Struggling M&I Plaza once again can become a prominent office tower, real estate experts contend, but only if the next owner atones for its predecessor's mistakes.
Local real estate developer Paul Kite Co. had emerged as a top contender to buy the struggling downtown property from Maryland-based CapitalSource Inc., which assumed ownership of the 28-story building in June after foreclosing on a $5 million mezzanine loan.
Paul Kite didn't respond to an e-mail request for comment. But sources say Kite's investor backed out of the deal, leaving the immediate challenge of luring tenants to CapitalSource.
CapitalSource hired the local office of St. Louis-based Colliers Turley Martin Tucker earlier this year to coordinate leasing efforts and increase occupancy to the point it becomes attractive to another suitor. The current occupancy rate in the 425,000-square-foot building is hovering around 30 percent-far below the average of about 85 percent for Class A downtown office space.
Any attention the owner and CTMT give the building would be an improvement over what the previous ownership provided, said Sam Smith, CEO of locally based Resource Commercial Real Estate.
"They had an opportunity with more than one of my clients and found a way to shoot themselves in the foot," he said. "It seemed like they were going out of their way to not make deals."
Crown Properties of New York and Greenfield Partners of Connecticut teamed to buy the tower, then known as First Indiana Plaza, in 2002. At the time, it was 75-percent occupied. The building took on the new name 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. Brokers mostly blame an absentee owner and unresponsive leasing agent for driving down occupancy in the prominent tower at 135 N. Pennsylvania St.
But Cornelius "Lee" Alig, a principal of the former leasing agent, locally based Mansur Real Estate Services, said he was frustrated as well. Crown Properties' resistance to tenant-improvement allowances proved a major sticking point with would-be tenants, he said.
"The owner was undercapitalized," Alig said, "and as a result we couldn't do big deals, and we lost tenants."
New leasing agent Jon Owens, a principal with CTMT and a longtime office broker in Indianapolis, is confident he can help elevate the building's stature in the downtown real estate market. He and CapitalSource are in the process of finalizing a marketing plan that targets law firms and financial institutions. Owens questioned whether the previous partnership took such a step.
"That was such a dysfunctional relationship between the owner and agent," he said, "and the building paid dearly for that lack of planning."
The Indianapolis Bar Association has signed a lease to occupy 10,000 square feet on the 15th floor of the building. The services the association provides city law firms should help attract legal tenants to the tower, Owens said. His prospects so far include six firms of different sizes.
What also could attract prospects to the tower is the wide-open floor space, Owens said. If two smaller tenants agree to be moved from the 20th floor, all of floors 18 through 28-or 175,000 square feet-will be available from the same elevator bank. Such large contiguous amounts of space are unavailable downtown, Owens said.
Indeed, Chase, OneAmerica Tower and Market Tower are either full or nearly full, as is 300 North Meridian. That gives M&I Plaza a "window of opportunity to take advantage of the market conditions," Owens said.
M&I Plaza's rental rate is $19.50 a square foot and includes a tenant-improvement allowance of $20 a square foot. The rate puts the building on par with National City Center and neighboring One Indiana Square, which have lease rates ranging from $18.50 to $22.50, according to IBJ statistics. By comparison, Chase and OneAmerica towers start at $21.50, and Capital Center North and South and Market Tower at $20.50.
Halakar Properties manages One Indiana Square and has considered acquiring M&I Plaza. But the price remains too high, said Todd Maurer, the company's president.
Even so, CapitalSource may accept less than the original asking price of $31 million. The tower sold for $50 million in 1997 and for $38 million in 2002, when it was 70-percent occupied.
With any luck, Owens is hopeful the building can reach 85-percent occupancy within two years, at which time it might become attractive to a buyer.
Local owner best?
Maurer, citing his building as well as OneAmerica Tower and 30 South Meridian, said M&I Plaza is likely to perform better under local ownership.
"It needs someone who can lend a personal relationship to establish a level of trust and [confidence that] they won't turn around and sell it," Maurer said. "And a person most likely to do this is a local owner."
Maurer and his father, Michael S. Maurer, co-own One Indiana Square with local businessman Robert Schloss and Pittsburgh-based McKnight Group. Michael Maurer and Schloss also own IBJ Media, publisher of IBJ.
They bought the building in October 2001 and since have invested millions in amenities. Those include an 8,000-squarefoot fitness center and rebuilt restaurant, which have helped occupancy rates more than double to 70 percent.
Owens, however, disagreed that local ownership always is best. Chase Tower, owned by Australian-based Macquarie Group, is a prime example, Owens said. His firm manages that property, as well as One America Tower.
"If you have a local management firm advising an out-of-state owner, or one that's out of country," Owens said, "you're going to get the results you're looking for."
In any case, real estate observers agree the 21-year-old M&I Plaza is beginning to show its age. The rest rooms, lobbies and common areas may need a little upgrading, brokers said. CapitalSource has budgeted money to refurbish the plaza area in the front of the building.
Amenities include a Sahm's restaurant and conference center on the second floor that can seat 100 people, and a fitness center with showers and lockers on the seventh floor. An attached parking garage on Ohio Street has 400 spaces for building tenants.
But one of its biggest amenities might be its attractive location, brokers say and, even more important, a change in ownership.