Big-Bucks Fight Rocks Gritty Pocket of L.A.
Ask most Angelenos to name the region’s high-rent hot spots and they’re likely to say the snooty shops of Rodeo Drive or the gleaming office towers of Century City. But some of the priciest commercial digs can be found in the gritty heart of the downtown fashion district, where some cramped showrooms displaying cut-rate women’s clothes command rents rivaling those of Beverly Hills boutiques.
Fierce competition among the area’s mushrooming garment wholesalers has sent rates soaring, boosted by costs you won’t find on a standard lease form. To secure a prime spot, some tenants in the heavily immigrant area are being asked to pay “key money”--tens of thousands of dollars in upfront fees in addition to already hefty lease rates.
That’s causing sticker shock among wholesalers like Korean-born Dan Seong, who sells slinky dresses and other junior fashions from a 700-square-foot warren on 11th Street. His landlord recently presented him with new terms for his lease renewal: a nearly 40% increase in the monthly base rent plus $50,000 upfront. Seong’s situation isn’t unique. The Korean Apparel Manufacturers Assn. estimates that 80% of its 700 members are paying key money amounting to more than $20 million a year in the 20-block area.
Landlords say it’s legal. Some tenants suspect it’s not, claiming that the fees don’t show up in lease documents and are often requested in cash. But in the rough-and-tumble district, where demand for prime space often outstrips supply and English isn’t the first language, no one has challenged the long-standing practice. Until now.
Seong and another wholesaler have refused to pay the key money and filed lawsuits against their landlords. In the process they’ve become celebrities in the tightknit Korean garment community, in which their countrymen dominate the district’s wholesale trade but not its property rolls.
“Someone had to speak out about this,” said Seong, whose case has made headlines in local Korean newspapers. “. . . I don’t mind paying rent and taxes and all those things. But this feels like extortion.”
A Willingness to Go Public
Whether he prevails in court remains to be seen. But the legal action signals a new willingness among immigrant merchants to go public with one of the district’s murky little secrets. It also underscores the eye-popping lease rates that can be found just blocks from skid row.
The steep price of admission might come as a surprise to many, considering there’s not much fashionable about the fashion district. This thicket of pot-holed streets, tired buildings and crabbed storefronts is worlds away from the runways of Paris and New York. But look behind the dogeared exterior and you can spot money being made out of whole cloth.
Southern California is the West Coast garment capital, with knitting mills, sewing operations and support services stretching from downtown to Orange County. But it’s the scruffy streets of the L.A. fashion district where bargain hunters come to shop. Which is why some bare-bones cubbyholes like Seong’s can command lease rates upward of $10 a square foot.
“There is an amazing amount of foot traffic in the area, and everyone is there to buy,” said David Zoraster, vice president of CB Richard Ellis’ appraisal division. “That’s what’s driving everything. Never mind what it looks like.”
Savvy consumers know deals can be found in the retail dens that dot Los Angeles Street and Santee Alley. But the really big bucks change hands along wholesale corridors such as 11th, 12th San Pedro streets and Maple Avenue, where more than 1,000 merchants do a thriving trade estimated to top $2 billion a year.
Here, wholesalers nest like birds of a feather according to their specialties: juniors, children’s clothing and so on. That makes it easier for their nationwide base of customers, which include mom-and-pop retailers, small chains and specialty clothiers, to comparison shop without hoofing all over the district.
Location is critical, according to real estate broker I. Hassan. He says wholesalers who try to make a go of it even a block or two from their specialty cluster are at a significant disadvantage.
“Everyone has their own little pocket. So a guy who is selling a junior line wants to be as close to that pocket as possible,” said Hassan, of Los Angeles-based Quantum Associates. “That’s where the buyers are. So he’s willing to pay a premium.”
Enter key money.
Named for the custom of compensating landlords for handing over the keys, the practice is popular in Asia and other parts of the world. It shows up sporadically in overheated U.S. markets. In parts of Silicon Valley, for example, landlords are demanding upfront stock options from dot-com tenants.
But nowhere is key money more enduring than the L.A. fashion district, where it has ebbed and flowed with the health of the area the better part of 30 years. The mid-’90s peso crisis, for example, saw key money evaporate along with many wholesalers’ export sales. But like bell-bottom pants and halter tops, it has resurfaced with a vengeance. Rumors of six-figure payments for some prime spaces abound.
Landlords defend key money as insurance in a cutthroat industry where companies routinely go out of business, leaving behind unpaid lease obligations. Pragmatists say it’s simply a case of demand exceeding supply in an immigrant district with low barriers to entry, where there are always scrappy newcomers willing to pay for a prime location.
“Nobody is holding a gun to their heads,” said Max Salter, a fashion district property owner who says he doesn’t charge key money but doesn’t condemn those who do. “[Tenants] can always move somewhere cheaper.”
But the wholesalers contend that it’s predatory behavior by property owners who know that tenants’ mobility is limited. They also suspect it’s a tax dodge for some landlords who, some merchants claim, pressure them to pay in cash and don’t provide receipts.
Others are frustrated that the amounts just keep getting bigger, fueling a boom-and-bust cycle that’s bad for the district.
Thus wholesaler Seong is looking to the American justice system to help rein in a practice he and others say has gotten out of hand. A soft-spoken, bespectacled 45-year-old with a youthful shock of black hair, Seong is uncomfortable with his newfound notoriety and the potential repercussions for his business.
“I’m a little bit nervous,” he said.
Still, he says he’s determined to do his small part to reform the system, even if it means becoming persona non grata to all the landlords in the district.
According to his complaint filed in Los Angeles Superior Court in January, Seong moved his company, the Blue Age, into a building at 11th and San Julian streets in the spring of 1997, after signing a three-year lease with an option for a three-year extension “at market rate.” He paid no key money to move into the site, which carried a base rent of $4,000 a month with a 5% annual rate hike. So he says he was stunned when his landlords, Elias Donay and Fereidoon Kangavari, informed him he’d have to pay $50,000 on top of a new base rent of $5,500 a month to remain beyond March 31, 2000.
Given the choice to pay up or move out, Seong sued, alleging that his contract rights had been violated. His complaint alleges that key money was never mentioned in the option clause and that the landlords’ request for a fat upfront payment amounts to “illegal, oppressive extortion.”
Byung Wook Kim, another wholesaler in the same building, filed a similar suit against Donay and Kangavari in May, alleging that the landlords “illegally and improperly” sought $60,000 in key money from him. Donay and Kangavari are attempting to evict him.
They declined to comment. But their attorney, Farid Novian, denies that they’ve done anything illegal. He said key money is a fact of life in the garment district and that the upfront compensation is well within the definition of “market rate” for the area. The Korean community may be casting Kim and Seong as crusaders, but Novian says they’re simply using the courts as leverage to cut a better lease deal for themselves.
Still, their public defiance has touched a nerve with other immigrant wholesalers, who contend that they too are being unfairly squeezed by other landlords in the district.
One merchant, speaking on the condition of anonymity, said he has paid nearly $100,000 in key money over an eight-year period. He said the annual payments were never incorporated into his formal lease document. His only receipt is his canceled checks. Another wholesaler said that she had to borrow much of her $35,000 key money from relatives. She said she made the recent payment in cash. No receipt.
“How can such a thing be legal?” asked Nam Ho Shin, president of the Korean Apparel Manufacturers Assn. “We want the courts to put a stop to this.”
But legal experts say that just because some landlords may be cheating on their taxes doesn’t mean that the key money itself is illegal. Indeed, area brokers say it’s an unusual but legitimate custom best governed by the laws of economics, not those of the courts.
Several new projects are under construction in the district that could help to stabilize rates.
But Seong isn’t taking any chances. He showed a visitor two of the crisp $100 bills that other merchants have begun tucking into his mail slot to help with legal expenses, along with notes in Korean urging him to stand tough.
“A lot of people are watching this case,” he said. “I can’t give up now.”
