Construction lending slowed down in 2017, but this year, a big construction deal has already closed in Downtown Los Angeles. Urban Offerings and ESI Ventures have secured $122 million in JV equity and bridge lending to develop a 250,000-square-foot creative office property in the fashion district. The project is composed of two properties, a five-story office property located on S. Los Angeles Ave at 8th Street, and the Deardens building, a four-story property located on S. Main Street at 7th Street, which had operated as a department store since the early 1900's.

“There is some robust demand for both retail and creative office in that part of Downtown Los Angeles,” Shlomi Ronen, managing partner at Dekel Capital, tells GlobeSt.com. “It is in the heart of the fashion district, and there are a lot of fashion tenants that are still in Downtown L.A., and this creative class needs creative office space.” Ronen secured the funding on behalf of the borrowers, along with Malcolm Davies, Principal/Director at George Smith Partners.

The borrowers owned the department store property, and rolled into this deal, according to Ronen. They are looking to renovate both buildings into boutique-style creative office space. “This project is going to be a create office conversion in a building that served as a department building for many years,” he explains. They came in with the idea that they were going to renovate it into creative office with some ground floor retail.”

The Downtown Los Angeles market has a 17% office vacancy rate, and with tight construction financing available, it seems like this would have been a difficult deal. Ronen, however, says that there was ample interest on both the equity and debt sides of the equation. “It did, but once you start digging in, you see that a lot of that space is in big towers. It just isn't space that these types of tenants want to be in,” he says. “Where there is creative space available, it is leasing up at rates that are significantly above what is being achieved in some of the towers.”

While this deal doesn't mean that construction financing is back in 2018, it does show that there is demand for construction deals from quality sponsors. “The trend is that if you have a well-located, sponsored deal, there is going to be capital out there to finance it,” says Ronen. “Because of the extensive nature of the renovation, this is as much a construction loan as it was a bridge loan. What ended up intriguing the lender and equity is that we ended up rolling in the department store building into the package so that they essentially own an entire block in that neighborhood, which is very unique.”

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Big Construction Deal Makes an Early Splash in DTLA

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