Buying into L.A.

Special to The Times

Want to become an urban pioneer and buy one of the trendy converted lofts going up downtown?

You may have a wait. Downtown Los Angeles is on its way to becoming a rental market, with some 90% to 95% of new units set aside as rentals.

While developers and real estate experts predict the downtown residential market will eventually mature to become a mix of rental and for-sale properties, if you want to live in what is being called the "new" downtown, at least for now, you're going to have to rent.

Of the 8,000 housing units under construction, planned or proposed in downtown over the next few years -- many are loft conversions of historic buildings -- only three projects initially will be available for sale.

Why? Tax incentives for creating rental housing out of historic buildings, government subsidies for developing affordable rental housing and a skittishness by investors to bankroll a for-sale project in an unproven residential downtown, especially one that flat-lined during the recession of the 1990s.

And developers say they are choosing rental over purchase projects as a way to test Angelenos' commitment to the city's new urbanism. Will folks who normally don't venture east of La Cienega Boulevard pay rents downtown averaging $1,500 to $2,000 a month?

"First you have to prove that people are willing to pay that kind of money," said developer Tom Gilmore. "We had to prove the rental market was strong."

Gilmore, who recently converted three historic buildings in the city's core into rental loft units, thinks he's done that. The buildings -- the Continental, the Hellman and the San Fernando -- are part of a block of redevelopment Gilmore is undertaking known collectively as the Old Bank District bound by Main and Spring, 4th and 5th streets.

Based on full occupancy of those buildings -- some 230 units combined -- Gilmore now plans to convert the El Dorado Hotel on South Spring Street near 4th built in 1913, into 66 for-purchase loft-style condominiums.

"By the dozens," Gilmore said, tenants from the Old Bank District "are asking us to convert something to condos because they want to buy. The rental market is feeding the buying market."

Prices for the El Dorado condos will range from about $275,000 for a 1,000-square-foot unit to $450,000 for a high-end 1,500-square-foot unit, Gilmore said. The project will start construction late 2003 and will be ready for occupancy by mid-2004.

That's a long time for buyers to wait, according to Stephen May, who has sold residential housing downtown since 1989, including a few units at the Toy Warehouse Lofts, 20 loft condos that sold out almost immediately in late 2001 and early 2002.

May said he receives two to three calls a day from people wanting to purchase loft-style condos downtown. But there are few available.

"There is a market downtown for for-purchase property," May said. "There is a tremendous hunger for a residential downtown."

Currently, the only downtown for-sale project nearing completion is the Flower Street Lofts -- 91 loft-condos that are being converted out of an old UPS building in the 1100 block of Flower Street overlooking Staples Center.

"We took a leap of faith downtown," said Jeff Lee, principal of the Lee Group, which, along with Hollywood-based CIM Group, is developing the project.

Lee said the company researched other rental versus for-purchase markets around the country, and decided to go the for-purchase route, partially because that is the company's area of expertise but also because, he said, they felt the market would support it.

"We came to the conclusion that for-sale was the way to go," he said. "We are great believers of this city."

Yet, Lee said, it took inquiries at some 30 banks before the group could get financing because the project was deemed financially risky.

"There were a lot of banks that have been through the carnage of downtown years before," Lee said, referring to the recession of the early to mid-1990s that hit downtown especially hard with value losses in the condo market of 36.6% and commercial vacancy rates at a record 27%.

Prices for the Flower Street Lofts will range from the mid-$300,000s for a 1,500-square-foot two-bedroom, two-bath unit to a penthouse unit of 2,570 square feet for $1,095,000. Since mid-February, more than half the units have been sold. Occupancy is expected this summer.

"There will be more for-sale projects," Lee said. "We probably just beat the for-sale guys in the market."

Lee, like others, believes that eventually some portion of the downtown residential real estate market will turn over to condos. He predicts 30% or more, especially if the rental market gets over-saturated and interest rates stay low, a positive factor for the overall picture of reviving downtown.

"The more homeownership you have the better," he said. "Homeownership brings long-term stakeholders in that push the city for better parks and keep the police on their toes."

The third project planned for for-purchase sale is the Grand Avenue Lofts, 125 lofts also developed by CIM Group and the Lee Group. Construction on that project will begin this summer.

Whether for rental or purchase, Los Angeles is following other major cities nationwide, including Houston, Dallas, Phoenix and San Diego, in efforts to transform dying urban cores into burgeoning residential living areas with bustling marketplaces.

"It's important to have a strong heart of the city," said Carol Schatz, president and chief executive of the Central City Assn., downtown's leading business advocacy group. "As long as L.A. is defined by two theme parks, a beach and a sign, it can't be a great city."

The catalyst for residential change downtown came in 1999 when the city adopted the Adaptive Reuse Ordinance, designed to streamline the conversion of older, vacant commercial buildings into residential units by relaxing building requirements.

While some debate about what comes first in reviving a downtown, residential or retail, Schatz believes housing was the missing element to get the process started.

"We knew that housing was the critical issue," she said. "We had to wait for the market and the economic downturn to come back so we could push it." According to Schatz, who frequently visits other cities across the nation and takes notes on their development, Los Angeles should look to other revitalized downtowns to understand how the market will emerge in time.

In Phoenix, downtown revival started with the rental market in the late 1990s, but now there is more emphasis on for-sale units. Experts in Dallas predict rentals will dominate; and San Diego, Denver and Houston have a mix.

While the success of for-sale lofts downtown, such as the Toy Warehouse Lofts and Flower Street Lofts, has already shown the market is ready to convert, it can't, for at least a while.

According to a 2002 survey of 35 downtown projects in development conducted by the Los Angeles Conservancy, more than 80% of the developments are depending on federal rehabilitation tax credits for subsidization, which require that a building be rental property for at least five years after completion. "But everyone knows converting those units into for-sale property is the next step," said Trudi Sandmeier, with the conservancy.

Either way, the change is historic.

"These buildings have been vacant since Bunker Hill was built off," said Sandmeier, referring to the 1960s and 1970s when a bustling downtown started shifting from the city's core to the shiny, new skyscrapers of Bunker Hill. They "have been sitting there waiting for the next thing to come along."

Allison B. Cohen can be reached at a.cohen@ix.netcom.com.

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