When the city of Indianapolis relocates two of its departments later this year from Sherman Park on the near east side to 1200 S. Madison Ave., some say the city is merely trading one blighted area for another-and abandoning a neighborhood it has said it wants to help.
And over the 10-year lease with Pillar Investments LLC, owner of the Madison Avenue property, the city will pay nearly $1.2 million more in rent than it would had it stayed at Sherman Park, according to public documents and others provided by Sherman Park's receiver, Larry Harshman, of Harshman Property Services LLC.
Sherman Park, which occupies a complex of old RCA buildings at Sherman Drive and East Michigan Street, has been in receivership since an auction in December failed to produce a buyer. Bloomingtonbased Pinnacle Properties Management Group LLC has made an offer to buy the 13-building, 1.2 million square foot industrial complex, but the deal has not closed.
The prior owner, Sherman Park LP, bought the complex from Thomson Consumer Electronics in 1995. At the time, Thomson leased back 55 percent of the property. In the late 1990s, Thomson moved its injection molding operation from there to Mexico, creating a large hole in occupancy.
Since then, Sherman Park has had trouble attracting tenants to the area and several large tenants filed bankruptcy, which caused cash flow problems leading to the partnership's bankruptcy, explained Cliff Rubenstein, a partner in Sherman Park, late last year.
Pinnacle's offer for the property came with promises to the city that it would reduce rent at the complex and fill it with tenants. Less than half of Sherman Park is occupied.
Pinnacle has turned around other underperforming parcels in the past, including a 2-million square-foot former Thomson Consumer Electronics/RCA facility in Bloomington. When Pinnacle began redevelopment of that site in the late 1990s, it was completely vacant. Within seven years, it was fully occupied.
"The city has said it's so behind this area," said Deanna Garner, president of Garner-Randolph Industries. Garner's procurement services company is less than three miles from Sherman Park. "We're flabbergasted. The city's actions are not measuring up to their word."
Pinnacle executives were equally surprised and say the city's move will hold up closing of the deal, although it has not altered its decision to buy the property.
"The city leaving certainly puts a monkey wrench in our original redevelopment plan," said Peter Dvorak, president of Pinnacle. "Having the city there would have provided a strong anchor and helped in attracting tenants."
Investing $20 million
The company, which in July exited the local apartment market to focus on industrial development, plans to invest about $20 million in Sherman Park. That figure includes the purchase price, Dvorak said. But before it can get started, it'll have to come up with a new redevelopment plan now that its anchor has decided to leave. Closing likely will take place by October.
"We were surprised the city said they planned to move, considering the economic situation here," Dvorak said.
The city turned down Pinnacle's offer of reduced rent and promises to turn around the property and is slated to relocate portions of its departments of metropolitan development and public works in December. That assumes massive renovations to the vacant, 140,000-square-foot industrial building on Madison Avenue are completed in time.
That work, which involves gutting the entire building, will be done by Keystone Construction Co., an affiliate of building owner Pillar Investments.
The city occupies 48,628 square feet at Sherman Park and will lease 70,000 square feet on Madison Avenue. It has said it is relocating because it needs more space and because Sherman Park's prior ownership and its upkeep have been unstable.
"Because of the instability of the owner, we also have experienced some complications with building and structural issues which have gone unfixed to this point and have led to difficulties for employees and visitors alike," said Anne Coffey, public information officer with the city.
Messages left for Suzannah Overholt, who led the project to relocate the two departments, were not returned. Overholt presented the city's plans to relocate the two departments to the City-County Council's administrative and finance committee, which approved the move.
The additional space the city wants is available at Sherman Park. Pinnacle's letter of intent to lease space to the city was for 70,000 square feet at $9.75 per square foot, a reduction from the $11.95 a square foot the city was paying. Under Pinnacle's ownership, rent would increase 2.5 percent a year.
The city's lease at Sherman Park expired July 31, but a hold-over clause allows the city to remain at 150 percent of the $11.95 rate, which the city will pay until it relocates.
Pillar Investment's lease agreement, which was effective Aug. 1, provides the city with six months of free rent, then $11.50 per square foot. The amount increases 2 percent a year for 10 years.
Overall, the city will pay $1.16 million more in rent over the term of the lease than it would had it accepted Pinnacle's offer to stay.
"I find it almost unbelievable when the city is in desperate need of revenue, they can agree to an expensive relocation venture that makes no sense and is more costly," said Harshman.
The City County Council on April 30 approved the relocation after the council's administration and finance committee approved it a week earlier.
Still, questions arose then about the rationale for the move, according to minutes of the committee's meeting. Councilwoman Jackie Nytes pointed out that both the old and new locations are in areas in need of economic development. Nytes, who voted in favor of the move, questioned if the city was "abandoning one desperate, struggling neighborhood for another."