L.A. Prep: A Brilliant Real Estate Solution for Food Companies

Thank you for granting TPR an interview and tour of L.A. Prep, which opened its 56,000-square-foot space in Lincoln Heights in April of last year. Let’s begin with you sharing the L.A. Prep marketplace’s raison d’etre.

Mott Smith: The idea is to be a real-estate solution for food companies. Our goal with L.A. Prep was to solve the regulatory and facilities problem for small and medium-sized food companies. That’s what we’ve done, we think.

When my partner Brian Albert and I looked at what was happening in the food world, we saw that there was an amazing explosion of energy, particularly at the entry level and just above the entry level. But entrepreneurs were hitting a wall: licensing and facilities.

It’s really easy to start a food company, but it’s very difficult to grow a food company. Let’s say you’re doing great making salsa out of an hourly kitchen and selling at farmers’ markets. Then a major buyer like Whole Foods says, “Your salsa’s delicious—I want to carry it.” You might think you’ve hit the jackpot. But then you realize that to comply with wholesale standards, which are a whole different category than even commercial standards for food processing, you’re looking at about $2-500,000 of investment and up to a year of regulatory process. That’s very difficult to deal with if you’re selling $2 tubs of salsa wholesale.

Share the evolution of the L.A. Prep idea. 

Civic Enterprise Development cut its teeth doing urban infill. Our business strategy has always been regulatory innovation. Because we have good relationships with public officials, and because we like to blaze trails that make the city more vital and help small businesses, we were attracted to helping first-time homebuyers. We thus were the first company to come to market with a small-lot subdivision. We’ve done a lot of work on parking reform, as well as work to make it easier to open bars and restaurants.

L.A. Prep was a natural outgrowth of that. We saw the market getting tighter for infill housing—the recession made it nearly impossible for small people to compete. Food was an area where we didn’t see anybody else playing, and so we saw a great opportunity to solve a big problem that nobody else had worked on yet.

How did Civic Enterprise Development acquire this 56,000-square-foot facility in Lincoln Heights? Who owned it and how was this facility previously used?

Our building was built in the late 1940s as the headquarters for the Sani-Gard toilet-seat cover company.  In the 1980s, it had a variety of retail and warehouse uses. In 2001, Joachim Splichal bought it to be his central commissary kitchen. But after getting a better deal on space Downtown, he sold it to Meruelo Maddox Properties.  When they went under, Evoq Properties got the building along with the rest of the Meruelo portfolio. We purchased it from Evoq in early 2014.

When we saw this building, we loved everything about it. It was the right size. It was in an up-and-coming neighborhood that has food-access issues. We saw lots of opportunities to help create jobs here. Most importantly for us, it’s a block from the Metro Gold Line. We put all those pieces together. After spending a year looking for the right property, this one was clearly it.

What’s L.A. Prep’s business model?

When people think about L.A. Prep, they immediately think it’s an incubator. It’s specifically not an incubator. It’s a real-estate project. L.A. Prep is to food what an apartment building is to housing. It’s a place where you, as a food company, can have your own kitchen with a door that locks so nobody messes with your stuff when you go home at night. You can scale up or scale down as you like by renting extra facilities like storage, refrigerated space, and frozen space.

Our income stream is rent. We don’t participate in the businesses aside from friendly assistance and referrals.

Is L.A. Prep fully rented up? Who, by example, are the tenants?

We’re very pleased that we exceeded our pro forma occupancy within six months after opening. Right now, we’re over 90 percent leased. The tenants range from non-profits like the great L.A. Kitchen to for-profits, from start-ups like Semolina Artisanal Pasta to mid-range companies like 4th & Heart Ghee, to local favorites like Joan’s on Third Santa Monica, to national companies like Bluebottle Coffee and Beyond Meat. Two-thirds of our businesses are woman-owned and a third are minority-owned. The project has brought 200 new jobs to the community.

Why do you believe that your L.A. Prep tenants, small and large, have chosen to rent?

When we initially conceptualized the building, we thought this was going to be for early-stage food companies that had outgrown the incubators and needed their first full-time space. What we found, consistent with the range of tenants I just mentioned, is that we offer something that everybody needs, no matter what stage of development they’re at.

Companies have come here for four reasons:

First, thanks to the great staff at the L.A. County Department of Public Health, we’ve been able to help rework both the regulations and process for wholesale licensing for food companies.  Because of that, at L.A. Prep, we’ve turned licensing from an open-ended, potentially year-long slog into literally an over-the-counter process. We’ve done all the hard work of getting everything in the building approved. When you sign your lease here, you can show up at the county the next day and walk out with your health license. That’s completely unprecedented.

Second, most food companies want to focus on their food business. They’re not interested in worrying about plumbing, electrical, and HVAC. We take care of all of that for them. When you are a tenant here, whether you are a start-up, non-profit, or for-profit, you can call us and say, “I need a new hookup for my new mixer.” Next week, it’ll be there. That’s the extent of your involvement.

The third reason why people are here is the flexibility. Generally, if you build out your own standalone facility, you have to make a lot of decisions about space and design that you’re going to have to live with for a long time. Here, you can change direction in six months at relatively little cost, based on where your particular business is actually going. We afford tenants the ability to not know what they’re going to be when they grow up, but to rest assured that if they’ve got five pathways to success, they can take any of them here and prosper.

The final thing that draws people to L.A. Prep is the community. For a lot of small food businesses, people are working in isolation, in the middle of the night, in an often not-exactly-legal rental kitchen. Here, they’re surrounded by other people doing similar stuff. They learn from each other. They share information. They share employees. If there’s a great worker, that person will be able to pick up as many shifts as they want.

Is L.A. Prep the first of its kind? Did you look and find another model? Did you have an array of consultants ready to design “the” solution? How did you start? 

When we started working on this project, we looked everywhere for a model, and we couldn’t find one. I’m reminded of something I once read in the Harvard Business Review: When you want something innovative done, hire somebody who’s never done it before. That was easy for us, because nobody had done this before, so everyone was new.

Our first stop in figuring out how to do this was the L.A. County Department of Public Health. They were great partners. The explosion of small food businesses has presented a huge regulatory and staffing problem for them. You can’t inspect all of the new food businesses that have cropped up. For the county, putting these new businesses in a highly professional, well managed facility was very appealing. They can send out two inspectors and take care of 50 businesses in a day.

The county gave us some initial guidance about how the facility would need to be structured in order to make it work. Then we brought on a great kitchen designer who’s done a lot of retail and wholesale facilities, “Fast Eddie” Navarette of FE Designs. He created a prototype. Once we found our building, we brought in the fantastic architectural firm Shlemmer Algaze Associates (SAA)—people who’ve designed nuclear sub factories, raceways, and other unprecedented facilities. In three days of intense work with the entire team around a CAD monitor, the thing had been designed.

We then brought on a very creative contractor, Howard Building Corporation (HBC), because they’re very resourceful and great at dealing with the complex coordination that had to happen here. Finally, we had the best owner’s rep in the business, Dave Stafford—very level-headed and well organized. That team made it work, and they were completely awesome. 

And the money? Review how you financed a real estate development that’s unproven.

Our joke is that L.A. Prep was two developers without balance sheets, a project without comps, and tenants without credit. That was our pitch to all the potential financing sources!

At the end of the day, though, what got this done was a recognition that the market was real and that we were going to deliver, coupled with some pretty courageous and visionary financing sources.   

The first challenge was establishing the market. To do that, we reached out to members of FoodCentricity, a leading food manufacturers’ group we worked with closely in the early stages. Overnight we had 100 signed LOIs for people who wanted space in the building, so we were pretty convinced that there were legs to this.

The bulk of our financing came through a New Markets Tax Credit Structure.  Our lawyer, Michael Williamson of Buchalter Nemer, introduced us to New Market Tax Credits, a federal program to fund loans for jobs-producing uses in low-income census tracts. After eight years trying to convince us to do a NMTC deal, it finally made sense here. With NMTC, we were able to finance 90 percent of the project costs. We raised about $2 million of traditional equity to complete the capital stack.

We are incredibly grateful to the L.A. Development Fund and Urban America, who provided their tax credit allocation to our project.

Genesis L.A. played a critical role, as well. We needed $11 million as part of the tax credit structure. This was a big challenge because, as excited as so many potential lenders were about our deal, it was such a new concept that nobody wanted to pull the trigger on it. But Genesis L.A., under the leadership of Tom De Simone, was the lynchpin. Tom called me up and said, “I know you need $11 million. I can’t do that, but I can lend you $1.5 million. And I predict that because I said ‘yes,’ everybody on the fence is going to say ‘yes,’ too.”

It turned out that he was completely right. Capital Impact Partners, the California Endowment, and Raza Development Fund came in. Tom catalyzed the whole thing. 

We’re doing this interview while there are visitors from Minnesota inquiring about how to replicate this in their state. Is that common?

Yes. We’ve gotten calls from all over the country and even Europe—Britain and Holland—from people looking at this as a model.

Our goal is actually to develop and own these in a variety of locations. We got a call from the mayor’s office in Chicago inviting us to do one there, and we’re very pleased with that. We’ve made a decision that our next one will be in Chicago. We will also probably do another in Los Angeles because the market here is deep enough.

Non-profits that are looking for guidance often inquire. We’re happy to meet and share our knowledge with anybody, because our goal is to blaze the trail. If we can help change the way cities work and the way it feels to be a small food company, we want to do it. 

Let’s close the interview with a shout out to one of your largest tenants, L.A. Kitchen, which has a 20-year lease. Why does L.A. Prep work as a headquarters for them? 

Paula Daniels, the founding chairman of the LA Food Policy Council, introduced us to Robert Egger, L.A. Kitchen’s founder. Robert and I had a drink together, and we decided that we were brothers from another mother. After my business partner met him, we all decided we would work together, whatever it took.

L.A. Prep works for them because they came to LA with a million-dollar grant to work on senior hunger and food waste. They are program experts, having run the DC Central Kitchen for 25 years, and they didn’t want to be landlords. It’s the same story with all of our tenants. They don’t want to be real-estate owners. They want to run their food company. It works for L.A. Kitchen because they didn’t have to build this facility.

It works for us for a whole bunch of reasons.

One is that L.A. Kitchen provided some stability on our pro forma and made financing easier initially.

Second, they help solve a major challenge for our other tenants. When Whole Foods calls and says, “I’m ready to go—I need 10,000 units in three weeks,” we can give you the storage space. You’ve got the production capacity. But now you need labor.

L.A. Kitchen is training former felons and people leaving foster care in culinary arts. Any given month, there might be 30 or 40 trainees here who really want to work and who’ve got their food handler cards. Because L.A. Kitchen is here, those other tenants can call them up and say, “I need 15 of your best workers fulltime for the next two weeks.” They’re onsite already.

Simply stated: Having them here is a great synergy.