If the landlord at One SeaGate walks away from its mortgage late next year, the new owner of the 32-story building faces some tough math and assessing of the future of downtown Toledo, local real-estate experts say.
Newkirk Master Limited Partnership, of Boston, which owns the landmark riverfront building - home of Fortune 500 firm Owens-Illinois Inc. since 1981 - has said there's "substantial risk" it will not be able to make the final "balloon" payment of $32 million due in October, 2006, and that the office tower could go into foreclosure.
Newkirk's situation is mostly the result of O-I's decision to move its headquarters to Perrysburg by the time its One SeaGate lease expires Sept. 30.
No matter who ends up owning the building, the rental rates will have to be in line with other Class A office space downtown, or $16.50 to $19.50 per square foot per year, for it to remain a prime office complex, experts said.
O-I has paid more than $13 million a year, or $18 a square foot, for 24 years.
"If you're going to look to bring tenants in from other buildings, you're going to need to add spice to the deal," said Bob Mack, a real estate agent with Signature Associates. That could include rent reductions or incentives for renters.
The eventual owner of One SeaGate will have to deal with operating and renovation costs, said Mark Zyndorf, a longtime Toledo commercial and industrial real estate expert.
"If it's half vacant, or totally vacant, you still have to operate it," he said. He estimated taxes, utilities, and other necessary expenses would be more than $5 million a year and renovations would cost $12 million to $15 million. The riverfront building has 707,000 square feet of rentable space.
The value of the building is debatable, which is key because it could determine what the owner does with it.
The $32 million balloon payment is generally considered the upper end of the value range. But O-I has argued in court that the market value should be $19 million instead of the $45.5 million on Lucas County's books.
"Let's say the buyer spends $32 million and adds $18 million for renovations and reserve [to pay expenses] until it's rented, that's $50 million, and at a 7 percent prime rate, nearly $300,000 a month in interest," said Mr. Zyndorf. "Plus, half a million for operating expenses."
He questioned how many buyers have such "big pockets."
A new owner, the mortgage holder if Newkirk defaults by not covering the balloon payment, would have to determine the viability of the building and the Toledo market, he said.
A lender likely wouldn't want to run the building, so it might sell it cheaply just to get rid of it, he explained.
Larry Boyer, senior vice president of commercial real estate for Fifth Third Bank (Northwestern Ohio), and other real-estate professionals said such balloon payments are common for mortgages on buildings with one large tenant like O-I. When the main tenant's lease expires, lenders often require the balance of the mortgage to be paid off.
Newkirk has a non-recourse loan for One SeaGate, which means the lender has only the property as security and the owner can walk away from the building. Local experts say those loans are common for office buildings, as the mortgages are often bundled and sold to investors.
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