As Buffalo goes through its biggest real estate boom in decades, one dark cloud hangs over the revival: the prospect that downtown’s tallest building could soon have as much as 38 stories of empty office space.

While the owners of One HSBC Center make the case for public money to renovate and revive the building, some of their real estate rivals are starting to make the opposite case: Let it fail.

The outcome of the argument could have a big effect on whether Buffalo’s boom grows or fails. Seneca One Realty, which owns the building, warns of damage to the entire downtown commercial market if the building were foreclosed upon and sold, suggesting that a new owner could desperately slash rents to lure tenants from other buildings. That, in turn, could cause a downward spiral for older office facilities.

But increasingly, rival building owners, developers and brokers say the use of any taxpayer money would constitute an unfair public subsidy of one building and owner over others in town, artificially driving down rental rates and creating an uneven playing field.

Though no one says so, there could be a measure of self-interest at work as well. If the building is sold out of bankruptcy, the price may be low enough to make it affordable for a developer to buy and renovate – and make a good deal of money.

“I don’t see why there’s any need for the government to get involved,” said Jim Militello, president of J.R. Militello Realty. “Should we write checks to every landlord to help them keep the lights on?”

The tower could be 95 percent vacant within a year, after its two dominant tenants move out by December. That would leave the New York City owners without the revenue stream to keep up the building’s monthly mortgage payments, not to mention unable to meet a $75 million, one-time “balloon” payment due in January 2015.

A panel of out-of-town land experts in March said a “public-private partnership” would be necessary to achieve a turnaround by converting the tower to other uses.

That drew the ire of rival building owners, developers and brokers.

“Let the building be foreclosed. We don’t care,” said Carl Paladino, founder and chairman of Ellicott Development Co., the biggest private property owner in the city. “If the owners made a bad investment, they should suffer the consequences.”

Others concur.

“Not a nickel of taxpayer money should be spent to bail out a developer or a bank in that type of a situation,” said Sheldon Berlow, a longtime Buffalo broker now at Pyramid Brokerage Co. of Buffalo. “For the taxpayer to subsidize the mortgagee or the investor, both of whom made errors, is preposterous.”

But supporters say some public support is critical to keep the landmark from “going dark” and falling into foreclosure, citing its prime location and massive size. It has been assessed at $84 million, and it generates property taxes of $2.4 million to $3.6 million a year, plus fees to help support the Buffalo Place downtown improvement district.

“It’s a worthwhile building to do it for, only because of the size,” said Greg Oehler, chief operating officer of Hunt Commercial Real Estate, which represents Seneca One. “You can’t just leave it sitting there vacant.”

Instead, they say, the building should face regular market forces – foreclosure or bankruptcy.

A unique scale

The debate over the fate of One HSBC Center is part of the bigger ongoing battle over government’s role in private-sector development, and it takes on more significance because of the tower’s prominent position as the tallest privately owned building in the state, outside of New York City. It also sits on the edge of the Canalside project, and its difficulties come just as construction and development on both the waterfront and the Medical Campus reach a fever pitch.

“You will not uncover any building or situation in the past that would even come close in comparison to the HSBC Center going dark,” said Clarke Thrasher, the Hunt broker who handles lease negotiations for the tower.

Numerous buildings downtown have gone through bankruptcy. Among those are the Olympic Towers, the Rand Building, the Main Court Building, Cathedral Place, Main Place Tower, KeyCenter, the Tishman Building and the Guaranty Building.

“The market and law have this process, and it works and is fair,” said David Schiller, associate broker and director of sales at Pyramid. “Let the market work, and it will repair itself.”

The 10-year loan on the tower – originally for $83 million when Seneca One bought the building in 2005 – is part of a mortgage-backed investment security that was packaged and sold by Goldman Sachs Group to investors. A total of 186 loans, backed by 203 properties nationwide, are included in the package, but the HSBC loan is one of the 15 largest.

In March, Fitch Ratings downgraded the investment, citing 46 loans as worsening problems that could cause losses. The leading cause of concern was the HSBC tower loan, as Fitch noted the impending vacancy and lack of excess cash flow. Additionally, the ratings agency reported, Seneca One and HSBC Bank USA are in arbitration over the bank’s failure to pay supplemental charges other than just the rent.

“Fitch said it will continue to monitor the tenancy and leasing status of the property.

Given the situation, the national panel of six real estate experts, convened here by the Urban Land Institute on behalf of the city and Seneca One, backed a strategy to convert the office tower into a mixed-use building with condominiums, a hotel, office space, retail space, a restaurant and an observation deck.

They said that plan would have a less devastating impact on the community and could be done much more quickly than restocking the building with smaller office tenants. It could also have a broader public appeal, by tapping into waterfront redevelopment.

“We think the conversion of the building could make it a destination,” said Seneca One Chief Operating Officer Stephen Fitzmaurice.

But such a conversion is also more expensive, the real estate panel said, so a public-private partnership was proposed.

“Perhaps those opposed to some form of public-private effort are not thinking ahead about how difficult the un-managed process will be,” said Charles Long, of Oakland, Calif., who led the Urban Land Institute panel. “If the decision is to postpone action, it will be much harder and more expensive to tackle the problems later.”

Even some critics concede support may be necessary. “It’s not going to happen on private funding, without public assistance,” said Robert P. Strell, president of MBA Consulting & Appraisal Co. “... Look around at all the projects in Buffalo. How many are without public funding? You don’t see any.”

Yet opponents insist it should not be the role of the government to rescue the private sector – a position supported by Howard Zemsky, co-chairman of the state’s Western New York Regional Economic Development Council.

“People make investments, take risk and seek reward. Sometimes it works out; sometimes it doesn’t. That’s OK,” said Zemsky, who is also managing partner of Larkin Development Group, owner of the Larkin at Exchange Building. “The government’s job here is not to bail out the owner.”