Walk into the Real Office Centers (ROC) portion of The Vine in Irvine, and it’s business as usual. Entrepreneurs and others related to the OC startup ecosystem who lease space from Newport Beach-based ROC in the Irvine Co.-owned building, are either working in the open co-working spaces or private offices. There’s a farmers market in one of the parking areas. Some ROC members are eating outside on the back patio.
The tableau of normality belies the legal turmoil that’s been roiling ROC in the past few weeks and erupted late last month with the eviction of ROC—and consequently its subleasees—from a building in Santa Monica. ROC was evicted based on allegations by landlord Hudson Pacific Properties that it had not paid rent for April or May.
The Santa Monica eviction is apparently not an isolated event.
The Business Journal has confirmed that Irvine Co. has filed five unlawful-detainer lawsuits in Orange County Superior Court against ROC. Two other Irvine Co. lawsuits against ROC have been filed for the same reason for San Diego-based properties. If a tenant doesn’t voluntarily move out after a landlord has properly given them the required notice, the landlord can evict the tenant. But first, the landlord must file an unlawful detainer lawsuit in superior court.
The next step for the five OC lawsuits is a June 12 trial date in Orange County Superior Court, although both sides say they’re trying to work out an amicable solution before that.
The eviction and lawsuits are significant because co-working has become a trend for entrepreneurs nationwide, and OC is no exception. Co-working provides a more casual, open work environment and perks, such as beer on tap and monthly networking events. Millennials flock to co-working spaces in droves. ROC is just one of the co-working landlords that are part of the OC startup scene but likely still the biggest.
ROC Chief Executive Ron McElroy told the Business Journal last week that the lawsuits are a result of ROC being in “a very aggressive expansion mode with the expectation of securing a significant raise through an investment banking firm.”
“We had extended ourselves financially well beyond our normal operating budget,” he said. “That coupled with the continued negative drag from the hampered [Santa Monica eviction] site and taking an inordinate amount of time—seven months—to secure a permit to renovate our 1541 Ocean site in Santa Monica, (resulted in) sustaining huge losses from those two Santa Monica properties.”
McElroy confirmed he hasn’t paid rent for April and May because of the aforementioned issues, in addition to losses sustained at a couple of other “nonperforming” projects in San Diego, as well as problems ROC encountered at a building it formerly occupied in the Airport Business Center in Irvine.
ROC-in in OC at First
ROC was one of the first co-working spaces to open its doors and beer taps in OC. It opened its first location here in 2011. At its height, ROC had six locations in OC and 13 altogether, including San Diego, Los Angeles and Honolulu. It currently has four in OC: The Vine, the Irvine Spectrum, Newport Beach and Newport Center, according to its website.
ROC occupies approximately 21,628 square feet at The Vine at 5151 California Ave. in University Research Park and uses an outdoor area in the back for networking events, pitch contests, investor forums and social events.
Its entry-level membership, which includes resources such as a mailing address, access to events, and as-needed space rental, begins at $75 per month, ROC Chief Sales Officer Pat Ryan previously told the Business Journal. The cost of a co-working space at all of its locations starts at $125 per month. Private offices start at $500 per month.
Santa Monica Eviction
The eviction notice at ROC’s building at 604 Arizona in Santa Monica put the company on notice that its lease was no longer viable as of May 22, which the Los Angeles Business Journal, our sister publication, first reported. ROC was forced to relinquish possession of the 44,000-square-foot building. Hudson Pacific declined to disclose how much the rent is.
Ryan said ROC subleased the Santa Monica building to about 50 tenants, a mixture of private offices and co-working spaces. Hudson Pacific, as with any ROC landlord, has no direct lease arrangements with the various tenants that ROC subleases to.
Ryan emailed a statement to the Orange County Business Journal, saying the eviction was the result of ongoing disputes with Hudson Pacific.
“The cost of the protracted litigation, as well as what ROC perceived as interference from Hudson, resulted in ROC’s inability to hold on to the premises,” the statement said. In a phone conversation, Ryan declined to elaborate on what kind of interference he was referring to.
The statement goes on to say that ROC attempted to work out a smooth transition of the building’s operations to Hudson, but that the latter rejected that and decided to “summarily take over the building.”
The statement also said that the eviction should not affect ROC’s other operations, including its other Santa Monica location at 1541 Ocean Ave.
Hudson gave ROC until May 31 to move its possessions out of the 604 Arizona building.
McElroy said that until a scheduled trial date based on Hudson Pacific’s unlawful detainer lawsuit, Hudson Pacific and its attorneys gave ROC “every indication that they wanted to preserve the ongoing operation intact.” On the Friday before that, however, ROC’s attorney received notice from Hudson’s attorney that Hudson wanted the premises completely vacated, McElroy said.
“The entire handover could have been very smooth and without much fanfare if Hudson wanted it to happen that way,” he said.
Hudson Pacific issued the following statement: “This matter solely concerns ROC’s failure to pay its rent to Hudson and, as a result, the court awarded a judgment to Hudson … ROC’s innocent members, including many hardworking entrepreneurs, are also unfortunate victims. Hudson will be pursuing all its available remedies in this matter.”
This came on the heels of ROC pulling out of a 15-year lease in March for 27,000 square feet at Atlas Capital Group’s ROW DTLA in downtown L.A.’s industrial district, a space that was partially built out, the Los Angeles Business Journal reported.
McElroy told the OC Business Journal that ROC sustained a loss at the ROW building, with financing that it had expected being pulled after the project started.
“That, along with the other losses in L.A., caused a bit of a snowball effect with the rest of the operation,” he said.
OC Scenario
Irvine Co. provided the following statement regarding ROC: “We are in discussions with ROC to see if we can get these matters settled.”
McElroy said ROC’s attorneys are communicating daily with Irvine Co. attorneys.
“We are diligently working towards a short-term fix but also a long-term fix to continue operating the centers, or in a couple of cases, to allow for the continuation of the operations under other management,” he said.
One leasee of ROC’s at The Vine, Petersen Walrod, said he felt “scared” when he heard that ROC was in hot water for not paying its rent.
“For me, I don’t have that much stuff here, so not so concerned with logistics,” he said during an interview outside The Vine last week. “But there’s a community of people here. … I don’t think you can get a solution by just moving everyone to a different place. That would just disperse people to the wind.”
Walrod has been a tenant of ROC’s for about two years with a desk in an open area of the co-working space. He co-founded Qidian, which offers workshops and individual coaching, with his father, Wallace Walrod, who’s been in charge of research at the OC Business Council since 1997.
“ROC is one of the most important spaces in the startup scene here, and losing this (property) would limit that scene,” Petersen Walrod said.
A former ROC tenant who got the rug pulled out from under him in OC is attorney Mark Devore, a solo practitioner criminal defense attorney. He had been a long-term tenant in a building owned by Irvine Co. ROC took over his floor in 2015. He first got a notice that ROC would no longer operate the shared-office suite he had been occupying since 2002 at 18662 MacArthur in Irvine, known as the Airport Business Center, as of October.
He was OK with that since his lease only went until August, he said. But then, out of the blue, on March 17, he got an email that he and all the other tenants had to vacate the premises by April 17. Devore said ROC made no concessions to any of the long-term tenants. And once Devore decided to move to a non-ROC building, he said ROC stopped answering his questions. The last week he was there, he said, ROC did not provide reception or phone answering, even though he had paid for those.
“They were totally silent on the issue, no warning,” he said. “I wouldn’t know if UPS delivered something … as any packages … would just be left at an empty front desk.”
He said he believes the only reason he got his full security deposit back is because he’s an attorney. “I would never do business with them again,” Devore said.
McElroy did not respond to those specific allegations by the Business Journal’s deadline.
ROC’s lease at the Airport Business Center expired, an Irvine Co. spokesperson said. It was not evicted from that location.
Irvine Co. is refurbishing the Airport Business Center buildings into a creative-office property called The Launch. The renovations are expected to be done by the end of the year, based on Irvine Co.’s website.
Irvine Co. Lawsuits
The lawsuit focusing on The Vine is indicative of all Irvine Co. lawsuits against ROC. That particular lawsuit was filed in March. It delineates that Irvine Co. and ROC originally entered into a lease in August 2014. After some amendments to the lease, it was established that the lease would expire in 2024. ROC paid a cash security deposit of $57,910.
During the 12-month period from July 2016 to June 2017, ROC’s share of the operating expenses was $11,556 per month.
The lawsuit states that as of Feb. 16, ROC had failed to pay portions of its rental charges in full, including basic rent for September and November last year. The total it was in arrears at that time was approximately $76,000. That same day, Irvine Co. served ROC with a three-day notice to pay the back rent or vacate.
On March 3, ROC paid Irvine Co. approximately $57,000, which it directed the company to apply in part to that month’s rent and the remainder to a monthly promissory note ROC owes Irvine Co. in the amount of $3,500 per month approximately, according to the lawsuit.
The lawsuit is seeking immediate possession of the premises, the unpaid rent amount of approximately $76,000, forfeiture of ROC’s security deposit, and damages attributable to ROC’s “unlawful dentition of the premises” at a rate of approximately $1,777 per day from April 1 to the (court’s) date of judgment, among other things.
