Downtown L.A.’s largest commercial real estate portfolio is about to get substantially smaller.
New York investment firm Charlestown Capital Advisors, which is expected to assume control this month of Meruelo Maddux Properties Inc., is planning to sell off nearly half of the downtown company’s 35 properties.
The sales are an integral part of Charlestown’s approved plan to revitalize the publicly traded real estate firm after more than two years in Chapter 11. It would leave the reorganized company with a slimmer portfolio of prime development lots and some marquee properties, including a huge warehouse complex that houses American Apparel Inc.
“It’s probably a good move,” said Tom Gilmore, a pioneer downtown developer who heads Tom Gilmore & Associates. “In order for significant development to occur, some properties need to change hands and fresh capital needs to enter the market.”
Last month, U.S. Bankruptcy Court Judge Victoria Kaufman tentatively approved a reorganization plan put forward by Charlestown and partner Hartland Asset Management, minority investors that own about 2 percent of Meruelo Maddux shares in total.
The plan, expected to receive final approval within the next few weeks, won out over a competing reorganization crafted by secured lender Legendary Investors Group and company founder Richard Meruelo, who is leaving his post as chief executive. His stake would be diluted from nearly 45 percent of outstanding shares to less than one-quarter under Charlestown’s plan. President John Maddux also will depart.
Charlestown and Hartland, as well as two other investors, plan to pump $38 million into Meruelo Maddux, including $17 million to purchase 55 percent of the shares and $15 million for operating expenses. The company will be run by two interim executives until the board selects new leadership.
The company is the biggest nongovernmental owner of acreage downtown, mostly industrial and warehouse properties on the east side. It filed for bankruptcy in March 2009 after announcing it couldn’t make payments on $266 million in debt amid the sharp downturn in the commercial real estate market. The bankruptcy followed the company’s initial public offering by just two years.
Charlestown founder Raj Maheshwari and Legendary Chief Executive Dilip Bhavani declined comment.
Meruelo and Maddux declined to comment through a spokesman.
Global firm
Little is known about Charlestown locally. The company is an investor is several real estate companies globally, but had no presence in Los Angeles aside from the small stake it had acquired in Meruelo Maddux prior to the bankruptcy.
The company was founded by Maheshwari, a former analyst and executive at Prudential Securities, in August 2005 as a private merchant bank specializing in financial advisory and mergers and acquisition services. Hartland is a New York-based adviser for institutional real estate investors.
A source familiar with Charlestown who was not authorized to speak, said Maheshwari, a New York resident, has been interested in gaining a presence in downtown Los Angeles since the development of L.A. Live, and increasingly since the announcement of a possible National Football League stadium there.
At its height, Meruelo Maddux owned more than 40 properties, but some were sold by Meruelo as he sought to hold on to the company. Charlestown intends to sell at least 15 properties, beginning with those outside of downtown, including several in Pomona and the City of Commerce.
In downtown, about 10 properties are on the block, including 1060 N. Vignes Ave., a 4-acre vacant lot entitled for a 320-unit residential tower, and 336 W. 11th St., a lot entitled for 80 units.
Downtown sources told the Business Journal that the company is already in talks with brokers to market several properties as a package sale.
Developed properties that would be retained include the upscale Union Lofts apartment building at 325 W. Eighth St. and the company’s headquarters at 761 Terminal St., a sprawling 20-acre site where American Apparel also is located.
Prime development sites staying in the portfolio are a 3-acre parking lot with a small restaurant building at 1117-1119 S. Olive St., targeted for residential development, and 129 W. College St. and 915-949 S. Hill St., two sites entitled for mixed-used developments.
“Whether they are sold or kept for development, either way it’s great,” said Mark Tarczynski, executive vice president at Seattle-based Colliers International. “The new entity now has fresh capital to sell the rest of the properties so that means no more stagnation, which is only good for the market.”
Exit plan
The bankruptcy plan calls for secured creditors to be made whole through monthly payments made over the next four years at an interest rate of 5.25 percent. Among the chief creditors are Bank of America Corp., which is owed $50 million; and Cathay General Bancorp, which is owed $50 million. Chief lender Legendary Investors settled with Meruelo’s company for $60 million.
Unsecured creditors with undisputed claims also will receive full payment of their claims but at a reduced interest rate. According to the bankruptcy filing, the 20 largest unsecured creditors are mostly contractors that have worked on a residential project also sold off. They claim they are owed more than $7.5 million.
Existing shareholders will not fare as well. They will be given the choice to sell their shares to the new management for 35 cents a share or have each old share converted into one-fifth of a share of the reorganized company. Shares closed at 50 cents June 2 on the Pink Sheets. At their height in 2007, shares topped $10.
Since filing bankruptcy, Meruelo Maddux has been losing approximately $2 million a month on property expenses and taxes. Charlestown projects it should be able to steadily reduce the losses until the company is profitable in 2014. The company’s nearly 80 employees, many of whom provide real estate management services, are expected to be retained.