Yuval Bar Zemer and Paul Solomon have had a dream of converting an aging industrial district on downtown’s outskirts into a vibrant mixed-use neighborhood of lofts.

The first phase of that dream was realized last year with the conversion of two warehouses into the tony Toy Factory and Biscuit lofts. Emboldened, the two plan to build another residential development on a parking lot and storage shed across from the Toy Factory Lofts.

In fact, Bar Zemer was so confident about the prospects for that budding neighborhood that he moved his family from the Westside to be on “the cutting edge of a new lifestyle.”

But those prospects got a whole lot dimmer this month, and it isn’t just because of the slowing residential housing market.

Los Angeles redevelopment and planning officials issued a Jan. 3 directive that will severely limit residential projects in the city’s industrial zones, making it tougher for Bar Zemer and his partner to build their next project.

The city wants to preserve as industrial space the properties that Bar Zemer and his partner are eyeing for conversion to residential, along with a lot of other industrial space.

“Under this policy, it looks like it could remain a parking lot for years to come. It’s a shame, not to allow the evolution of a unique neighborhood,” said Bar Zemer. “Now, my family could be living in a small island surrounded by dilapidated industrial buildings.”

City officials contend they have a good justification for their actions, saying that residential conversions over the past several years are rapidly diminishing industrial space near downtown where the industrial vacancy rate is in the low single digits.

They see preservation and improvement of the space as critical to maintaining a healthly jobs-housing balance, and bringing in cleaner and greener industries with thousands of jobs paying higher-than-retail wages.

They also stress that the policy is nuanced. Some residential conversions will be allowed, but limited to specific “transitional” areas within these zones. However, anyone seeking to build housing in the core industrial portion will have to go through more hoops than they have until now and could be denied permission to build.

“The key is our ability to cluster uses instead of the scattershot approach we’ve had with our industrial policy until now. That way, we can build a critical mass that can start to attract the new and cleaner industries of the 21st century,” said Community Redevelopment Agency Chief Cecilia Estolano.

But the new directive has aroused more than the ire of Bar Zemer and his partner. Local business owners, other developers and business groups fear it could stifle the flow of mixed-use and residential projects, intensifying a downturn that’s already under way.

Of most concern is the speed with which the directive is being implemented. While there was nearly a year of dialogue on the issue, there was no consensus when the final directive was unveiled right after the holiday season. Developers and business groups had little time to mobilize.

“We have people now willing to invest in a down market no less in mixed-use projects,” said Carol Schatz, president and chief executive of the Central City Association. “Now they are being told ‘no,’ and we are supposed to wait goodness knows how many years for these new industries to materialize.”

Speculation accusations

Few are hit harder by the directive than Bar Zemer and Solomon, principals in the development firm Linear City LLC.

Back in 2002, the pair bought the parking lot and storage shed across from the Toy Factory Lofts with the expectation of being able to turn it into a mixed-use loft project, with 20,000 square feet of commercial and industrial space on the ground floor and 60 to 70 residential units on several floors above. They were hoping to break ground on the project in late 2008 or early 2009.

Besides the jobs created by the ground floor businesses, some of the loft dwellers might also run their own businesses; all of these jobs would represent a net gain over the largely vacant current site.

The Community Redevelopment Agency and Planning Department have a different view. They characterize the most vocal opponents of the directive as speculators who paid high prices for parcels during the recent housing boom in the hopes of getting variances for their residential projects and making a quick buck.

“There is intense financial pressure on people who overpaid for properties in the hopes of rezoning for residential and then flipping them,” Estolano said.

Bar Zemer denies that characterization. And it’s certainly not the case with another property a few blocks away, at the corner of Seventh Street and Santa Fe Avenue. That’s where David Seewack owns and operates a factory that makes brake and truck parts. Seewack purchased the site in 1995 when property values were the lowest in decades. The site consists of nine separate low-rise buildings, all constructed in the first half of the last century.

The company, American Moving Parts LLC, has outgrown the site, and Seewack would like to relocate it somewhere nearby. But the buildings and infrastructure on the site are so outmoded there’s no loading dock and Seewack has had to install a generator to supplement the power supply that he’s been unable to find an industrial buyer. So, three years ago, Seewack put forward a plan to convert the site to lofts, similar to the nearby Toy Factory Lofts that Bar Zemer and Solomon were building.

Attitude change

At first, Seewack said, city officials welcomed the plan as a step towards revitalizing the area. But then, two years ago, the attitude at the Planning Department abruptly changed; Seewack attributes that change to a memo from Deputy Mayor for Economic Development Bud Ovrom that essentially urged planning officials to be cautious in approving residential projects in industrial areas.

“That memo had the net effect of stopping residential projects like mine in industrial areas,” Seewack said.

Last year, the local zoning administrator rejected Seewack’s application for the loft project, citing a loss of jobs in converting the site from industrial use. Seewack pointed out that without significant investment in the infrastructure serving the site, it was unlikely that an industrial user would move in and the site would remain vacant after American Moving Parts moved out. Meanwhile, if the site were converted to lofts, some of the loft dwellers would run their own businesses.

Seewack appealed to the Area Planning Commission, which split on the project, letting the zoning administrator’s decision stand.

Seewack then asked the City Council to intervene. Last week, the Council agreed to take up the project at the urging of Jose Huizar, the councilman representing most of the Downtown Industrial Zone. It’s scheduled to go before the Council’s Planning and Land Use Management committee in the next couple weeks.

Like Seewack, Bar Zemer and Solomon are now pinning their hopes on the ability of Huizar to persuade his fellow councilmembers to allow their project. Huizar has already publicly stated his willingness to waive the directive “on a case-by-case basis.”

Circumventing policy

Similar battles are expected to play out throughout downtown and possibly areas of Hollywood as the directive takes hold, though there might be somewhat less pressure in the near term now that the residential real estate market has collapsed. Once the market turns up again, perhaps as early as next year, the pressure to circumvent this policy may heat up.

So far, though, there’s been little heard from downtown’s largest landholder, Meruelo Maddux Properties LLC, headed by developer Richard Meruelo, a staunch supporter of Mayor Antonio Villaraigosa. Meruelo Maddux owns sites in both the core industrial zone that the directive seeks to maintain and so-called “transitional” areas that would allow for some residential development.

Also, Meruelo Maddux has residential, mixed-use and industrial projects in its portfolio, so it has more flexibility to adapt to the directive than developers who are exclusively residential or mixed-use builders. A spokesman for Meruelo Maddux declined to comment for this story.

Meanwhile, one of those developers specializing in mixed-use development, Concerto Development LLC, is opposing the new policy directive. Concerto recently opened the 2121 Lofts, also at the corner of Seventh Street and Santa Fe Avenue.

“We have other projects that we would like to do in the area and we have strong policy support from the Council offices that have ways of ensuring that these projects ultimately succeed,” said principal Lapchih Fan. “But if this policy is enacted, it will become a much more drawn-out process.”