When real estate developers Brian Albert and Mott Smith set out to open a multitenant commercial kitchen, they knew it would take a little flour and a lot of innovation with public health codes.
In fact, their attempt to create an unusual operation to bolster local food entrepreneurs meant working with Los Angeles County’s Public Health Department to reinterpret its code. They created guidelines that might become law before year’s end.
“No one wants to spend a year going through plan check and inspections,” Smith said of the permit application process for a standalone food operator, which can take six to 12 months and then cost several thousand dollars annually.
But Smith and Albert helped whittle that down to several hundred dollars and only a few weeks for their tenants at Lincoln Heights shared-kitchen complex L.A. Prep and anyone else willing to set up a similar model.
L.A. Prep opened its 56,000-square-foot rehabbed brick warehouse in April, and its 54 spaces – dedicated to one renter each – are now 85 percent leased. Ranging in size from a large storage unit to a roomy one-bedroom apartment, the spaces come with basics such as a sink and ventilation hood, and are further outfitted by each tenant.
Renters run the gamut from premarket Kombucha cocktail maker Ferm Fatale to local baking operations for Oakland chain Blue Bottle Coffee. L.A. Prep’s sweet spot, however, is small food operators trying to scale up. These growing meal delivery services and clarified-butter makers face major roadblocks because unlike a furniture shop or T-shirt supplier, they’re dealing with public health. They’re also part of a blossoming specialty foods market that saw $109 billion in U.S. sales last year, according to a recent report by Mintel International and the Specialty Food Association.
And as much as some of these growing entrepreneurs might need access to cash, their biggest hurdle might be jumping through regulatory hoops.
“A lot of people talk about how do we invest in and support small businesses,” said Tom De Simone, chief executive of Genesis LA, a community development financial institution that helped finance L.A. Prep. “What this project proves is it’s not always about getting the end user or borrower a loan.”
From scratch
While grappling with regulatory hurdles might sound mind numbing, Albert and Smith have made it their business. The duo launched Lincoln Heights real estate development firm Civic Enterprise Development in 2003 and carved out a niche innovating around business complexities on profitable, socially conscious projects.
“It’s a nightmare but also an opportunity,” said Albert, adding that he and Smith took this tack partly because they lacked other developers’ big balance sheets.
“We have to create value,” Smith said.
Several years ago, a restaurateur friend told them how hard it was for local food entrepreneurs to scale up and get their goods to market, a conversation that planted the seeds for L.A. Prep.
They spoke with small food makers and the larger clients some of them might serve, such as grocers, to better understand the issues and these businesses’ needs. Smith and Albert discovered many of these mom-and-pop operations either couldn’t get out of their homes or were forced to work in a gray market, renting space hourly in communal commercial kitchens, many of which are not fully regulated.
If these small operators wanted to establish their own space, it meant navigating a byzantine maze of state and local regulations, a process that could cost thousands of dollars while possibly taking a year or more.
Test kitchen
Smith and Albert came up with a solution: a shared facility where each business gets its own dedicated kitchen complete with lock and key. Some amenities are shared, such as refrigerated, frozen and dry storage space; loading docks; and changing rooms, though tenants’ goods stay separate.
The co-developers found their warehouse and in early 2013 approached the health department to figure out a way to meet the agency’s standards while making the approval process less onerous for their tenants.
Luckily, the state’s cottage food law had just passed, allowing certain foods to be made in private homes and sold to the public. That process had primed the county department to re-examine regulations a little higher up the chain.
“It was a full discussion about how we can work together to protect public health and at the same time foster the innovation that this business model requires,” said Angelo Bellomo, director of the environmental health division for the Department of Public Health.
L.A. Prep’s final hurdle was lining up the financing for this untested model, another steep climb. Smith and Albert needed about $18 million and got about $6 million from investors using federal tax credits meant to be deployed in job-producing projects in low-income areas.
But those credits hinged on L.A. Prep securing an additional $11 million in debt, which was hard to come by due to the speculative model and unsigned leases that would likely be held by fledgling businesses, said Genesis LA’s De Simone.
But De Simone’s group saw it as an opportunity partly because several years earlier it had invested in a nonprofit Pasadena kitchen renting by the hour. The project had been successful, even developing a wait list. It also served the smallest startups, which would eventually need a larger dedicated place to lease, such as L.A. Prep.
Genesis LA signed on with a $1.5 million loan triggering interest from other backers.
Cooking with gas
Albert and Smith said L.A. Prep is now profitable.
Rents aren’t cheap. They average about $3,000 a month and go as high as $9,000 for largest tenants. But rent also includes communal office and meeting space as well as health and safety fees to cover services such as laundry, trash and bulk necessities including smocks and soap.
Wholesale, retail or combination licenses are available and tenants can quickly slide into a larger space if needed. That came in handy for Hima Pandya’s Tin Star Foods, which makes ghee: clarified butter often found in Indian cooking.
Pandya was already churning out 5,000 pounds of ghee a month when she moved into a small L.A. Prep unit in April. But she suddenly got a big order and needed to triple her production.
“We got a quarter-of-a-million-dollar purchase order and had to deliver in eight weeks. … It wasn’t an option to be in a small space anymore,” Pandya said. Fortunately, a larger unit was available.
“L.A. Prep really came at the right time,” she said. “There was no plan B in L.A.”
