Friday, January 18, 2013
4 questions about Ameritrust & county HQ deal
On Tuesday night, the county council is likely to vote on executive Ed FitzGerald’s proposal to unload the skyscraper albatross and get a brand-new county headquarters in the deal.
Optimism is high. Crain’s Cleveland Business staffers sat in on the same Dec. 11 meeting with FitzGerald as I did, and a Crain’s editorial (subscription required) has called the proposal “a splendid opportunity to turn that real estate lemon into lemonade.” (Here’s my post on the Dec. 11 announcement.)
But since the old county government’s plan to build a headquarters at the same site ended in an embarrassing $45 million failure, I’ve taken my own look at FitzGerald’s plan, testing a few things: What’s the simplest way to understand the choice the county is faced with? Will the deal really lower the cost of government? What could go wrong? What’s in the fine print? Here are some things I’ve found.
The choice at East Ninth Street: new or old? Do you want the county to move into a new, modern office building, which it will own in the 2040s, for a cost of about $6.7 million a year for 26 years? Or should it lease in a historic building, despite some inefficient nooks and crannies, for $700,000* a year less?
That’s the choice the county faces at East Ninth Street. It fielded three offers for the Ameritrust complex and several offers of headquarters sites, but only two developers offered to tackle both at the same time.
FitzGerald has chosen the new building. He’s recommending the Geis Cos. proposal to buy the Ameritrust complex for $27 million, knock down the ugliest part of the complex (the P&H Buildings at East Ninth and Prospect) and replace it with a new eight-story, green-roofed headquarters for the county government. Geis would fill the Ameritrust Tower with apartments and open up the Cleveland Trust rotunda to restaurants, shops and public use.
Rejected developer Optima Ventures wants the county to lease several floors in its 925 Euclid building, the former Huntington Building. It’s a beautiful 1924 landmark with classical columns and a soaring bank lobby with striking murals. It already looks like a seat of government. Optima offered to buy the Ameritrust complex across the street for $16 million (or $11 million less than Geis), use the Cleveland Trust rotunda as the county council chambers, and also put apartments in the Ameritrust Tower. It proposed a 20-year lease of about $6 million a year, or about $700,000 a year less than Geis’ deal.
Optima executive Chaim Schochet hasn’t given up. At council meetings, he’s argued that building new offices means the county government won’t be able to shrink its space if it downsizes in the future. It won’t be cheap to operate those offices in the 2040s, when the building is no longer new, he warns. Schochet also says downtown Cleveland has so much office space, it doesn’t need any more. (After FitzGerald chose Geis, Schochet made an an 11th-hour alternate offer: $30 million for the Ameritrust complex, $6.1 million a year rent, for 26 years, $10 million option to buy the space at the end.)
So why not choose Optima, with its lower rent? FitzGerald’s consultants don’t like the Huntington Building’s layout. They say it’s inefficient for the county’s purposes; they’d have to split up offices they’d rather put together. They’d have to set up office cubicles in part of the grand lobby (as Huntington Bank did) to make it even semi-efficient.
County officials would rather have new, efficient, modern offices. The new building would replace the ugly old P&H Buildings -- arguably a good tradeoff. Crucially, FitzGerald and (I’ve heard) the council like the idea that future county leaders could buy the building in 2040 for $1. In other words, for an extra $700,000 dollars a year for 26 years, the county gets the building at the end of the lease.
Will the county sell all its excess properties? FitzGerald and the consultants say the $6.7 million a year lease at East Ninth and Prospect will cost less than the current occupancy costs -- $10.3 million a year -- at the buildings the county wants to vacate. In other words, moving will lower the cost of government.
“That’s to me what’s appealing about this,” FitzGerald said on Dec. 11. “You take obsolete office space off the market. You get a $180 million investment into Euclid Avenue. You get first-class office space that’s better for employees and customers. You sell the Ameritrust complex. And you do it for less than what you’re paying now. That’s pretty damn good.”
But saving money depends on actually getting rid of the buildings the county doesn’t want. Even vacant buildings cost money to maintain. For instance, just holding onto the Ameritrust complex costs the county $936,000 a year in security, utilities, maintenance and the like.
So how many vacant buildings can the county sell, and how soon? That’s hard to evaluate right now. FitzGerald has 12 properties up for sale besides the Ameritrust complex, from the current county administration building to the old juvenile courthouse on East 22nd. He has some offers in hand. He wants to accept some and reject some others. But he isn’t releasing the details until this month or next.
FitzGerald may simply be trying not to overwhelm the council with lots of deals. Or he may still be negotiating some of them. In December he hinted he was negotiating a possible deal for a convention center hotel on the current county administration building site.
“It’s not a fire sale,” FitzGerald said last month. “We’re not in a desperate position where it’s a buyer’s market and they’re going to dictate to us what we’re going to get.”
This is how you want your chief negotiator to talk and think: He’ll hold out for a better offer if he must. But to realize those annual savings in the cost of government, the county can only hold out so long for a good one-time price for its properties. And there’s still the chance we’ll get stuck with a few dogs.
What are the other costs besides rent? The costs you don’t think about — that’s where the old government screwed up with its aborted 2005 headquarters project. The former county commissioners bought the Ameritrust complex thinking that building a new headquarters would pay for itself – but their switch from leasing to buying would’ve added millions to the cost of government. (For the whole sorry story, see my 2008 story “Tower Play.”)
Two pieces of good news. One is, by leasing, the county covers certain costs. The developer is on the hook for the development costs, providing custodians, and $50 per square foot in tenant improvements. The county would pick up the rest of the cost of outfitting the building, an estimated $25 per square foot, or about $5.5 million.
Also, FitzGerald’s consultants, CBRE, seem to have their eye on other stray costs. They’ve estimated the 20-year cost of utilities, future refurbishment, and the move. They think those extra costs come to at about $1.2 million a year, a fraction of the expected savings from moving and consolidating.
Councilmen David Greenspan and Dale Miller, at Tuesday’s meeting, cited a couple of further moving costs: the cost of wiring the building for phones and computers and possible extra costs if the county doesn’t like the developer’s building designs and pushes for something fancier. Greenspan thinks the move will cost about $16.5 million plus an unknown cost for phones and computers.
Any reader who wants to take a deeper dive into these numbers can download this 108-page pdf of CBRE’s Jan. 2 presentation to council. It’s at least clear that this set of county leaders and consultants are doing a much more thorough job than the guys who tried to move the county in 2005.
What’s this pesky ground lease? The deal with Geis includes some weird fine print that sticks the county with part of* the burden attached to the Ameritrust complex. Some of the land under the P&H Buildings is actually half-owned by the county, half-owned by developer Lou Frangos. So the county has to pay Frangos rent on his share of the land. The two sides have been battling in court for four years over how much. The county-Geis deal says Geis will pay $11,000* a year in rent; the county will have to pay the rest of whatever rent is set by court-appointed arbitrators.
As a taxpayer, I wish the developer would take over all of the rent when it buys the Ameritrust complex. It seems like the obligation attached to the land should go with the buildings. But when FitzGerald struck the deal with Geis last month, the arbitrators hadn’t set the rent yet. It’s got to be hard, in negotiations, to demand that another party take over an obligation of unknown size.
The arbitrators’ report was filed Tuesday. Their ruling: the county has to pay Frangos $21,500* a year in rent, plus inflation. (The rent is set at $65,000 plus inflation; the county's share is half that, minus Geis' $11,000.) That's not a huge line item compared to the other terms of this deal – except that the lease lasts 99 years.
So unless Frangos sells his share to the county, he and his heirs will eventually pocket $2 million-plus. In one small way, future Cuyahoga County residents will still be paying for Tim Hagan, Jimmy Dimora and Peter Lawson Jones’ rash decision to buy the Ameritrust complex into the 22nd century.
*Updated, 4 pm, to correct the complicated math on the rent offers and the ground lease.
(Photo from clevelandskyscrapers.com)