Zeller Realty Group - News - December 28, 1998

commercial property investment and development

IN THE NEWS

Minnesota Real Estate Journal
December 28, 1998

Zeller Realty Corp. acquires Kinnard Center in Mpls.
COMPANY’S SECOND MAJOR BUY IN 1998
By Liz Wolf

Zeller Realty Corp. is ending 1998 with a bang. Not only did the Chicago-based company acquire International Centre in downtown Minneapolis last month for nearly $31 million (MREI, 11-2-98), now it has picked up its sister tower, the Kinnard Financial Center, located next door at 920 Second Ave., S., for an undisclosed price. The sale closed Dec. 8.

The assessed market value of Kinnard Financial Center is $31.1 million or about 115 per square foot, according to Hennepin County records.

Sources say the building sold for between $100 and $105 per square foot or roughly $27 million to $28 million.

The 270,067 square foot property was developed by Ryan Cos. In the mid-1980s, as was International Centre. The Class A tower was sold by a co-mingled fund that is managed by Heitman Minnesota Management. Heitman hired John Breitinger and Scott Pollock of United Properties to market the property on behalf of the owners. Zeller represented itself in the transaction.

Jim Gearen, vice president of Zeller, says it makes a lot of sense for one entity to own both office towers, which has never occurred before. In a very complicated transaction, Zeller purchased the 341,000 square foot International Centre in
November from five condominium owners. A sixth condo owner, Fredrickson & Byron, which controls two floors of the building or 11.5 percent, retained its ownership.

“The two buildings share a loading dock facility and access to an underground parking ramp,” Gearen says. “With one owner, there will be one management team and one engineering team, which will hold down operating costs. It gives tenants in both buildings more flexibility in accomplishing their needs.”

Zeller has taken over management and leasing of both towers.

A deal meant to be

Before Zeller was able to put the two properties under contract, both were under contract by other parties: International Centre by Great Lakes Reit and Kinnard Financial Center by a partnership with J.E. Robert Cos., an investment company based in McLean, Va., as the principal equity.

This summer, both deals fell apart within a matter of weeks of each other and Zeller took advantage of the situation by stepping in with bids.

“We thought this was a great opportunity,” Gearen says, adding that both transactions were very complicated and “took a lot of patience.”

“Once Zeller became the successful buyer of International Centre, this became the most logical thing, says Breitinger, referring to Zeller’s acquisition of Kinnard. “They created substantial value by putting the properties back together; the projects complement each other. Zeller did a great thing: They took a lot of risk by buying the condo units, especially since they couldn’t get all of them, but in buying both towers, they put themselves in a terrific position.”

Kinnard Financial Center is 99 percent leased with John G. Kinnard & Co. as the lead tenant, while International Centre is 98 percent leased.
“I see the two buildings as one transaction,” Gearen says. “This is one of those transactions where two plus two equals five. We’re pleased. This does a lot for Zeller. This grows our local portfolio by about 60 percent.” Zeller leases and manages 1.7 million square feet in the Twin Cities, of which the company owns about 1 million square feet.

Zeller acquired its first property in the Twin Cities in 19941, with the purchase of Norwest Financial Center in Bloomington. In 1994, the company picked up the Highland Bank Building in Bloomington, and a year later, it acquired The Water I in Eagan. All three have since been sold, but Zeller continues to lease and manage the properties.

Whether Zeller will retain ownership of International Centre and Kinnard Financial Center long term will depend on market conditions. However, Gearen says the company likely will hold on to both properties for the long haul.

As for renovation plans for the towers, Gearen says Zeller will renovate both lobby areas to “really make them into one building.” How that will be accomplished is under review by an architectural firm hired by Zeller.
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