Palmer 'Re-Gentrified' Downtown LA, Despite Doubters and Design Criticism

David Abel: Geoff, let’s begin with the Medici, one of your first housing development projects in Downtown Los Angeles’s urban center.

Geoff Palmer: In 1989, we built the Skyline Terrace off of College and Alpine—198 units. We then hit social unrest Downtown: 1,500 fires. The building went 30 percent dark. Things were really bleak Downtown. Everything was shuttered. There had been 32 million square feet of office built, and everybody was leaving as fast as they could.

Things didn’t turn until between ’95 and ’97. By then, occupancies were coming back up. There was less than a 1 percent vacancy in market-rate units. High-rise rents were about $1.48 to $1.60. There were 13,000 tax credit units. Everybody was trying to create Downtown as a ghetto, and it was my concept to re-gentrify it.

I had conceived of the Medici over a period of time. When the Thomas Cadillac site became available, I jumped on it. I had to compete against a couple of parking lot operators. The hardest part was convincing the brokers that I was serious. I got the banks to tell the broker to stand down, and we made the deal.

David Abel: What do you wish to build and for what market—the middle market?

Geoff Palmer: In our first Downtown project, Skyline Terrace near Dodger Stadium, which was completed in 1989, there was a lot of student activity—about 25-30 percent—and they wanted to be closer to Downtown.

I then picked a hillside, promontory site at 8th and Bixel with views and started planning the Medici. The new Staples Center was just starting and I knew that was going to be a success. I conceived of a park on 8th Street, with five-story buildings over a podium terracing down the hill. I wanted to make it somewhat contemporary inside but still very classic.

I’d been Downtown earlier in the year and watched Shakespeare in the Park. I was marveling at the monumental buildings and thinking about how I’d love to build something monumental, but also really classy. Barney’s in Beverly Hills was newly designed and everybody was fascinated with that Italian design. I said: This is what I want to build Downtown.

I took the pictures for these two buildings down to Con Howe, the planning director.

He said, “I don’t believe it.”

I said, “You’re gonna believe it when I show you the plans.”

They approved us in 120 days and gave us a building permit in 10 days. The planning department approved us 4-0. They thought we’d be unsuccessful and they could get social housing.

Once we were successful, they were freaked out.

They said, “Oh my God, look what we’ve allowed to happen.”

That was the start of my troubles.

 

David Abel: As you have noted, you invested in the Medici not as a novice. What in your development experience prompted you—in the late ’90’s post-riots—to begin planning what would become 600 apartments, in multiple phases? 

Geoff Palmer: I had 25 years’ experience by the time I got to Downtown.

When you’re out in the hinterlands, like Santa Clarita, you’re doing General Plan changes, conditional-use permits and tract maps; you’re building huge infrastructure and river levees; you’re putting in roads. You’re moving millions of yards of dirt. Downtown, you’ve got finished streets with all the utilities there. All you have to do is design a building and build it, with a podium. It was sort of a no-brainer.

David Abel: What’s now in your development pipeline? 

Geoff Palmer: We’re under construction on 650 units at Olympic and Broadway—a six-story and 10-story building. We’re just finishing 526 units on Temple and Figueroa.

There was a fire along the freeway, and that was our building, unfortunately. It went down in December and we’re now reframing it. The first building opened in May and we’re already 80 percent occupied. We’re getting $2.80 a foot there, so that’s doing very well.

The second building will open up sometime after the first of the year and we’ll be finished by May. Then we will be building across the way on Temple and Beaudry.

We bought the Bank of America data center. It’s 9.6 acres, and we have it entitled for 1,437 units. That’ll be next year’s project. 

David Abel: You’ve been criticized for suburban building designs that are internally—rather than street—focused. Your reaction to such criticism?  

Geoff Palmer: I don’t think of our buildings as internally focused. What does that mean? Is a high-rise externally focused?

Actually, we have a lot more open space in our buildings than anybody else building Downtown. All of our buildings have balconies out to the street. We have exterior retail areas.

We have not had great success in renting retail Downtown. We’ve been criticized for that. It’s not easy to get small entrepreneurs to take a risk to open up a pizza place or a coffee shop. We’re building on the periphery.

People say, “He doesn’t want to rent.” Of course I want to rent. I’ve got fulltime people trying to do it. We’ve got 27,000 square feet of space at Lorenzo that we’re trying to lease and we don’t have one space open yet.

David Abel: Would it be correct to assume that, when you started the Medici, you truly wanted to build a beachhead fortress from city street life—because a safe, secure fortress was thought, by even skeptics, as essential to entice both capital and tenants to Downtown? Indeed, the Medici had a homeless camp on the other side of 8th Street. 

Geoff Palmer: Right. Everybody thought I was crazy. I said: “I have a view of Citicorp Plaza.” I was between that, Aetna Insurance, and Arco Towers.

I said, “I think we can build apartments there. There are 20 restaurants across the streets and the Metro line is right there. I think these things are going to rent.”

At the time, there were only 1,800 market-rate units. Jona Goldrich had 1,200 of them, and he was freaked out: “You’re going to add 30 percent to the market? You’re going to kill us.”

And I said, “Don’t worry. They’ll come.”

David Abel: Clearly, your housing projects—the Medici, Orsini and the other Renaissance Collection complexes—have changed Downtown. The growth of the residential community here is materially different than when you started.

Geoff Palmer: Others would argue that it’s the adaptive reuse, but I agree with you. 

David Abel: Now, you’ve built and maintain the Lorenzo: the largest student housing project in the West, if not in the country. 

Geoff Palmer: If not in the world.

David Abel: Describe the inspiration, site, and business model of the Lorenzo.

Geoff Palmer: First, we had nine acres to work with.

Downtown, we had a lot of students. All the students said: “We love what you’re doing. Can you build something like this closer to campus?”

The cost of land here is very expensive, so the only way we could make it work was if we rented per the bed. We paid $70 million for the dirt from the hospital.

We were not the highest bidder, by the way. But we were going to build them 300 parking spaces for free that they have in perpetuity.

We tried to get as much density as we could. We had a plan for 1,030-something units, and we had offered a 44-story high-rise that the city thought would be more appropriate at 12 stories. We accepted it. We haven’t built it yet, but we have land for it. Our environmental documents are still good, so we intend to build it.

David Abel: Elaborate on the Lorenzo’s amenities and the security. 

Geoff Palmer: I built this more like a courtyard with an amphitheater and a half-acre of soccer field. The intent was to make it look like St. Mark’s Square in Venice, and I think we’ve accomplished that.

It’s also very academic. Abbeys and universities usually have beautiful columnated courtyards, and I wanted to mimic that.

It cost $330 million to build the project and took us five years to get it entitled.

We put in professional indoor basketball courts, jogging tracks, outdoor sand volleyball courts, four swimming pools, and five grilling stations on the roof. We built a hundred-seat movie theater. We have spas, saunas, steams, yoga classes, pilates classes, dancing classes, room service from Central Kitchen, and a maid service.

Our concierge package system is automated. Kids can pick up their packages 24/7. They get a buzz on their phone, they use their bar code, a door opens, and they get their package.

We have GPS for all of their shuttles, which run every 10 minutes to campus and back. We have 5,000 kids riding on the shuttle every day, with five shuttles going constantly to USC and back—door-to-door.

It’s a very expensive model, at about $21,000 a unit to manage. We run it as a five-star hotel. We’ve got $4.5 million in payroll burden. There’s $1.2 million in security. There’s 700-some thousand dollars in shuttles. There’s $668,000 in Internet.

We’re giving a lot of value. It’s all-inclusive. You pay one fee, and you get everything—all your utilities, Internet, TV, shuttles, and concierge service.

David Abel: Are you going to do 10 of these?

Geoff Palmer: No, because it’s not profitable.

We’ll make money on the Lorenzo because we have very low debt in it. I wrote a big check to make sure of that. But it’s only a six-cap today. That’s not what we had intended. We thought we were going to come up with a nine, going to 10.

We don’t feel we can charge a whole lot more—maybe in time, but not right now. We would rather have it full.

We’ve got 3,300 kids here now. Capacity is 3,648. After 200 more, we have an obligation to do five percent affordable, which we’re going to do. That takes up 200 beds’ equivalent because it’s 46 units. So we only have maybe 150 beds short of being full. But we’re statistically full, because you can’t be 100 percent full with student housing.

David Abel: What is your relationship with the universities and the marketplace you serve here? 

Geoff Palmer: We service many different schools. Anybody can rent here if you’re a fulltime student.

We rent to USC primarily—probably 89 percent—and we have FIDM, Loyola Law School, Relativity School of TV, SMC, UCLA (believe it or not), City College, Doheny Nursing School, Marymount, and the Trade Tech. There’s 30,000 kids who go to school right next door.

I pay $50,000 to be the exclusive off-campus housing provider for USC. But I don’t do it through USC. I do it through Fox Sports, which has another concession with them. Does USC like that? No, of course not. We’re competing with them. We’re taking $40 million a year in revenue that they think they should get. We have 8 percent of their student body. I invite them over, and they don’t want to get involved with us.

David Abel: Have you now saturated the student housing market?

Geoff Palmer: I don’t know that we’ve saturated the market, but again, we’ve got 8 percent of the student body here. Nobody thought we’d get that as quickly as we did. This is our third year.

We’ll get 20 percent return on our equity this year, but that’s not what’s typical. In the past, I’ve been very successful. Today you have to put about 25 percent equity in a deal—it’s typically, in there for three to five years max. I’m able to finance out 100 percent, and I get an infinite return. Through the magic of depreciation, we haven’t paid federal taxes for the last 30 years.

I have a model that the Lorenzo doesn’t meet. I’ve still got cash invested in this deal. For me, this is a 50/50 deal: 50 percent expenses, 50 percent profit. In my conventional deals, it’s 30 percent expenses, 70 percent profit. I like 30/70 more than I like 50/50.

David Abel: What should the developers and financiers in the audience learn from the Lorenzo’s success?

Geoff Palmer: They’re not going to take the risk that I did. Nobody’s ever going to build this again. This is the Taj Mahal. They’re not going to spend $330 million.

Given what I’ve learned here, I wouldn’t do it again.

It would only work in a major university where there were barriers to entry and there was a huge need for it. You don’t want to go somewhere where it’s easy to build student housing across the street. Here, there are barriers.

We’re doing fine with this model because it’s low-leverage, but it’s not what we had hoped it’d be. Am I happy with what I’ve got? Yeah! It’s a beautiful facility.

At some time in the future, if we choose to, we could turn it into conventional housing. As the Figueroa Corridor comes this way, it might make more sense to do that.

David Abel: Geoff, as clearly one of the most prolific and successful housing developers in Los Angeles, why are you still developing at such scale?

Geoff Palmer: Quite simply, I don’t like paying taxes!

But as I said, I’m a third-generation builder. I enjoy what I’m doing. If somebody asked me, “What’s your favorite deal?” I’d say it’s the next one I’m doing.

Audience Questions

Frances Anderton: You’ve received a lot of flak in recent years as the big bad guy of development in LA. How do you feel about it? 

Geoff Palmer: I’m a developer. I’m not in the PR business. I’m not a politician, so I don’t wake up every morning and try to respond to Curbed LA. They’re the ones that try to give me the moniker of “worst developer.”

For poverty advocates, their concern is the gentrification, which we symbolize. They’re all upset about it.

But the business community realizes what we’ve done. We’ve created prosperous areas out of what were formerly blighted and decayed areas. If you remember what LA looked like 15 years ago Downtown, it looked like Sarajevo—just bombed out.

We took risks that other people wouldn’t, and we pounded on the table and said: “People, come on Downtown! Let’s get going!”

We had ULI in our garden in 2000. We said, “Look what we’ve done, look how quickly we’ve done it, and look how accommodating the city was.”

They all said, “You’re right,” and started buying land Downtown. They bid the land up. I bought it at $31 a foot, they then paid $125 and bid it up to $300 or $500 a foot before it crashed again. Then it went back down to $50 a foot. Now it’s bid up to about $900 a foot.

Audience member: This morning, the City Attorney expressed interest in writing a new ordinance regarding inclusionary zoning. What is your take, and has your stance changed since you fought tooth and nail? 

Geoff Palmer: Let’s talk about the State of California. The law hasn’t changed. They’ve tried three times to change it in the legislature, and they haven’t been successful.

We don’t need social engineering. Why is it that these people think that real-estate developers should give 15 percent of their profits away? They don’t ask it of grocery stores, gas stations, or haberdasheries. They only ask real-estate developers.

Why do these social engineers think that private individuals should be subsidizing these people? Where do they get these progressive ideas? It’s totally un-American.

Fortunately, we have a rule of law. We went to the state Supreme Court, and we were upheld.

In fact, the city tried to extort money out of me that they shouldn’t have by going and appealing it. I told them, “Pound sand.” I said, “You’ve got a 17-percent chance you’re going to lose it.”

Aides from the ACLU told them, “Don’t even attempt it.” They did it anyway because they’re so arrogant—and they lost in the appeal court, and in the state Supreme Court.

Three times they tried to win it at the legislature. The last time, they did it. It was approved by the Democratic legislature, but the Democratic governor vetoed it. Go figure. Because he’d been a mayor of Oakland, he said it has a chilling effect on development and we shouldn’t be doing this.

Now, the state Supreme Court did approve inclusionary housing for for-sale housing, but not rental housing—because that’s de facto rent control, which is in violation of state law. If they can get the votes in the legislature, maybe it’ll happen.

I think it’s immoral. “Thou shalt not steal.” And certainly not by force of violence. 

Elana Eden: On a similar topic, could you talk about adjustments that were made to this project as a result of your experiences with the UNIDAD Coalition, and whether those experiences might influence future projects? 

Geoff Palmer: That was more corruption. I can only tell you that we were bludgeoned into having to deal with the social justice groups.

We got one of these pro bono law firms out of San Francisco making hundred-page comments to our EIR.

We didn’t want to litigate it because we were paying interest on $70 million at the time. We thought “We gotta get this thing going.”

We hired Latham & Watkins to cut a deal with these guys, and we ended up giving them a lot: 5 percent affordable; an 8,000-square-foot medical clinic, which we’ve fully built out; plus a bunch of scholarships and living wages. It cost about $40 million including the capitalized lost income from the affordable units.

Is that social justice—that I had to pay $40 million because the State Bar has enabled these people to extract from us, because there was some issue of discretion?

I learned that I will not buy land that requires discretion. Now, everything requires discretion. There’s no by-right anymore. But I’m not going to take something that I’ve got to rezone, where they can come in and bludgeon me again.

They keep moving the goalposts. They make it more difficult and more expensive. That’s another reason why this thing hasn’t been as successful as it should have been.