments."

In addition, seismic retrofitting of Grand Central Market required that several tenants be evicted. That resulted in lost rent, and required Yellin's management company to shoulder a greater portion of the maintenance bill, which is typically passed on to tenants.

"By 1997, we were really hurting," Yellin said.

Things got so bad that Yellin's company was unable to make its bond payment, forcing the CRA and MTA to restructure the deal. The CRA put $4 million into a debt payment reserve fund, and rescheduled the debt service on the bonds, pushing back its first bond payment to 2015. (The MTA bonds are to be repaid prior to the CRA bonds.) The UCLA study claimed the restructuring cost the CRA $12 million.

The restructuring also reduced the management fee paid to Yellin's company, from 5 percent of revenues to 4 percent, or about $180,000 a year.

The CRA's Spivack said the restructuring has accomplished its intended purpose, enabling Yellin to make the bond payments on time. Spivack said that while rents may be improving slightly, they have not risen enough to warrant reimposing the original bond payment terms on Yellin.

"We don't see that changing any time in the near future; the revenues simply wouldn't be there to justify it," he said.

Meanwhile, attention is turning to the main goal of the project: revitalization of the entire Grand Central Square block.

Yellin said substantial progress has been made, and that Grand Central Square has been a catalyst for several nearby projects including the new state offices at the historic Junipero Serra Building at Fourth Street and Broadway.

"Back in 1994 and 1995, state officials visited me," Yellin said. "They were considering purchasing the Junipero Serra building, but were hesitant because of the way the area looked. I showed them what we were doing with the Grand Central Square project and I'm convinced that played a role in their decision to locate the offices there."

Yellin also pointed to the recent opening of a series of buildings that had been converted to residential use by Gilmore & Associates at nearby Fourth and Spring streets.

Nonetheless, there are still plenty of empty storefronts in the area with "For Lease" signs on them. Leasing agent Franco Canzona is trying to find tenants for three such stores.

"The redevelopment of Grand Central Market has definitely resulted in more calls," Canzona said. "But the activity is not great enough to cause the offers to increase. The landlord is holding out for higher offers, so the stores remain vacant."

So, after 14 years, $70 million and a near-default, what are some of the lessons that have been learned?

According to Yellin, the principal lesson is patience.

"When I started this project, I was young and somewhat na & #271;ve when it came to redeveloping historic areas," Yellin said. "I wanted to do it all. In retrospect, I might have taken things a little slower."

Spivack echoed that sentiment. "It is very difficult to convert historic buildings very expensive and very daunting," he said.

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