Banking & Finance

Ground Leases Boost Commercial Real Estate Market

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YOUNGSTOWN, Ohio — Real estate professionals in the Mahoning Valley and surrounding areas largely agree that business is good. But why is it good? Well, that question has plenty of answers.

Brokers and agents in several real estate offices report they are busy with deals, pointing to multiple factors: increased confidence in the market, renewed national interest, existing players looking to upgrade and aggressive marketing.

“What’s interesting about the activity is it cuts across all sectors,” observes John Horvath, a commercial services broker at Northwood Realty Service’s Poland office.

“This is a great market right now. We’re busy doing site acquisition, we’re busy doing office and we’re busy in development as well,” Horvath says. “Retail and office are very strong for us.

Business is booming across Mahoning, Trumbull and Columbiana counties, he adds, with no concentration in any particular geographic area.

Clients, Horvath says, are more confident in the marketplace and thus are willing to spend money. Companies already in the tri-county market are “moving up the ladder” in terms of additional square footage or want to move into an area with better traffic counts, proximity to freeways or easier access. And tenants aren’t holding back from expanding the way they had previously, a shift that appears to have taken place over the past year.

Still, the diminishing amount of available space in the Mahoning Valley has yet to translate to increased lease rates, Horvath notes. Demand always puts pressure on rates but the surge in price typically takes a while. “Our area in general is more stable in a lot of ways than the bigger markets,” he says. “We don’t see the great highs and the great lows of some other markets throughout the country.”

Dan Crouse, broker with Routh-Hurlbert in Warren, affirms that business across the board is strong, not limited by market segment or geography. “We don’t have any one sector that’s going nuts but we are all absolutely busy,” he says.

Crouse reports he has a couple of vacant sites being sold for buildings to be constructed and that a colleague has a set of houses on a property that had been listed for years now moving through the process to eventually have commercial buildings constructed.

“We see people who are in the market who look like they are ready to go,” Crouse says.

He could not say with 100% certainty what is driving market activity, although he speculates that a potential hike in interest rates could be a factor. “People want to get stuff closed fairly quickly and most of them are using some sort of bank financing, so you could draw that correlation,” he says.

Among the recently announced deals for Kutlick Realty, Boardman, is the property at South Avenue and U.S. Route 224 in Boardman where the former Classic Park Diner stood. The restaurant building was demolished and a new Valvoline Instant Oil Change is under construction.

That property involved a transaction known as a ground lease, in which the landowner retains ownership but leases the right for a tenant to build his own building, explains broker Bill Kutlick. Such leases typically have 20- or 25-year terms with five-year options.

A ground lease is “probably the best real estate transaction a property owner can enter into,” Kutlick says. The tenant builds the building he needs with his own money, requiring the tenant to have “very strong credit,” while the property owner realizes income but doesn’t have to pay taxes on the capital gain that would come from selling the property outright.

“It’s a complicated deal,” he acknowledges. “They’re complicated because most tenants don’t want to do it. They want to own the land themselves. It’s easier for the tenant to get financing and it’s easier if they want to sell later on.”

Other ground lease deals Kutlick is involved with include the Taco Bell being built at South Avenue and Route 224, a new project at the Tiffany Square Plaza and several parcels near the Cortland Walmart.

Kutlick says Boardman is seeing a repurposing of several properties, which in many cases means demolishing the existing structures and building new. Doing so is generally less expensive than renovating, which often involves installing a new roof, mechanicals and plumbing, “the expensive stuff,” he says.

“It’s cheaper to knock it down than do what I call selective demolition,” which “costs more because you’re watching what you’re demolishing.”

Several years ago, he offers as an example, Kmart remodeled and rebranded several stores under the Big K brand, putting millions into the program. The result was stores that still looked like the old Kmart stores.

“The difference that you receive in sales – 20% to 30% bump in sales on a brand-new building versus a remodel – it’s worth it to rebuild and get a whole new store, energy efficiency, everything else, than just trying to put paint on it and get a 5% to 10% bump in sales,” Kutlick explains.

Trilogy Realty and Development, Boardman, is seeing steady activity, including projects going up in Boardman and Howland, reports Jim Sabatine Jr., managing member.

“We think we’ve got the two best retail sites in the market covered right there,” Sabatine says, adding that he has deals in the works with national restaurant and retail chains.

“Sales for restaurants are really good so [clients] are opening more,” he says. National retailers operating in areas like Cleveland that don’t already have a presence locally are looking at the Mahoning Valley, Sabatine adds.

On state Route 46 across from the Eastwood Mall, Trilogy has assembled a parcel where it plans to develop retail space and have the opportunity for a freestanding building for restaurant or retail use, Sabatine says. “Right now, everything is in the design phase,” he says.

Trilogy also developed the property on Route 46 in Howland where Stone Bridge Grill & Tavern is opening in mid-November. The new restaurants and hotels in the area all are doing well, he says. “It seems like there’s a shift to develop 46 because that’s where everybody wants to be right now,” he says.

Last year Trilogy acquired the former Talmer Bank and Trust office building on Route 224 in Boardman across from Best Buy. Trilogy will tear down the single-tenant office building.

“There’s more of a market for new retail and new restaurants to be there,” he says, adding that a ground lease could come into play at the parcel. “The economics are different on every deal. It just depends on each particular deal what makes the most sense for the user and the developer.”

In Calcutta, Trilogy Realty redeveloped the former Payless Shoes building, where AT&T and a new Domino’s pizza shop are preparing to open, he reports, and Trilogy is handling the Sheetz service station at the Route 46-Interstate 80 interchange.

Atypical of the other real estate professionals interviewed, Alan Friedkin, broker and owner at Friedkin Realty in Liberty Township, says activity has been “kind of quiet,” although he reports he has an industrial site he may be doing something with soon.

“This time of year we’ve got a little uncertainty with the election,” Friedkin says. In addition, some national retailers have reduced their exposure in the market. “It’s a little soft right now and the economy has a lot to do with it,” he remarks.

Don Sebastian, associate broker with Northwood’s Hermitage, Pa., office, reports business is good. Sebastian recently merged his firm, Sebastian Real Estate, with Northwood.

“The merger is a win-win for everyone involved,” he says. “It just seems that the merger has given us momentum in all respects.”

While the market isn’t flying, Sebastian says his office’s activity is. “We’ve gone out and done some things,” he remarks. “We’re just not sitting back waiting.”

Sebastian says he does ground leases occasionally and has a “very large situation pending right now” with an out-of-state firm. “It’s a very large deal by our standards.”

Published by The Business Journal, Youngstown, Ohio.