With the ink dried on Thursday, Nov. 10, for a breakthrough financing deal, the downtown-based Ratkovich Co. and Jerico Development in San Pedro were able to turn a public outreach event for the West Harbor project on Saturday, Nov. 12, into a groundbreaking.
Work has now begun on the project to redevelop the Los Angeles Waterfront into a new retail and entertainment hub — 10-plus years in the making — thanks to $90 million of construction financing from Petros PACE Finance, a Texas-based lender for a public energy efficiency lending program, and Brentwood-based Parkview Financial.
Investor equity was previously provided by Osprey Investors, bringing the total raised for the first phase of West Harbor to $155 million.
Jones Lang LaSalle Inc. arranged the financing structure for the deal, which is considered a coup of sorts in the current environment, as investors are largely holding off on looking at new retail development.
“I’m proud of our team for their hard work in securing an accretive financing package that will make West Harbor the heart of the L.A. Waterfront,” Ratkovich Chief Executive Brian Saenger said in a statement. “We are in a time of economic uncertainty for commercial real estate, but that is not the case at West Harbor.”
The team is aiming for a grand opening in 2024.
Transforming the area
Billed as a “transformative revitalization” and “first-of-its-kind destination,” the 42-acre West Harbor is slated to completely revamp the Ports O’ Call site in San Pedro, bringing in a slate of dining and entertainment options to the South Bay. Eateries will include the first-ever satellite location of Hollywood’s restaurant Yamashiro, a King and Queen Cantina and a market hall for fast-casual dining. Bark Social, a membership-based off-leash dog park bar and café, is also slated to come, as well as a 6,200-seat amphitheater.
Saenger, in an interview, said the initiative was “part of the larger redevelopment of the harbor area,” which has also included shoring up the San Pedro Bay Port Complex and development around anchors such as the Aquarium of the Pacific in Long Beach.
“I think people will not only be excited to come to West Harbor and see what we have to offer, but also be exposed to everything around the Port of Los Angeles,” he said.
The deal signed on Nov. 10 has Parkview lending $35 million at typical private rates, while Petros is loaning $55 million through the Commercial Property Assessed Clean Energy, or C-PACE, financing program. Saenger said the blended interest rate between the two is in the “single digits,” though he declined to provide exact figures.
“We came to an agreement six months ago,” Brad Ross, a managing partner and head of originations for Parkview Financial, said. “Then we had a lot of wood to chop with structure and legal and getting to a point where everyone was ready to close.”
Ross said West Harbor is a “one-of-a-kind project that is irreplaceable,” which is what ultimately sold his team.
“It came about over a long period of time,” he said. “They originally came to me and I said, ‘Ah, retail construction, no thanks.’ It’s been a challenged part of the market even before Covid.”
Leasing the project
It was the developers’ hard work that persuaded the financers, evidently.
Ross said West Harbor had “tremendous pre-leasing” for tenants at the project, and Saenger said the Port of Los Angeles — which owns the property and leases it to Ratkovich under a 66-year ground lease — will by 2025 have invested more than $1 billion in the L.A.
Waterfront area, which includes San Pedro and Wilmington adjacent to and complementary of the West Harbor site since 2005.
Even after underwriting the loan “especially conservatively,” it remained viable for Parkview, Ross said.
“This is a serious project, just to get it to the point where they could show it to us. By the time we saw it, they had 70% of the retail space pre-leased. That’s unheard of,” Ross said. “There was also a tremendous investment over the last decade from the city, the port and the borrower — time and money that showed a huge commitment to this project.”
Andy Meyer, the managing partner of Petros PACE Finance, lauded Ratkovich and Jerico for being an accomplished development team that brought a unique project to the table.
“By the time we closed, a majority of the space was pre-leased, which got everybody excited about the viability and success of the transaction,” said Meyer, who oversees the originations business for his firm and was the primary point of contact for negotiations.
C-PACE financing provides fixed rate, low-interest financing for projects that meet one of four criteria — demonstrating energy efficiency, water efficiency, producing renewable energy, and including resiliency attributes such as seismic bracing or retrofitting. West Harbor includes a plethora of energy and water-efficient fixtures, Saenger said.
The nature of the financing makes it repayable twice a year through property tax assessments, a trait that also makes it transferable with any change in property — or in this case, lease — ownership. According to Meyer, C-PACE financing is secured by a special assessment lien, such as a tax lien, and has a senior lien priority above the mortgage. This gives the lender better security in the property, he said.
“They were able to take advantage of interest rates prior to the numerous increases over the last 12 months,” Meyer added.
The $55 million financing deal for West Harbor represents a relatively large C-PACE loan for Petros, according to Meyer. Their largest loan was for $153 million, for the Black Desert Resort in Utah.
Part of putting the West Harbor deal together was getting both Parkview and the Port of L.A. comfortable with getting into a C-PACE deal. Unlike typical financing deals, the lenders had to record against the leasehold interest, since Ratkovich is the lessee rather than the property owner, creating “structurally complex transactions,” per Meyer.
On top of that, they had to contend with the rise in construction material costs, the periodic raising of interest rates by the Federal Reserve and the economic fallout of the Russian invasion of Ukraine. This was not an insurmountable task, given Ratkovich’s and Jerico’s 10-year partnership with the Port of L.A.
“The team worked hard and had that strong relationship where we were able to get the lenders up to speed and answer questions. That just took time and patience. Even with all those things happening, we were able to get this across the finish line,” Saenger said.
“Along the way, we’ve had to work with the Port on extending timelines and deadlines, andall of those have been great, small wins, but they all culminated into last Thursday, when we secured those two loans, and then when we had the groundbreaking on Saturday.”
Ross said this deal marks Parkview’s first with Ratkovich. “Their reputation precedes them as sponsors and developers,” he said. “I’ve certainly known about Ratkovich as long as I’ve been in Los Angeles real estate, and then I’ve come to know Jerico a bit, which is really impressive.”
West Harbor Win Los Angeles Business Journal
By Zane Hill