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The Real Deal Los Angeles

To build or not to build: LA developers pay big bucks to bypass zoning codes

Approvals come via hefty contributions to city for housing, school funding
By Natalie Hoberman | September 24, 2018 05:00PM

Photo illustration (Credit: iStock)

When Mark Levy, president of development firm City Market of Los Angeles, first proposed redeveloping a former produce market in the Fashion District into a sprawling new mega-complex six years ago, he knew it would be a tough bargain with the city.

The Fashion District, a historically industrial neighborhood, has been slow to join the renaissance washing over other Downtown areas like the Arts District and South Park. The 1.7 million-square-foot project had the potential to be the spark it needed.

But it was also well outside the lines of what the zoning code permitted —  leaving the developers with little choice but to enter into a development agreement.

By late June, the City Market developers had agreed to a $10 million benefits package that would include funding for homeless services, public transit and affordable housing units.

Developers in L.A. are increasingly coughing up large sums of money as a way to get their projects off the ground. Outdated land use plans and a burgeoning housing crisis are helping to drive the wave of spending for city coffers, real estate developers and city planners told The Real Deal. The packages have become a project cost, an anticipated expense that makes it even more challenging to build in L.A., which is already notorious among developers for its high cost of entry.

A development agreement ensures that City Market would be exempt from any future regulations that could impact the project. It also offers a chance for the city to impose certain conditions on the developers.

“We knew that there would be a public benefit contribution,” said Levy, who added that it’s commonplace to have a benefits package when changing zoning codes. “Did we know how much it was going to be? I can’t say that.”

At $10 million, the contribution is among the largest packages to have come before the City Council in recent years, according to Los Angeles City Planning Commissioner Renee Dake Wilson. Most range from $100,000 to $200,000, she added.

Wilson, who reviews benefits packages before they come before the City Planning Commission, blames the economic crisis for the recent uptick in entitlements. City funding was cut severely during the crisis, she said, leaving zoning plans and coding regulations out of touch with the projects being proposed today.

“When you have a project that is out of the box, it provides an opportunity to offset some of the project’s impacts through a development agreement,” Wilson said, adding that it is common for councilmembers to try to guide contributions to their own districts.

At least some of the contributions end up funding public parks and affordable housing projects, she said. That is especially relevant in L.A., where the median value of a single-family home hovers above $600,000 and there are more than 25,000 homeless people.

Large contributions are also being paid in other pockets of L.A., not just in Downtown.

In late June, Capri Capital Partners secured approval to redevelop the Baldwin Hills Crenshaw Plaza into a mixed-use complex featuring condos, hotel rooms, offices and retail.

As part of the agreement, the firm agreed to pay $2 million to L.A. Trade Technical College for educational programs and another $1.5 million to the council district for local improvements. The city also mandated that local residents account for at least 30 percent of the workforce hired to build and run the project. Capri, which is based in Chicago, also agreed to set aside 10 percent of the apartments and for-sale units to low-income residents.

Ricardo Pagan, CEO of Claridge Properties, said city officials are increasingly asking for funding for issues outside the project’s scope, such as for a college or a “tree-planting that’s three miles away.”

“It can have nothing to do with your project,” he said.

As the market has improved, so have the city’s demands. “They suspect that you can handle a lot more than you really can because the market is stronger,” Pagan said.

Claridge is one of three minority-owned real estate firms that recently secured approvals to develop the 2 million-square-foot Angels Landing site in Downtown.

A report from the Chief Legislative Analyst in December revealed that the project, a joint venture between Claridge, Peebles Corporation and MacFarlane Partners, would generate $54.3 million in one-time revenue for the city, and another $12 million in annual tax revenues.

Less than two miles from Angels Landing, City Market South will rise on San Pedro Street in the heart of the Fashion District. The mixed-use project will span three city blocks, and include more than 900 residential units, a 200-key hotel, a school and over 220,000 square feet of commercial space.

With a construction timeline lasting two decades, and project costs estimated to be anywhere between $500 million and $1 billion, the project is expensive enough to scare many developers away.

“It was important that the combined package didn’t make it so onerous that a project in this area wouldn’t pencil, because if nothing gets built, there’s no public benefits at all,” said Levy.

The city ended up calculating his benefits package by requesting $5 per-built-square-foot, plus an extra $1.5 million in revenue from digital signage on the property.

Wilson, who is also an architect, said the benefits package was “not out of scale.” Yet, she admits that hefty contributions like these could take a toll on developers wanting to invest in the region.

“There’s definitely concern with all the factors that create pressure on a project,” said Wilson. “We are trying to balance that. But developers recognize that if they are entering into a development agreement, it’s because their project is coloring outside the lines.”