Sunday, March 22, 2015

The mortgage on the 22-story office building at 55 Public Square just got sold -- this time for a major loss. It's put the building's ownership potentially in play, and may signal the start of a major shakeout among downtown Cleveland office buildings.

Miami-based Optima International bought 424,000-square-foot 55 Public Square in July 2008 for $34 million after purchasing One Cleveland Center earlier that year for $86.3 million. The building is the former home of the Cleveland Electric Illuminating Co.

At the time, 55 Public Square was 85 percent full, with space largely taken up by midsize law and engineering firms. That dropped to 74 percent by June 2013, 69 percent in December 2013, and just 49 percent in November 2014. (Average downtown Cleveland occupancy is 74.2 percent for the fourth quarter fo 2014.)

Rents, too, collapsed at the building. They are just $14.50 per square foot, compared to an average of $19.05 per square foot elsewhere downtown (nearly a 25 percnet discount).

The building has major infrastructure needs. Its parking garage, elevator, AC chiller unit, and concrete roof all are original to the building (constructed in 1958), and all need replacement.

The bond rating company Fitch downgraded the mortgage behind 55 Public Square to "below-investment grade" on February 5, 2015.

On March 3, CW3 Asset Servicing -- which held the mortgage on the property -- sold the mortgage to a new company, 55 Public Square Holdings LLC. 55 Public Square Holdings is owned by Ohio-based Triangle Capital Group.

Crain's Cleveland Business is reporting that the $19 million mortgage sold for just $7 million -- a whopping loss of almost $12 million.

A research at Trepp, which monitors the mortgage market, suggested the sale occurred because CW3 Asset Servicing believed the building was "underwater" -- worth less than the mortgage held. Crain's said that Triangle Capital may continue to hold the mortgage, or it may renegotiate the mortgage, or it may try to foreclosure on 55 Public Square to gain control of the property.

A lot of owners of older Class B and Class C office buildings downtown are now worried that similar transactions may affect them as well.

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