Terminal Tower sold to K&D Group in $38.5 million deal; apartments planned for 12 floors
Terminal Tower, downtown Cleveland’s most iconic skyscraper, changed hands Thursday in a $38.5 million deal that will trigger a mixed-use redevelopment project and a major corporate headquarters move.
The K&D Group, Inc., bought the 52-story office building from Forest City Realty Trust, Inc., the homegrown, publicly traded company that owned Terminal Tower for 33 years. Now K&D plans to transform 12 of the tower’s lower floors into 293 apartments, in a project that could start in late 2018 and conclude in 2020.
The transaction marks a changing of the guard for a Cleveland landmark at a time of heightened interest and sales activity downtown.
The Millennia Companies of Valley View has a contract to buy Key Tower from an out-of-town, publicly traded seller later this year. Other buildings, including much of the Tower City Center complex surrounding Terminal Tower, have new owners who are chasing tenants or contemplating redevelopments. Pubic Square, refashioned as a more unified, greener park, sits at the center of the action, beckoning investors and passersby.
K&D, the region’s largest privately held owner and manager of apartments, expects to maintain Terminal Tower’s upper floors as offices. The observation deck still will be open on weekends during most of the year. The building’s broader, lower floors – four through 15 – will become one- and two-bedroom apartments, following the trend of turning challenging or obsolete downtown office space into housing.
“It’s pretty much a miracle,” Doug Price, K&D’s chief executive officer, said of the relatively swift timeline for concluding such a complicated deal at a multi-building, mixed-use complex where other transactions have taken much longer to close. The Plain Dealer first reported on the potential sale in May.
“Forest City was very good to work with,” Price said. “It was pretty smooth.”
The account, a playful personification of the tower and it’s lighting scheme, is merely under new management.
After markets closed Thursday, Forest City confirmed the details in a news release.
“We’re pleased to complete this sale, which aligns with our strategy of focusing our real estate portfolio on our major core markets, which include New York City; Washington, D.C.; Boston; Dallas; Denver; Los Angeles; and San Francisco,” David LaRue, the company’s president and chief executive, said in the news release.
The company bought Terminal Tower in 1983 and moved its headquarters into the building in 1997. Forest City launched a search for new corporate offices earlier this year. The real estate investment trust’s current space, roughly 250,000 square feet, is outdated, fragmented and too large for a business that has restructured dramatically since the recession of 2007 to 2009.
Now Forest City could fit into 150,000 to 180,000 square feet of more modern space. The company has looked at new construction and existing buildings, including Post Office Plaza, its only remaining asset at Tower City. An announcement about new digs is likely within the next few months.
“We have narrowed the list somewhat,” Jeff Linton, a spokesman for the company, said Thursday afternoon. “But we have not made a decision. We’re still going through a very thorough process, getting input from our own associates.”
As part of the deal with K&D, Forest City will continue to lease its current offices until mid-2018, with options to extend that lease if the relocation process takes longer.
Forest City’s pending move, combined with K&D’s residential redevelopment plan, made for an unusual transaction. It was tough to predict what value the buyer and seller would place on the property. And it’s no small feat to line up financing for a building that is set to lose its anchor tenant within two years.
“This wasn’t a building that was being purchased off a rate of return,” said Rico Pietro of Cushman & Wakefield | CRESCO Real Estate, who represented K&D in the acquisition. “This is an evaluation of what this property could be, and what it’s worth when it’s ultimately redone. … There’s still a ton of work to do to get this thing developed as the gold-standard housing product in the central business district.”
PNC Financial Services Group, Inc., provided the mortgage, Price said.
Between the purchase and the redevelopment work, Price put the total price tag of the Terminal Tower project at $100 million. K&D expects to seek federal and state historic preservation tax credits to assist with the renovations.
Forest City already employed historic tax credits for a four-year restoration and modernization project that wrapped up in 2010. But the lifespan of those credits is nearly done, making the building eligible again before K&D starts construction.
K&D plans to apply for property-tax abatement for the apartments – an incentive that Cleveland routinely grants for residential developments that meet certain green construction standards. The company also intends to ask Cleveland to approve tax-increment financing, which would redirect part of the new property-tax revenues created by the apartments to paying off debt. That arrangement, called a TIF, would apply only after the tax abatement burns off.
Price and K&D President Karen Paganini have hired Westlake Reed Leskosky of Cleveland, the architectural firm that previously worked with Forest City to study Terminal Tower’s potential as an apartment building. At this point, prices for the units haven’t been established. But they won’t be sky-high, Price said.
“If we can’t get decent rents there, I don’t know where we can get them,” he said of Terminal Tower, which was built in the 1920s and was the tallest building outside of New York City until the mid-1960s. “But we’re not going to stretch the market. We’re going to do something that’s not at the top of the market.”
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