The Fashion Industry is Helping to Fuel Growth of Los Angeles Creative Industries

fashion industry

The fashion industry may have sparked the birth of creative office in Downtown Los Angeles.  Nasty Gal, for example, an internet retailer of tween wear, took 50,000 in the Pacific Mutual building, a historic Downtown Los Angeles office building recently converted to creative office. The Fashion industry maintains a long history in Downtown that was dwindling but may not be rekindled on the creative side.

Surprisingly, PMI still continues to get demand from fashion  manufacturers for creative offices in Culver City, another Los Angeles outlet for the fashion design industry.

Many smaller consumer good companies today are more design, media, and marketing companies than they are manufacturers.  These companies design, prototype, brand and market their products from their creative offices in Los Angeles and outsource their manufacturing (overseas) and distribution.

Joel Kotin warns in his opinion article for the Orange County Register below (August 10, 2014) that Los Angeles is losing its dominance as a media center and is also thereby falling in its ranking of top world global cities.

However, Los Angeles may be growing as a design and marketing center for the consumer good industry because Los Angeles is rich in creative types who can design,create, market, brand, and sell.

 

Joel Kotkin: L.A. hanging on as a top global city – The Orange County Register.

Debt Service Coverage Ratios And Re-Margining Covenants in Commercial Loans

There has been an alarming increase in lenders demanding debt service coverage ratios, and/or the right to demand loan pay downs if a property’s appraised valued declines.  This is also called” re-margining.”  If an owner’s cash flow  or property’s value declines beyond a certain point, lenders want the right to require owners to make forced pay downs on their loans or post additional security.  These pay downs will likely come at a time when the owner is unable to obtain alternative financing and when his cash resources will already  be strained by falling occupancy as well as  rents and increases in tenant improvement and leasing costs.   This is similar to forcing a homeowner to pay down his loan if he loses his job.

The lender’s right to require pay downs can occur even if the owner is current on all his loan payments and obligations.  Such a provision demands even lower leverage and outsized capital reserves from a conservative investor.  Where will the equity for a loan pay down come from?

Office values are extremely volatile and have exhibited declines ranging from 40% to 70% during recession periods.  Defaults and foreclosures will only multiply if banks require owners to make loan pay downs during a recession.   Conservative investors should resist such clauses.