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Sunday, March 01, 2009 5:56 PM


Commercial Real Estate Mutiny In Downtown LA


Numerous merchants in LA's Grand Central Market did not pay their February rents for more than two weeks. The merchants were protesting high rents and advertising fees as described by Los Angeles DownTown in Mutiny at the Market.

A tenants' mutiny at Grand Central Market was resolved last week after a group of merchants who had withheld their February rents came to an agreement with the landlord and paid up.

As part of the resolution with landlord The Yellin Company, rents will be lowered and advertising fees charged to the tenants will be eliminated.

Adele Yellin, president of the Yellin Company, said that the move will lower costs for the 40 merchants.

"We do understand the pressure that our tenants are under in these times and we've taken steps to reduce their rent by eliminating the advertising budget," Yellin said.

The situation had been bubbling for months, and began to come to a head in late January. That is when Ralph Leech, an attorney representing some of the Grand Central Market tenants, sent a letter to the Yellin Company citing the deteriorating economy and asking for a 30% reduction in rents and a discontinuation of the monthly publicity charge that pays for advertising the market.

The crisis quickly escalated, as most of the tenants withheld the rents that were due Feb. 1. That led the Yellin Company to send notices to those who had not paid, threatening eviction.

Last week, both sides said they had reached a tentative agreement that should alleviate some of the financial woes.

Yellin and tenants who spoke with Downtown News said there will not be an-across-the-board 30% reduction, but instead the landlord will deal with each tenant individually. The monthly publicity fee paid by the merchants, which can vary from a few hundred to more than $1,000 a month, was removed from their lease requirements.

"The businesses are very slow. People are using lines of credit to pay rent. It's a bad situation, but hopefully we'll survive. We just need help," said Robina Sookasya, owner of Kabab and More, a Mediterranean food vendor.
The mass mutiny at Grand Central Market provides a strong hint at what's coming.

With rising unemployment and falling discretionary spending, the economy is not coming back anytime soon. Thus, tapping credit lines to pay rent is a tactic guaranteed to fail. Yet, the economic situation is such that using lines to pay bills will continue until every cent of those credit lines are used up. After all, what vendor will voluntarily go out of business now?

Those lines of credit will eventually be defaulted on and that in turn will sink the regional banks who made the loans.

This crisis was "resolved" for now, but how many more rounds like this can the tenants take? Equally important, how many more rounds like this can the Yellin Company take? Next, multiply this scene by every similar market in the US. A conclusion is not hard to reach: A massive fallout on commercial real estate is right around the corner.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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