March 13, 2009 - Meruelo Maddux Properties Inc, Los Angeles CA

Revival of Downtown Los Angeles Stalls

The largest private landowner in downtown Los Angeles said it may have to file for bankruptcy protection, the latest sign of how the credit crunch has frozen a multibillion-dollar revitalization of the city's downtown.

Revival of Downtown Los Angeles Stalls

The largest private landowner in downtown Los Angeles said it may have to file for bankruptcy protection, the latest sign of how the credit crunch has frozen a multibillion-dollar revitalization of the city's downtown.

Real-estate firm Meruelo Maddux Properties Inc. said Thursday that it was working to reach agreements with four lenders after the developer stopped making interest payments on 26 loans valued at $266 million. Three of those loans are due, and the company hasn't been able to extend them.

"The debt capital markets have totally shut down," Andrew Murray, the company's chief financial officer, said in an interview.

It is the latest shoe to drop for Los Angeles's downtown district, which has been the focus of a decade-long renewal project designed to convert old warehouses and office buildings into lofts, high-rise residential towers and an entertainment and retail district.

Major pieces already are in place, such as the Staples Center sports complex at the south end and the Frank Gehry-designed Walt Disney Concert Hall at the north end. The first phase of L.A. Live, an entertainment complex, opened in December. And developers have added thousands of new condominiums and rental apartments.

View Full Image The L.A. Live construction project, left, as seen from the roof of the Staples Center sports complex in downtown Los Angeles. Both complexes are part of a decadelong renewal project in the district. Getty Images

The L.A. Live construction project, above, as seen from the roof of the Staples Center sports complex in downtown Los Angeles. Both complexes are part of a decadelong renewal project in the district. The L.A. Live construction project, left, as seen from the roof of the Staples Center sports complex in downtown Los Angeles. Both complexes are part of a decadelong renewal project in the district. The L.A. Live construction project, left, as seen from the roof of the Staples Center sports complex in downtown Los Angeles. Both complexes are part of a decadelong renewal project in the district.

But some plans have stalled, threatening the goal of building out the surrounding area. The Related Cos., a national developer, missed a city deadline to break ground on a $3 billion condo and retail corridor. The first phase of the project, once slated to be completed this year, probably won't be finished before 2012 because the developer hasn't been able to secure financing. Related says the project is on hold temporarily. "When things pick up a little, downtown will do very well," said William A. Witte, president of Related of California.

And, as in other cities, the condo market has been hurt by slow sales. Condo prices in downtown Los Angeles fell to less than $400 per square foot in the fourth quarter of 2008, down $100 from the previous year, according to CB Richard Ellis.

Meruelo Maddux, which owns land but has done little development, has reached 50% occupancy on its first luxury rental building, Union Lofts, which opened in mid-2008.

Meruelo is late on completing a 35-story apartment building, adjacent to L.A. Live, that is due to open this fall. The company said it will keep making debt-service payments on that project, which it originally had planned to open in May.

Meruelo is trying to sell its buildings to pay down debt and to persuade its lenders to restructure loans, but said that if those options fail, a bankruptcy filing could be a "strategic alternative."

Executives say they remain committed to the idea of residential development in downtown Los Angeles. "Downtown L.A., the economy aside, will continue along its evolution unabated because so much has already occurred," Mr. Murray said.

Unlike in Miami or San Diego, the downtown area doesn't have a large supply overhang. Real-estate brokerage Marcus & Millichap forecasts that 39 new condo and 394 rental units will be added to the downtown market this year.

But while the district's troubles may reflect economic headwinds that have battered real estate nationally, some experts say downtown has also suffered from too many high-priced developments. "The price points that were projected aren't sustainable," said Raphael Bostic, a real-estate professor at the University of Southern California. "The prices you have to charge now make the returns relatively unattractive."

Original Story - Wall Street Journal

Update March 27, 2009

Meruelo Maddux Properties files Chapter 11 bankruptcy protection

Meruelo Maddux Properties (Nasdaq: MMPI), a self-managed, full-service real estate company that develops, redevelops and owns commercial and multi-family residential properties, today announced that it and numerous of its subsidiaries have filed, or will be filing, voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in California, with the intent of implementing a comprehensive reorganization to restructure its debt. Excluded from the filing is the Company's 35-story 717 W. Ninth Street residential tower project currently under construction.

Earlier this month the Company announced during its fourth quarter earnings call that it was experiencing significant, recurring cash shortfalls because of a challenging credit climate and real estate market and, as a result, was considering its strategic options, including seeking Chapter 11 protection.

"The company worked with diligence to avoid a reorganization filing," said Richard Meruelo, Chairman and Chief Executive Officer of Meruelo Maddux Properties. "Despite our best efforts and careful consideration of all other alternatives, the filing became necessary given the challenging economic climate. Now, our goal is to implement a comprehensive reorganization and continue to seek additional outside financing which we believe will allow us to move forward."

The Company expects to continue to manage its real estate portfolio and does not currently anticipate any disruption to its tenants. As aforementioned, the filing excludes its 35-story residential tower project currently under construction in downtown Los Angeles, and no disruptions to the ongoing construction are anticipated. For further information on the reorganization filing, please call our company hotline at 310.237.5910 or refer to our FAQ sheet on the Company's website.

Source - Company Website PR Release

Company - PDF - FAQ - Chapter 11