While Buffalo leaders debate the risks and merits of helping the owners of the city’s tallest building, the downtown real estate market is already littered with examples of once-troubled buildings that faced dire circumstances but emerged under new ownership without taxpayer assistance.
From the Main Court and Rand buildings owned by David Sweet to the Tishman Building that is now being redeveloped by Hamister Group, some of the city’s best-known edifices have experienced financial challenges, usually caused by the departure of major tenants or financial difficulties of the owners.
Some have been foreclosed upon by the lenders after the building owners defaulted on loans, and then sold at auction. Some were turned back to lenders in lieu of foreclosure or were sold in a hurry to pay off the lender.
Others were included in bankruptcy proceedings, and eventually sold, after their owners sought court protection from creditors. And still others were sold in a regular “arms-length” transaction but at a level well below the asking price or previous value, as the market or their individual circumstances had deteriorated significantly.
Aside from routine tax breaks afforded to any building downtown, such as the old Empire Zone benefits, or state historic tax credits, none received extra government assistance. And all are fully functioning buildings again.
“We’ve never had government assistance on any of our buildings, because I don’t believe in it,” said David L. Sweet, president of Main Seneca Corp. “I never thought it was fair for the Sweet family to ask the taxpayers to help the Sweet family, so we’ve always done it on our own. We’ve never approached the [industrial development agency] for a nickel.”
The owners of the One HSBC Center tower and Key Center at Fountain Plaza have both talked of getting public-sector help to support their buildings and allow them time to find other tenants or convert to other uses. The tower will be 95 percent vacant by year’s end, after HSBC Bank USA and Phillips Lytle LLP leave, while KeyCenter may lose major tenant Delaware North Cos.
They say such assistance is critical to preventing the buildings from going into foreclosure or bankruptcy, and dragging down the market.
As it is, lease rates today in Buffalo are lower than they were several years ago, as they are in many parts of the country, including cities like Rochester, Binghamton, Cleveland, Columbus and Pittsburgh. But Buffalo’s average lease rates are not only higher than a year ago, at an average of $16.83, they’re also above the rates in Syracuse, Binghamton and Cleveland, and very close to that in Columbus, according to data from Cushman & Wakefield, a national commercial real estate firm associated with Pyramid Brokerage Co. in Buffalo.
Power of the free market
But rival building owners and developers say there’s plenty of precedent for letting the market process work.
• The Tishman Building at 10 Lafayette Square went dark after National Fuel Gas Co. moved out to its new headquarters in Amherst. Eventually, the Lillian Goldman trust that owned it slashed the price and found a willing buyer in The Hamister Group, without government help.
• Olympic Towers, a Buffalo office building at 300 Pearl St., was in receivership for a while after the bank took it back from its owners. It was originally built for $21 million, changed hands later for $2.5 million and then again for more than $6 million.
• The Guaranty Building at 140 Pearl St. went through foreclosure a couple of times before Hodgson Russ LLP bought it and renovated it for the law firm’s headquarters.
Moreover, they say, there’s even more opportunity to turn straggling facilities around today, simply because of the newfound construction and development activity in downtown.
“I don’t think there was ever a building built in Buffalo in the last 40 years without government assistance, because there was no confidence. Now there’s confidence, and that’s going to spill over to a lot of renovation,” said Anthony M. Kissling, president of Kissling Interests , a fourth-generation property developer from New York City who now owns about 1,000 apartments in Buffalo.
“There are tremendous positive things that are going on,” he said.
Sweet is credited with two of the biggest examples of buying a building out of foreclosure and then reviving it. Those were the Main Court Building at 438 Main St., and the Rand Building at 14 Lafayette Square, both of which are now “working out well,” he said.
Rand Building’s rebound
The Rand Building had been about 60 percent occupied and was facing the loss of other tenants when local investors, including Sheldon Berlow and Arthur Judelsohn, bought it in 1979. They repositioned it, retained tenants, and eventually brought occupancy up to 98 percent before selling it to investors from Brooklyn in 1985. Those buyers, however, paid a high price and borrowed far more than the building was worth. They wound up unable to afford it.
Sweet had just sold a property in another part of Buffalo for a short-term gain and was looking for a way to reinvest it. At the suggestion of a broker, he bought the Rand Building indirectly in December 1991, after purchasing the $5 million mortgage on it from Japan’s Daiwa Bank for $3 million. The loan was already in default, so he foreclosed and became the building owner.
Built in 1929, the 165,000-square-foot building, with 29 floors, was 75 percent occupied at that time, although it “came with some substantial tenants,” he said. Over the subsequent years, he worked to repopulate the rest, and brought occupancy to as high as 90 percent before a law firm moved to the Calumet Building – after getting assistance from the Erie County IDA for the move.
“I had a gripe about that,” Sweet said. “I felt that was a misuse of IDA money. All it did was facilitate the relocation of a downtown law firm from one downtown building to another, with no increase of jobs.”
The building is now 80 percent full, with tenants such as Townsquare Media, a claims administration firm, and several law firms.
“David Sweet has done a terrific job. The building is almost full. He’s a happy landlord,” Berlow said. “So it isn’t gloom and doom that a building was foreclosed on. That’s part of the whole game here.”
The Main Court Building was owned by a Canadian firm called Vandor, but the $5 million mortgage was held by Delaware North – which was also the biggest tenant with 75 percent of the space. When the Buffalo-based hospitality company’s lease came up for renewal, the building’s manager sought a rental rate that was nearly 50 percent higher than what Delaware North was willing to pay. So Delaware North moved out to its current home at KeyCenter at Fountain Plaza, leaving Vandor holding the bag with just 22 percent of the space occupied.
A last-minute buy
The building went into foreclosure and was put up for auction in July 2001, with an opening bid expected for more than $2 million.
“I wasn’t in the mood to buy anything more,” Sweet said.
But friends convinced him to at least take a tour an hour before the auction, and “I was so impressed with it, I said we should try to buy it.”
So he hustled to the bank, got a $300,000 check and “whizzed back to the auction” just “a few minutes before it started.” Bidding began at $2.5 million, with Delaware North attorneys and Sweet as the only bidders until the price reached $3 million, when the hospitality firm backed out. Another bidder then entered the fray. Sweet finally got it for $3.025 million.
Sweet marketed it as Class B office space, gradually regaining tenants and stability. Built in 1963 for Western Savings Bank, with 140,000 square feet of space, the 12-story Main Court is now 65 percent occupied, with tenants including the Erie County Bar Association, four departments of the Appellate Division of State Supreme Court, and a couple of law firms.
“We hit that at a very good time. The Statler was just closing down, so we got several good tenants from the Statler,” Sweet said. “So we were off and running. We got off to a blazing start and it kind of tailed off. But it’s in the black and we’ve got prospects for more occupancy.”
Main Place rebounds
Another major downtown building, Main Place Tower and Main Place Mall, suffered through the failure of the tower’s dominant tenant, Empire of America Federal Savings Bank, during the savings and loan crisis, leaving a significant hole in the the building’s occupancy. But the owner, Hammerson Group of Canada, had managed to release most of it by November 1995, when it was 70 percent occupied.
That’s when Patrick Hotung’s Violet Realty – now Main Place Liberty Group – bought the building for $15.5 million, far less than the $40 million it had been marketed for. It had sat “for a while” before Hotung came along.
Built in 1969, the tower and mall together have 650,000 square feet of space, with 26 floors. It’s now home to many technology and communications firms, but the mall has significant vacancies as retailers left the downtown area. The tower’s occupancy rate has remained about the same since the building purchase, as the space formerly occupied by New York Telephone and some other tenants has largely remained empty.
The total property also includes the connected 22-story Liberty Building.
“It’s financially in a better position today than it was back then,” said James Militello, president of J.R. Militello Realty, a Buffalo commercial real estate brokerage firm. “The property is doing very well. There was no need for any government interaction in that case.”
Kissling also bought his first major Buffalo building, Cathedral Place, out of foreclosure in September 2001, after law firm Damon & Morey moved out. He snapped up the 11-story, century-old building at 298 Main St. for $2.6 million from the lender, Chase Manhattan Bank, on the suggestion of a Chase loan “workout” specialist he knew and saw at a wedding.
“That’s how I got the building, just by dumb luck,” he chuckled.
At the time, the building was half-empty, but Kissling invested in tenant improvements and other upgrades, including new windows and a new air-conditioning system. Now, the second floor is fully rented, while there are “spotty vacancies on the third and fourth floors. The fifth and sixth, however, are completely vacant.
“The building’s in good shape,” he said. “It’s not like it’s been vacant for 10 years.”
Now, with the hustle and bustle picking up downtown, he’s planning to invest almost $7 million to renovate the 110,000-square-foot building by the winter of 2015 into a LEED-certified mixture of apartments and office space. About 40 percent of the costs will likely be financed through historic tax credits, which have also been using by many other downtown development projects, particularly Rocco Termini’s Hotel @ The Lafayette.
Cathedral Place also has benefited from Empire Zone tax breaks, but those are expiring soon. Kissling said he has applied for a $500,000 low-interest loan from the city, “but I don’t know if we’re going to get it” and “there’s nothing else we can get.”
“I have faith that things are going to turn around in Buffalo. It’s unbelievable what’s going on in that town,” he said. “The whole area’s going to improve. I have high hopes that Buffalo is going in the right direction, and I’m willing to take a shot. I may lose money for a while, but eventually, I’ll turn the corner and I’ve got a great asset,” he said.