Commercial Real Estate and Office Complexes and Kite Realty Group and Real estate deals and Real Estate & Retail

M&I Plaza, only 30-percent occupied, may sell at cut-rate price

September 22, 2008

A local real estate developer has emerged as a top contender to buy the 28-story M&I Plaza--potentially at half the $50 million price the building fetched a decade ago.

Paul Kite Co. confirmed it is in talks with Maryland-based CapitalSource Inc., which took over the struggling office tower in June after foreclosing on a $5 million mezzanine loan.

The 21-year-old building has been only about 30-percent occupied since its largest occupant, the law firm Bose McKinney & Evans, moved to the nearby Chase Tower in September. It is no longer generating enough cash to cover payments on the $25 million first mortgage, market observers said.

CapitalSource had hoped to sell the building for $31 million, but the reluctant owners may now be prepared to accept less. The building is valued at $66 million for tax-assessment purposes (a number the owners are challenging), but it has traded hands for much less. It sold for about $50 million in 1997 and again for $38 million in 2002, when it was 70-percent occupied.

"It's true we're talking, but it's still up in the air," Paul Kite said in an e-mail. "We have not yet entered into a contract."

Kite said he was about a week away from "being in or out" of the deal. He said CapitalSource has other potential suitors. A big hurdle for almost any buyer would be securing financing, thanks to a meltdown in capital markets.

The replacement cost of the 425,000-square-foot building, at 135 N. Pennyslvania St., likely would be $85 million or more, making it a compelling value as a turnaround opportunity, said Andy Banister, a first vice president in the local office of CB Richard Ellis, who is listing the building for sale.

"Everybody sees it as a great Class A building that obviously has occupancy issues that could be a good long-term play," Banister said.

Potential buyers include a mix between local and regional players--"obviously it's got to be somebody with the wherewithal to be patient as they lease it up," he said.

Another local firm, Halakar Properties, also has looked at the building and still may consider a bid, said Todd Maurer, the company's president.

"It makes sense for us to look at this building because of our ownership of One Indiana Square next door," he said.

CapitalSource is working with the holder of the first mortgage, a subsidiary of Columbus, Ohio-based Nationwide Insurance, and may consider providing seller financing in a bid to remove tight capital markets as an impediment to a sale.

"The building has been well-received by the market," Banister said. "Hopefully we'll find the right group to step in and take advantage of it."

Paul Kite Co.'s notable Indiana properties include the 1,000-acre 70 West Commerce Park in Plainfield, a proposed 33-acre retail development at 86th Street and Olio Road in McCordsville, and Evansville's Washington Square Mall.

The company also has properties in Florida, Georgia, Illinois, Iowa, Ohio, Oklahoma and Texas. Paul Kite founded the firm in 2004 after leaving what is now Kite Realty Group Trust. The new company is not affiliated with the publicly traded real estate investment trust run by Paul's father, Al, and brother, John.

History has shown that local ownership of office buildings often leads to success, Halakar's Maurer noted, citing Kite Realty Group Trust's 30 South Meridian, OneAmerica's One America Tower and his firm's One Indiana Square.

Crown Properties of New York and Greenfield Partners of Connecticut teamed to buy the tower, then known as First Indiana Plaza, in 2002. The building took on the new moniker early this year after Milwaukee-based M&I acquired the Indianapolis bank.

Greenfield dropped out of the partnership last year, leaving Crown as sole owner. It conveyed the property to CapitalSource after it foreclosed this summer.

The owners had tried for more than a year to sell the tower but couldn't find a buyer willing to pay anywhere near the rumored asking price of $60 million.

Brokers and other observers have said an absentee owner and unresponsive leasing agent played a role in the building's struggles. The local office of Colliers Turley Martin Tucker took over leasing efforts this year.

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