The Defiant Tenant
RICHARD MERUELO WALKED OUT OF COURT one day last month looking like he needed some air. The 41-year-old land banker, who owns more downtown real estate than anyone, had just been accused of real estate fraud and telling lies in a long-standing fight over an $11 million Skid Row warehouse. He faced allegations of illegally subletting the property for Hollywood shoots, including an episode of Fear Factor, and falsely representing himself as the owner.
It was the last thing the maverick developer wanted to hear during a big week where life outside the courthouse seemed to be going his way. Days earlier, he had filed a public stock offering with the Securities and Exchange Commission, meaning he was preparing to lure investors to his empire. The day after his SEC filing, the L.A. Times ran a profile of him that read like a product of Meruelo’s PR machine, describing him as a visionary on whose shoulders the future of downtown development rests. Surprisingly, the article made no mention of this impending trial or the SEC filing, in which Meruelo described himself as “socially responsible.”
Now he was being told he made things up.
“That was painful,” Meruelo said, exhaling and rolling his eyes as he thought about opposing lawyer Douglas Honig’s portrayal of him as a dishonest brat. For 45 minutes, Honig had flayed Meruelo, practically mocking him for his alleged false statements. Honig’s clients, who own the warehouse in question, said they told Meruelo he could not sublease property he was leasing from them while he was in escrow to buy the property. Yet Meruelo represented himself as the owner and rented the property for film shoots, then denied it was a rental. Even his unlicensed real estate broker had called it a rental.
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Meantime, his SEC statement, which showed him $33 million in debt, contradicted documents he filed in court that showed him $166 million in the black, as he argued for his right to buy the property, the sale of which had been jeopardized by his alleged violation of the lease agreement. Something just didn’t add up. “Richard, you were just accused of being shady, what do you have to say?” the Weekly asked. The talkative and blunt developer — a man with a seemingly endless line of credit and more than 100 downtown parcels to his name — paused for a split second. “[Honig’s] a mouthpiece in a cheap suit,” Meruelo, a son of Cuban immigrants, replied.
That Meruelo would be fond of gangster speak is not surprising. Given his entrepreneurial drive and his real estate empire that stretches from Miami to L.A., a certain amount of loose talk follows him around, sometimes raising the specter of dirty money. “Every time we had a Miami or a Cuban connection, people’s first thought was, ‘Oh, no, how did these guys get here?’?” he told a Times reporter.
What is troubling is that the prince of L.A. development, the socially responsible visionary, could be the subject of allegations that contrast so sharply with the notion of good faith in business dealings. Meruelo plays in the big leagues. He donated $197,000 to Mayor Antonio Villaraigosa’s campaign and later received a $150 million loan from the California Public Employees’ Retirement System. Since 2004 he’s purchased 50 properties for more than $329 million, much of it undeveloped. Credit and debt come with the turf of such prolific purchasing, and political ties are all part of the game.
Yet what was he doing in court defending a deal in which he had claimed he owned a building he doesn’t actually own?
Why was he arguing he didn’t sublease the property to film companies when his own SEC statement attributes a small portion of his income to “temporarily leasing our properties” to the film industry?
And why did he file documents in court that show him to have a personal net worth of $166 million, while he’s informing potential investors that he needs their money to meet existing financial obligations?
“Different properties, different dates, different accounting firm and different methods of accounting,” said Meruelo when pressed by the L.A. Weekly for an explanation of his conflicting financial statements. Honig was having none of it. “Mr. Meruelo wants to play bigtime developer,” Honig said, with a husky New York accent. “Sometimes he just can’t do what he wants to do. So he changes his story. But [real estate transactions] require you to come to the table with clean hands. And Mr. Meruelo’s hands need to be washed.”
THE CONTROVERSY THAT LANDED MERUELO in Los Angeles Superior Court last month arose from a purchase agreement in August 2004. Meruelo agreed to pay $8 million for the 126,000-square-foot former Salvation Army warehouse at 801 East Seventh Street, in the heart of Skid Row. He said he planned to tear it down, as the value, which has increased to $11 million, is in the land. His SEC filing, which lists the property as one of his “small tenant projects,” says his plan is for a “multi-tenant manufacturing and distribution facility.”
The contract called for a $250,000 deposit and a 14-month escrow, during which Meruelo could rent the property under a standard industrial/commercial single-tenant lease. Rent was $100,000 a month. Before the ink was dry, however, Meruelo got antsy. He decided to act as though he owned the place.
Evidence at the three-day trial, which ended September 27, showed that Meruelo immediately signed on with real estate developer and film-location broker Richard Korngute, who hooked him up with production companies interested in filming TV shows, movies and commercials in the cavernous warehouse surrounded by Skid Row’s urine-soaked streets. Korngute, who testified he is not a licensed broker, but is able to associate with one “as needed,” would get 40 percent of the rental fee. Meruelo would keep 60 percent. The owner of the property would get nothing. “We’re studio friendly,” said Meruelo. “We’ve done hundreds of these agreements.”
Problem was, Meruelo’s lease prohibited him from subletting the property without written consent from the real owner. So when the real owners, Michael and Marc Asheghian, drove by one day and saw a location shoot in progress, they got pissed off. When they drove by another day and saw an illegal recycling center on their property, and broken windows that led to abatement notices from the city, they tried to cancel the sale. Meruelo sued the Asheghians to force them to stick to the deal. He says they got seller’s remorse and were looking to force him out of escrow. “It was a scheme,” he said.
If the Asheghians were looking for a way out of the deal, Meruelo gave them an opening they could drive a truck through. He usually embraces the mantra “better to ask for forgiveness than permission.” In this case he asked for both: Evidence showed that Meruelo’s general counsel, Todd Nielson, had asked the Asheghians to amend the original lease to allow for subleasing, yet he was rebuffed; then Meruelo went ahead with his plan to rent out the property to film companies anyway.
On the first day of trial, Honig grilled both Meruelo and Nielson. They testified to having nothing to do with negotiating the film-location agreements, which were handled by an employee of Alameda Produce Group, a Meruelo company. “Isn’t it true that Mr. Nielson tried to renegotiate the lease to allow for subleasing, and the owner said no?” Honig asked Meruelo. “And after being told no, you [subleased] the property to film companies?”
Honig listed the film and TV projects at 801 East Seventh Street: Happy Landing Productions shot scenes for the feature film Stick It, starring Jeff Bridges; Believe Media shot a commercial for Reese’s Puffs cereal; Lock and Key Productions shot an episode of Fear Factor involving 55-gallon vats of water, jars of syrup and worms. “I never thought of it [as subleasing],” Meruelo said, arguing that the film agreements were licenses, not leases, in spite of contracts containing the words “lease” and “rental.” Not to mention the documents Meruelo filed with the SEC. “Why does your SEC statement call them leases?” Honig asked.
Then, the film agreements show Alameda Produce as the owner. “That’s a false statement, is it not?” Honig asked. To which Meruelo, referring to himself in the third person, replied, “I don’t believe so. Alameda Produce is owned by Richard Meruelo and provides property management services to properties owned by limited-liability companies. Richard Meruelo doesn’t buy under his own name. But if you are asking who was the owner of title to the property, it was not Richard Meruelo — not yet.”
On the second day, Korngute and Meruelo’s property manager, John Durham, testified that when they hammered out the film contracts, they thought Meruelo already owned the property. Why? “He handed me the keys,” Durham said. David Crockett, a producer of the film Stick It, said that he thought so too. After Korngute testified that he’s done hundreds of location deals with Meruelo, he told the Weekly he was surprised to find Meruelo was not the owner. “Had I known, I would have investigated further,” he said. In a letter to Fear Factor after the shoot, Korngute wrote, “I’m glad no one got hurt.”
Meruelo’s financial representations raised further questions. Mitchell Foon, vice president of East West Bank, one of Meruelo’s loyal lenders, testified that he had not looked closely at Meruelo’s SEC filing, and that he had not been apprised of more than $60 million in Meruelo property purchases in the last year. “We approved a loan just two weeks ago for $5 million,” Foon said, vouching for Meruelo’s credit. “We have a couple more in progress.” At that point in the hearing, Miguel Echemendia, Meruelo’s chief financial officer, was caught coaching Foon from across the room, causing the judge to issue a warning.
Meruelo’s lawyer, Gary Nevers, argued that the Asheghians had no right to cancel the sale, because Meruelo was the only party with that right. Nevers said that even if Meruelo violated the lease, there was no provision to kick him out of escrow on a building he intended to buy. “Then let’s see the green,” Honig replied, pointing to the SEC filing in which Meruelo is asking investors to get him out of debt. “Sometimes that’s how rich people get rich: other people’s money. They don’t want to pay for it themselves.”
Judge Elizabeth Grimes is expected to rule in the coming weeks on whether Meruelo can buy the property, or whether his maverick ways got the better of him.
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