There’s a childhood story that sometimes you can coax out of Richard Meruelo.

The 44-year-old developer spent his formative years working at his family’s downtown L.A. bridal shop, where he did odd jobs, from cleaning windows to taking gown measurements. But he may have learned the most by defending the business from an ornery parking lot kingpin.

The building that housed his family’s shop was badly damaged in the 1971 Sylmar earthquake and Meruelo’s Cuban immigrant parents seized on the opportunity to buy the property — their first commercial real estate purchase.

But the parking lot businessman, who had paid the previous owners $500 a month to park cars on the property, balked at paying the new owners.

“They thought we were just fresh off the boat — which we were — and that we wouldn’t notice that they were parking there,” Meruelo said. “We said, ‘The title report says we own this piece. You just can’t do this.'”

So Meruelo’s father, the late Homero Meruelo, had a wall built. This stopped the businessman from parking cars on the lot — until, Meruelo said, the man rammed through the wall one night with an old van. Meruelo’s father sued, won and put up a second wall.

But that wasn’t the end of it. The family learned the businessman planned to break down the new wall. So young Meruelo, his brother and father — who was armed with a Colt Gold Cup handgun — laid in wait.

“(He) showed up with his van and there was a stand-off,” Meruelo said. “It was like, ‘If you cross the line I am going to shoot you.’ That went on for about 30 minutes and finally (he) left and paid the rent. And we took down the wall. It’s where I learned that you don’t give up if you are right — if you believe you are right.”

The tale, exaggerated or not, says a lot about the mercurial Meruelo, who in the last two decades has amassed 4 million square feet of space, 3.4 million of which is in the downtown area on about 110 acres. That makes him downtown L.A.’s biggest landowner, according to CB Richard Ellis Group Inc.

It’s not fancy stuff — mostly large warehouses and distribution facilities that house food processers, cold storage and wholesalers in gritty neighborhoods on the east side of downtown. And, yes, he owns parking lots, too.

It’s a portfolio that seems to befit a businessman who, despite a baby face, has developed a reputation for being tough as nails — a characterization he takes pride in, not offense. He’s also been called unorthodox and litigious, characterizations he bristles at.

What’s more, Meruelo is regarded as one of the city’s biggest enigmas. On the one hand, he was Antonio Villaraigosa’s biggest donor in his 2005 mayoral campaign. On the other, his profile is so low that several other downtown real estate executives, including veteran developer Jim Thomas, said they don’t know Meruelo much at all.

Those who do know him said he’s dogged in pursuing deals, running his namesake firm and facing down foes.

Now, though, Meruelo is up against his biggest challenge yet: keeping his vast real estate portfolio out of the hands of hungry creditors.

Like many other property owners and developers, he was hit hard by the collapse of the real estate market. In March, Meruelo Maddux Properties Inc., the real estate company that he took public just two and a half years ago, announced it couldn’t make payments on its $266 million debt and filed for Chapter 11 bankruptcy protection, seeking to reorganize.

It was bitter medicine for Meruelo, who is used to being on the winning side of entanglements.

Not only did the filing jeopardize his control over his large portfolio, but it has threatened the dream laid out in his company’s IPO prospectus: converting those ragged industrial buildings into shining new homes and businesses for a rising class of urban immigrants.

But Meruelo is nothing if not determined.

Earlier this month, he sat down with the Business Journal at his company’s headquarters for a rare and wide-ranging interview. Known for being intensely private, Meruelo spoke angrily of his company’s predicament.

“We are 100 percent victim of the credit markets,” he said, sitting at his expansive desk in front of a colorful painting of the downtown skyline.

Dressed in dark slacks and a light blue guayabera shirt that is typical Cuban garb, Meruelo refused to accept defeat. He noted the company’s biggest residential project yet, a downtown high-rise, remains under construction. He even slipped in word that the company will announce a new residential project in South Park in the next few months.

“Do I like the difficulties that I’ve been in the last year, year and half? No, that’s not fun,” Meruelo said. “But you know, life is not always just fun. But it will get better.”

Not everyone is so sure that things will improve for him.

“What Meruelo had going was a vision for downtown Los Angeles that ran into a very difficult economy,” said Richard Moore, an analyst for RBC Capital Markets Corp., a Minneapolis investment firm that co-underwrote the $370 million initial public offering of Meruelo Maddux in January 2007.

“Had the credit markets not been so stingy and the economy not gotten so sour, I think it would have had a chance. We will never know I guess,” Moore said.

Getting started

Meruelo certainly has come a long way in a relatively short time. The L.A. native lived with his family in the largely Latino and working-class Pico Rivera as a young boy, before the family moved to Whittier where he spent his formative years.

He attended USC and graduated with a business degree in 1986, ready to take the family’s achievements to a higher level.

Over the next decade, with backing from his family, he dabbled in a variety of real estate projects, buying properties, rehabbing them and either selling or renting them. Then, in 1997, he put himself on the map with the purchase of the 1.4 million-square-foot former Rykoff-Sexton Inc. headquarters at Seventh and Alameda streets, with the debt secured by his parents.

The real estate markets were still flat at the time and downtown’s future as an urban oasis had yet to emerge, so Meruelo was able to pick up the property for just $19 million with funding from the Los Angeles Community Development Bank; the bank was a federally funded enterprise started just two years before with the goal of attracting development to Los Angeles. Meruelo paid back his loan but many others didn’t and the bank became insolvent in 2004.

Meruelo not only took a gamble on the large property, which includes several multistory industrial buildings, he took a gamble on a tenant, American Apparel Inc. At first, American Apparel couldn’t pay rent, but the company’s founder, Dov Charney, promised he’d eventually pay.

“I said, ‘Hey, I think he can make it,'” said Meruelo. “He said, ‘I’m an immigrant; I’m giving work to a lot of Hispanic folks.’ He knew I was very supportive of that. So I said, ‘Sure, come on. Try.'”

To this day, American Apparel designs and manufactures its popular T-shirts and casual wear at the complex. However, sources said the company’s lease has expired and negotiations have taken place.

Charney did not want to discuss the lease, but he described his relationship with Meruelo warmly, saying, “I have affection for Richard and hope to build a long-lasting relationship with him in a variety of different ways.”

Meruelo’s business steadily grew after the Rykoff-Sexton property purchase. Before the real estate boom there was little competition for the vacant or industrial properties he sought, especially in the gritty eastern section of downtown where, in 1997, as Meruelo put it, “Most people wouldn’t get out of their car, and if they did it was with a machine gun.”

Around 1999, Meruelo made another key acquaintance; he hooked up with Mike Meraz, a downtown real estate broker.

“It is something about a similar energy — probably a maverick nature. Being a stone-cold deal junky,” said Meraz, in describing his bond with Meruelo.

According to Meraz, who said he brokered as many as 30 purchases for Meruelo from about 1999 to 2007, he and Meruelo would “jump in the car, crank the volume and make some deals.”

Meraz said it was at his urging that Meruelo began using unorthodox business tactics — from extending escrows to reselling properties that he hadn’t yet taken ownership of but had tied up in escrow.

Meraz said that while those on the other side of the negotiating table may have frowned on the methods, he has a different take on them.

“If you are a buyer, you call it being prudent,” he said, adding, “This is a tough game.”

About his early days with Meraz, Meruelo said the broker was being nostalgic about a bygone era.

It was also during this period, in the early part of this decade, that Meruelo began doing business with controversial businessman Ezri Namvar, who lent him money for acquisitions but is now under federal investigation and has been accused of running a Ponzi scheme (See story page 21).

In the same period, Meruelo forged a tighter business relationship with John Maddux, a former O’Melveny & Myers LLP attorney who had worked for years with Meruelo’s parents on real estate transactions. In 2005, he joined Meruelo’s company and has a 6.6 percent stake in it, where he is chief operating officer. Maddux declined comment for this story, but sat down with the Business Journal in September 2007 for an interview in which he described Meruelo as both a friend and colleague.

“We sit down and talk about what it is (we) want to accomplish and decide which of us will take the lead and then we get after it,” he said at the time. “Richard is not super hands-on. Richard knows what he wants to accomplish and it is just intuitive.”

But that maverick streak hasn’t always been good for Meruelo. For example, he was barred from developing a piece of property near Union Station for 18 months because he demolished structures there in 2005 without permits.

It’s an allegation Meruelo doesn’t dispute, though in describing the era, he noted that it was a period of escalating intensity as the real estate market reached its peak and developers sought to outbid each other for properties. In 2005, Meruelo scored a huge financing source: the massive California Public Employees’ Retirement System, which at the time was getting heavily involved in real estate and private equity. It gave Meruelo $150 million to play with and he took advantage of it.

Brad Luster, a downtown broker who Meruelo met a year later, remembers the time well.

“My recollection is that he came out of nowhere: All of a sudden he was on the scene buying like crazy. He was very aggressive,” said Luster, who later ended up on the other side of a legal dispute over a property Meruelo was trying to acquire. “In my meeting with him, I remember him being specific and saying, ‘I want to become a billionaire in real estate.'”

But Meruelo also had something in mind other than being a big industrial landlord. He had a plan. So after years of ramping up and amassing what the company said in its prospectus was a 5 million-square-foot portfolio, Meruelo took his firm public. The goal was straightforward, yet ambitious: He would convert much of that gritty property into housing, retail and other projects to serve the expanding community in and around downtown.

“We believe we can earn higher risk-adjusted returns on the redevelopment of re-emerging urban markets than on initial development in emerging suburban markets,” the prospectus said.

Enough investors bought into the concept that the January 2007 IPO was a success. The company raised $370 million, enough to pay off CalPERS and an additional $86.5 million in mortgage debt, and capitalize the company for its next act.

‘Tough guy’

Meruelo learned a lasting lesson from that childhood run-in with his father’s nemesis: The legal system could work for him. “My father at the time was scared to death of the court system, and he sued somebody for the first time ever and won,” Meruelo recalled. “We all learned that, ‘Hey, you just don’t back away.'”

Indeed, Meruelo and his company have gotten into highly publicized scrapes with the Los Angeles Unified School District, the Southern California Institute of Architecture and the city of Los Angeles over everything from disputed property sales to vermin infestation at one of his properties.

Meruelo or entities related or controlled by him have been involved in at least 13 Los Angeles Superior Court lawsuits in the last year (though the number includes several related to the bankruptcy). He is victorious regularly.

“I don’t call it litigious, I just call it protecting my rights,” said Meruelo. “I think my reputation is: You aren’t going to pull a fast one on me. If I am wrong, I give up. I’ve lost money on a lot of deals with no litigation. If I made a bad decision or it didn’t work out the way it was supposed to, I walk away. But you aren’t going to be knocking down my wall, because you don’t want to pay me rent. That’s just not going to happen.”

That’s not quite how everyone sees it. Some say he has taken advantage of the court system to advance himself.

“He’s certainly a tough guy in the courts,” said Mark Tarczynski, a downtown real estate broker who’s known Meruelo for several years.

He described a practice Meruelo has employed in which he agrees to purchase a property, then extends the escrow and eventually sues to hold up the sale to beat down the price or to find another buyer at a profit. “He’s notorious for doing that.”

A suit involving Meruelo over the purchase of industrial land at 9901 S. Alameda St. appears to illustrate some of the methods Tarczynski described. In a 2004 lawsuit, filed by a limited liability company controlled by Meruelo, it was alleged that the seller, Shama LLC, refused to the sell the property to Meruelo for $25 million because it believed it could get a higher price from another buyer.

But Warren Becker, a manager of Shama, said that Meruelo instead had “dragged (the escrow) out three or four extensions,” adding, “We were taken advantage of by their strategies.”

“Meruelo was riding roughshod to get whatever property he wanted,” said Becker, who ran a steel service center with his brother at the Alameda Street property.

In a 2005 countersuit, Shama alleged that Meruelo’s entity was only trying to “tie up” the 21-acre property while it looked for financing and wasn’t ready to buy the property. Initially, the Beckers prevailed in court, but Meruelo later won the case on appeal in 2007. His entity sold the property to the city’s Housing Authority in 2008 for about $31 million, making Meruelo Maddux a profit of about $6.9 million, according to a Securities and Exchange Commission filing.

In describing the legal battle over the Alameda Street property, Meruelo said that Shama got seller’s remorse because of the constant increase in values during the boom. And he said that in selling the property to the city agency the company believed it was “doing the right thing for that community. It wasn’t like we went into that deal knowing we had the flip.”

‘Enigma’

Others who have dealt with Meruelo buy the idea that he takes to heart the interests of downtown. Though he doesn’t make a big deal of it, Meruelo has given back to the community that, in many ways, bred him.

Meruelo is involved in a number of charities and downtown causes, including gang intervention program Homeboy Industries, children services non-profit Para Los Ninos and a handful of other groups including the Central City East Association.

Meruelo, who is on the board of the association, donated the use of a 20,000-square-foot warehouse to the group. The facility gives homeless people a safe place to store their belongings and keeps the street clean, said Estella Lopez, executive director of the organization, which manages several downtown business improvement districts.

“Richard doesn’t seek the limelight for this. He has very quietly made this available for close to a decade,” said Lopez. “Without him, we would not be able to do this.”

Some would say Meruelo goes beyond shunning the limelight, to the point of being secretive.

Aside from Meruelo’s acquaintance with Villaraigosa — the businessman was the largest individual contributor to the mayor’s 2005 campaign, giving nearly $200,000 — he keeps a low profile. There are no close friendships with other powerful real estate company executives. City Councilwoman Jan Perry, whose district includes much of downtown and knows just about every developer in the area, goes so far as to say Meruelo’s style is so guarded that “he’s more of an enigma.”

Part of the explanation may be the fact that he is intensely private and is uncomfortable providing anything but the barest details of his personal life.

In his little spare time, Meruelo attends Los Angeles Lakers basketball and USC football games, but spends much of his time jetting back and forth between his South Park condo and a home in Miami, where his parents retired in the early 1990s, and where his wife, Maria, and two children live. His younger son is in high school and his older son will attend American University in the fall.

He said he would like his boys, whose first names he refused to provide, to work in the family real estate business.

“I don’t give them a choice,” he said, laughing. “Some parents say, ‘No, no, son, whatever you’d like.’ I don’t adhere to that.”

The collapse

Meruelo’s close-to-the-vest methods — no matter how odd for a developer in Los Angeles, where the development and the civic worlds are intertwined — worked for years. But then the ambitious developer stumbled taking one of his biggest steps.

Over the years, Meruelo has acquired more than simply gritty industrial real estate. In his portfolio are some high-quality properties, including the Union Lofts, a former Hill Street office building he converted into a fashionable 92-unit apartment property.

But even that doesn’t compare to 705 W. Ninth St., a $160 million luxury apartment venture that would form a template for the kinds of projects on which Meruelo wanted to build a new reputation.

The 36-story building broke ground in late 2006 without a construction loan in place. But after spending $60 million on the project, the company experienced a staggering setback: Meruelo learned in January 2008 that tens of millions in financing he had expected from Bank of America would not materialize.

“We had a loan with Bank of America and effectively on first draw, they say, ‘Sorry guys, we can’t,'” said Meruelo. “That was a major blow to our company.”

He said that his company began knocking on doors in search of financing and even went back to Bank of America, explaining the bank had put the company in a horrible position by not giving it a loan. The bank demurred.

Colleen Haggerty, a spokeswoman for Bank of America, said the bank conducted “preliminary term discussions and a review” of the project but a contract or loan agreement was never in place. It was determined that “the project did not meet the bank’s requirements for funding.”

Bankruptcy court filings shed some light on the matter. The bank already was in deep with the company, having lent it millions. Bank of America is one of the largest creditors of the company, claiming it is owed $48.1 million from two loans.

It took Meruelo Maddux eight months to get an $84 million loan from an affiliate of Century City real estate investment manager Canyon Capital Realty Advisors LLC. It was a critical delay. The credit markets were feeling the effects of the global economic downturn, raising the financing costs. The loan, which closed in August 2008, has a 12 percent interest rate, high by any standard. Then the economic collapse hit with a vengeance.

Shortly before Meruelo Maddux declared bankruptcy, it announced its fourth quarter results: a loss of $85.8 million. With negative income flow it could no longer service its $266 million in mortgage debt.

“Ultimately what caused them to go bankrupt was that there was too much debt for the income they could bring in,” said Moore, the RBC analyst. “That’s why development is so hard in a time like this. You are spending money and not bringing any in.”

Most of the company’s largest creditors are banks that lent Meruelo Maddux money, according to bankruptcy court filings. The single largest claim is from Cathay Bank for $58.7 million. The next two largest claims are from Bank of America, and Pasadena’s East West Bank claims it is owed $15 million.

Investors, of course, also were all but wiped out, not the least of whom was Meruelo himself, who owns 45 percent of the stock. Shares, which were priced at $10 for the IPO, now trade at about 30 cents over the counter.

The other big shareholders are investment managers, such as Taylor Asset Management Inc. of Chicago and Gruber & McBaine Capital Management LLC of San Francisco.

Meruelo said his company will file a restructuring plan “toward the end of the year that will deal with all our lenders fairly, improve our balance sheet and position us for future growth.”

So far, the firm has gotten a handful of favorable rulings in U.S. Bankruptcy Court, including how the court plans to treat the bankrupt 53 separate limited liability companies and other entities that legally hold title to each of the company’s properties. In June, a bankruptcy court judge ruled that the entities can be treated as part of a unified enterprise. That will allow Meruelo Maddux to delay interest payments on the debt on many of its properties.

Now, as the bankruptcy presses on, the next milestone in the case is over whether lenders can foreclose on the properties they have claims against. Court hearings on the matter began this month and should be completed in August.

Dan Schechter, a Loyola Law School professor and bankruptcy law expert who is not involved in the case, said that if the creditors are allowed to start foreclosing, that would mark “the end of the story” for the company given the unprecedented weakness of the commercial real estate market.

“It all depends on the underlying business reality. And if I had to predict what was going to happen, coldly, the company is going to fail; it will be dismantled, the lenders will foreclose and the lenders will be stuck with these dog parcels,” he said. “I hope to heck I am wrong, because I don’t like it.”

Manuel Funes, the in-house architect for Meruelo Maddux who has long known Meruelo, said the bankruptcy proceedings are weighing heavily on his friend.

“Sometimes you can see the pressure taking its toll, but he remains an optimistic fellow who tends to see the good things,” he said.

Indeed, Meruelo takes pride that despite his company’s reorganization, construction continues at 705 W. Ninth St., which has been held out of the bankruptcy as a separate legal entity. The building’s completion is expected by year’s end.

Even walks downtown can perk him up. The Meruelo family still owns the building that houses his family’s old shop, Belinda’s Bridal. The family got out of that business years ago, and now when Meruelo strolls downtown, he is amazed by the changes — the new housing, residents, stores and nightlife. He takes solace in it all.

“What keeps me going is knowing that for me personally there is a brighter future and I think downtown has got a brighter future. I will keep at it. I am not going anywhere,” he said.

The detractors, though, aren’t buying it. The feeling is he was too brash and took on more than he could handle. In short, his oversized ambitions got the best of him.

“There are developers who develop for years before they try their first high-rise tower, which especially in Los Angeles are like a degree of difficulty of 10 out of 10,” Tarczynski said. “In his particular case he hadn’t developed anything of significance — that’s like doing 0 to 90 miles per hour in a nanosecond.”

Still, for those who know Meruelo, he seems to engender an amazing amount of loyalty. Take Meraz, the real estate broker who did all those deals during the boom. He admits to an investment in the company’s IPO of more than $100,000, which has largely evaporated.

Yet, he still calls Meruelo his close friend, affectionately referring to him as “Richie.”

“I am holding something I paid 10 bucks for that is worth 28 cents,” said Meraz. “Forget the company, I believe in the man.”

On the Rise

Although Meruelo Maddux Properties is bankrupt, the company is still constructing a luxury apartment tower excluded from its bankruptcy.

Name: 705 W. Ninth St. (Until recently the development was known by the prior address, 717 W. Ninth St.)

Location: Straddles South Park and the Financial District and is a short walk from the L.A. Live entertainment center. The area is home to several new or planned residential projects.

Specs: 36-story building with 214 luxury apartments atop six floors of above-grade parking and 6,800 square feet of retail space. The seventh-floor outdoor deck includes an impressive 70-foot-long swimming pool and large hot tub.

Timeline: Project broke ground in late 2006. It is expected to be completed by the end of the year. The company will begin leasing the building in January.

Noteworthy: Meruelo Maddux broke ground on the project without a construction loan in place. In January 2008, the company lost financing it expected to receive. It took eight months to secure an $84 million loan, which came at a high interest rate.