The Somera Road team is proud to announce our newly acquired controlling interest in SouthSide Works – Pittsburgh, PA, a mixed-used development located on Pittsburgh’s South Side Neighborhood. As the new owner and operator we are excited to reintroduce the project with a renewed vision, plans for re-development and plans for new development. In total, Somera Road will invest over $37 million in capital improvements including an adaptive-reuse conversion of a former cinema into a modern 77K sf, open floor plate, creative office space called, “The Box Office”.
We are also deep in planning of the construction of a new multifamily development which includes 230 Class-A apartments on developable waterfront land controlled by the venture. Somera Road’s SouthSide Works will be a wholistic re-envisioning of what a modern live-work-play community should look like along the riverfront of one of America’s fastest growing, most exciting cities. Our goal is tointegrate the best that Pittsburgh already has to offer with Somera Road’s specialty – adding new thinking, an entrepreneurial approach, and creative innovation.
A New York real estate developer paid $30 million on Dec. 16 to gain another Nashville development for its portfolio.
Somera Road Inc. now owns about 2.6 acres on Eighth Avenue South, near the Gulch and restaurants such as Arnold’s Country Kitchen and Party Fowl. The developer will turn two existing buildings into about 81,000 square feet of commercial space — mostly office space, with some retail as well. Renovations will begin after Christmas and be ready for tenants in the third quarter of 2020, said Charlie Gibson, a broker with Cushman & Wakefield who represented Somera Road in its purchase.
The most noticeable building on-site is the Voorhees Building, at 700 Eighth Ave. S. Somera Road plans to add a penthouse level to the four-story brick building that could be office space or a restaurant/bar, as depicted in the promotional video below.
Somera Road also will preserve the building at 606 Eighth Ave. S., which abuts the train tracks that run through the Gulch. That building, currently known as the Downtown Antique Mall, will be turned into office space and retail.
Low-rise buildings between and behind those two buildings will be demolished to create parking for future tenants.
There’s been a flurry of deals along Eighth Avenue South just in the past couple of months. Another New York-based investor bought the Cannery Row complex of music venues in October, on the other side of the train tracks from one end of Somera’s new property. Dallas developer Lincoln Property Co. bought a site just up the road, at the roundabout with Korean Veterans Boulevard. Construction is underway on Lea Avenue of an apartment skyscraper.
Somera Road is developing a mixed-use project in Wedgewood-Houston and paid $18 million earlier this year for a MetroCenter office building. Somera Road also this fall debuted a revitalized building in the Gulch with two entertainment venues: 16-Bit Bar + Arcade, and Pins Mechanical Co.
In its newest purchase, Somera Road paid about $265 per square foot of land — an indicator of how Nashville property values keep rising, years into the “It City” surge of growth.
Somera Road bought the land from Harmolio LLC, a New York-based entity whose managing member is Arthur Friedman, according to Davidson County public records. There were six properties in the purchase: 606-620 Eighth Ave. S., as well as 700 Eighth Ave. S., 701 Seventh Ave. S. and 708 Fogg St.
Loomis Cos., of Euclid, Ohio, is handling construction, according to Metro permits.
By Adam Sichko – Senior Reporter, Nashville Business Journal
The property is a 202,000-square-foot, five-star distribution facility that was vacant at the time of sale. Kellen Duggan and Victor “Torrey” Lewis in Friedman’s Chicago brokerage office represented the seller, Somera Road, a New York-based commercial real estate investment firm, in the transaction.
“[Screw] funds,” Somera Road principal and founder Ian Ross told Commercial Observer earlier this year when asked whether he’d ever want to start one. “I don’t want to have to fit these deals into a box. We might have a $1.8 million deal or a $108 million deal.”
“These deals” have turned his 3-year-old firm into a heralded, but rather inconspicuous, private equity real estate shop deploying what sources told CO is a “clean playbook of perfect execution” on off-market, distressed CMBS real estate opportunities across the country.
In the years since its first deal in the summer of 2016 — the purchase of the 3Y Building, an office tower just north of downtown Kansas City — Somera Road has sourced and executed on 66 distressed deals at a valuation of over $1.5 billion across 49 markets and nearly half of the continental United States.
Ross started the company out of his Manhattan apartment in the summer of 2016 and has since grown the team to 15 professionals, who punch above their weight and successfully execute and asset-manage across the firm’s unbelievably large footprint.
“Oh boy, do they know how to work a deal,” the managing partner of a global hedge fund exasperatedly told CO, on the condition of anonymity because the manager is in the process of raising a new fund.
Ross, a former financier, doesn’t take himself too seriously, which is somewhat of an antithesis to the way he runs his business. He’s a 33-year-old commercial real estate “junkie” from Los Angeles, who said he’s only as good as the sum of the parts of his company — he works within a climate of “radical transparency.”
“The amount of deals that he’s closed, executed — in terms of the business plan — sold, stabilized and refinanced, it’s nothing short of a miracle in the world we live in,” Tim Dunn, the chairman of Kansas City-based JE Dunn Construction, told CO. Dunn said they’ve worked on around 15 deals with Somera, including its first, the 3Y Building.
While Somera is headquartered in New York, you’ll find their footprint in places like Allentown, Pa.; Athens, Ga.; Huntsville, Ala.; Tulsa, Okla.; Memphis and Cleveland. Some of the firm’s most high-profile deals to date have been in Memphis, Kansas City, St. Louis and Pittsburgh.
The walls of Somera’s office at 130 West 42nd Street in the belly of Times Square are adorned with mementos and sports memorabilia his team has collected from their work in the secondary and tertiary markets where they target distressed real estate. In his conference room are framed news clippings from Memphis, Tenn.’s The Commercial Appeal that show him shaking hands with local and state officials as well as FedEx Logistics executives after sealing arguably his most high-profile deal to date: a lease with Memphis-based global enterprise FedEx Logistics at the Gibson Guitar Building, a former guitar manufacturing facility located a block south of Downtown Memphis. FedEx Logistics CEO Richard Smith is planning an adaptive reuse of the property into an office hub to serve as the global headquarters for the company, which decided to move to the area to attract young talent and help spur a revitalization of the city’s downtown.
Next to the framed Commercial Appeal news clips is a Gibson guitar that Ross was gifted by his team following the closing of the FedEx deal. Ross had gifted Smith the same guitar, donning FedEx purple and orange, at the ribbon cutting in February; it was the last one manufactured at the location.
Somera (Ross named his company after the road on which he grew up in Los Angeles) has perfected a strategy of finding distressed assets in special servicing via commercial mortgage-backed securities (CMBS) trusts. It trades in distressed CMBS credit, buying and using the rights of the controlling bondholder to pull out and work out deals. They buy, execute, stabilize, monetize and repeat, aiming at smaller deals that are typically bypassed by larger institutional firms.
“His approach to how he finds assets and the ways he’s gone about doing it has been a very overlooked strategy by most,” said Matthew Philip, the head of commercial lending at Bayview Asset Management. “Going into CMBS trusts, looking for things from special servicers and really understanding what’s going on in those legacy deals, is textbook. [They] find where the distress is and take advantage of the opportunity, while being smart about what’s presented to [them]. To some extent, the complexity of pulling assets out of the trust, seeing that the distress isn’t always related to the specific asset but to the structure that’s behind it, is the genius in the approach. I don’t think a lot of developers have seen that opportunity that exists, especially with the smaller assets.”
Ross seemingly amazes those who transact with him. He has found a happy medium living under the realm of a major institutional investor but above the fray of a single-family office. He “runs his team hot, with a shock-and-awe approach,” the global hedge fund manager said. “He always beats his base case and is conservative by design.”
The firm has found a sweet spot in being sub-institutional, but Ross and Somera have to make up for that in volume, which they’ve proved is no issue, according to sources who spoke to CO.
The global hedge fund manager, who’s invested in a handful of Somera’s deals in the last year or so, said, “[Ross] knows that if he goes above a $20 or $30 million equity check, he’s up against a Blackstone, and things get ugly quickly … a $5 or $10 million check size on his management fee [nets them] probably [$500,000] or a million bucks a year. It’s nothing, but he’s just doing so many of them. It’s hard to compete with him. You have to be able to get messy with him on $5 [million] to $20 million deals. For a lot of people, it’s just not worth it. For him, it’s because he is trying to compound at very high rates of return, not collect a management fee.”
Somera works unbelievably fast in all aspects of its business and has on numerous occasions found a buyer for a project before even closing on its purchase. Out of the deals he’s done, “[many of them] never even made it to market, because he had already done what he had to do before he equitized them; that’s the speed this guy works at. It’s crazy,” the hedge fund manager said. “He’s sourced extremely well.”
Ross frequently challenges his newest or youngest employees by giving them free reign to run transactions — sometimes overseeing entire regions of the country — just to instill a level of trust and to see how they react to executing his firm’s playbook. That strategy hasn’t always panned out for the younger, less experienced employees, some of whom have felt overwhelmed and even left the firm. But Ross doesn’t care; where some failed, many have succeeded, becoming key members of his team. (Somera was named as one of Inc. Magazine’s Best Workplaces 2019.)
“His guys hustle,” said the global hedge fund manager. “They won’t last in his culture very long if they don’t move at a very fast speed.”
The fund manager said that when he was introduced to Ross and Somera just under a year ago, he deployed a diligence team into Ross’ ecosystem and pool of existing investors “to fully understand what he was doing, because quite candidly, he’s such an outlier, I wanted to make sure it was real.”
Ross is a staunch opponent to the idea of overextending his firm, shooting higher or becoming a “fund,” because he considers it a headache and a hindrance to his investment philosophy. He said his team views itself as “disintermediating what is often times an archaic fund model,” and he said becoming a fund “is against everything we are about. We like to stay nimble and flexible, and we want to be able to do deals of any size, asset class, geography or risk profile without them having to fit into a specific box or mandate.”
Per the hedge fund manager who spoke to CO anonymously: “if [Ross] overstretches his [firm], he’ll shatter it … he’s self-aware.”
“Listen, if I had the cojones, I’d have done the same thing,” Bayview’s Philip said. “Once you develop relationships with those servicers and you’ve executed a couple times, they’ll come back to you to sell the assets. You can figure this [method] out if you’ve got a little bit of savvy and an understanding of individual markets. The smaller deals lie under a lot of people’s radars. The [firms] with the big staff don’t want to spend time on all these $3 [million] or $4 million purchases of these defaulted assets, even though you can hit a bunch of home runs with them; they want to deal with the bigger stuff.”
For Ross and his team, basis is everything. In a yield-starved world, he has no qualms with walking away from an attractive investment if he doesn’t feel it meets the parameters of his game plan; he’s done it several times before, to the surprise of some of his investors. “His deal standards are so high,” the global hedge fund manager said, highlighting that Ross aims for a 25 to 30 internal rate of return (IRR). “He’s buying A-grade assets at B- or C-grade prices, hunting in a patch that’s messy — $5 [million] to $20 million deals. His returns in a very short period of time are extraordinary.”
But, getting the idea of Somera’s model across to investors in the company’s early stages wasn’t easy.
“Raising the first $5 million on our first deal is the hardest thing I’ve ever done,” Ross said. “I don’t take that for granted; it was extraordinarily challenging. But, you get the first deal done, and you build from there. We did our first deal in the summer of 2016. We did our second and third deals that November and December. And then I think we did [around] 26 deals in 2017. It was really kind of a snowball effect.”
In December 2017, Ross made his move on Memphis.
That month, Somera purchased guitar manufacturer Gibson’s real estate in Memphis and Nashville for around $32 million. The Memphis location — at 145 Lt. George W. Lee Avenue in the middle of the city’s Downtown — included what is a 150,000-square-foot factory and showroom and a nearby 350-space parking lot, where Ross is planning to develop a separate 350,000-square-foot office building called “The Clipper.” (The project is under development, Ross said, but before they started, he said Somera leased the parking lot to an operator—triple-net—who would run it for use during events and basketball games at the adjacent FedExForum). Ross and his partners explored other uses for the Gibson space, such as retail — for a grocery store — office or even a potential brewery, according to a 2017 letter sent by a legal representative of the investor group to the Center City Revenue Finance Corporation.
A few months later in the spring, Ross was approached by Billy Orgel and his son Benjamin — Memphis natives and community staples — who wanted to get involved, eventually taking a minority stake in the property and injecting Downtown development expertise and much-needed local backing.
Billy Orgel is the CEO and president of Tower Ventures, which develops wireless communications structures, and he sits on the Shelby County School board. His son Benjamin works for Memphis-based Slovis and Associates, a full-service commercial real estate firm; he’s also on the board of the Downtown Memphis Commission. The month that Ross bought the Gibson facility, the Orgels were wrapping up a conversion of the historic 19th century Tennessee Brewery in the city’s South Bluffs neighborhood — located just Southwest of Downtown, overlooking the Mississippi River — into a $42 million, mixed-use complex complete with multifamily rentals, office and retail space and a parking garage.
Around the time the Orgels entered Somera’s Gibson project, the newly formed FedEx Logistics’ CEO, Richard Smith, felt like planting a flag in Downtown Memphis.
“Strategically, it made a lot of sense to me,” said Smith, a Memphis native and son of billionaire FedEx founder Fred Smith. “It was kind of bringing the mountain to Muhammad, so to speak, in terms of where the talent is, so I was very interested in this.”
Smith got in front of the Orgels and learned of Ross.
“[Ross] brought on some people that really were well connected, particularly in the downtown market, which I think was a very, very smart move,” Smith said. “What struck me about Ian, at first, was he’s very young. But, I’ll tell you, he is a very sharp and dynamic businessman for his years. He was extremely passionate about Memphis and about the community. That spoke to me.”
Smith said Ross jumped at the idea to do Class A office space for a corporate headquarters. After some hesitation on the part of Smith to go forward with the plan, they picked it back up in December 2018 and haven’t looked back. The FedEx Logistics lease at the building will begin in April next year, the company has said. FedEx will expand the building from 154,000 square feet to just under 200,000 square feet.
Ross’ persistence and curiosity was bred from a young age.
Growing up, Ross’ parents instilled in him and his two brothers an unyielding ambition and an unwavering will to never stop learning, he said.
Ross’s father is an obstetrician, expert witness and a distinguished professor at UCLA medical school, and his mother is a counterterrorism consultant. His parents moved to Los Angeles from Boston when he was a kid, and he’s the middle brother of his two siblings. He’s married to a fellow entrepreneur: His wife started her own public relations business servicing the fashion industry.
“We use a twin desk at home,” Ross said. “She’s got hustle. I wouldn’t be here or have the motivation that I have without her.”
As an undergraduate, Ross attended Goizueta Business School at Emory University in Atlanta. He got his start in commercial real estate at Morgan Stanley in the summer of 2007, where he focused on originating and securitizing large, floating-rate CMBS loans, moving to an investment banking role at Jefferies & Company in December 2007.
In 2009, he saw an opportunity to join a newly formed family office called Triangle Capital.
“I came on and helped build that team, really, from day one,” Ross said. “It was myself and two senior partners — I was a junior partner and managing director [of acquisitions and asset management]. We built that team from three of us in a broom closet with a Bloomberg terminal into an 18-person operation.”
When Ross joined Triangle, they started focusing on buying distressed legacy CMBS credit at the bottom of the market.
“I always joke that when ‘The Big Short’ ends, we were the first scene of a sequel; we really came in at the bottom and started picking up the pieces,” Ross said. “From 2009 to 2013, there was a real arbitrage opportunity. CMBS is a more commoditized, yield-driven product; it was never supposed to be a credit product, because losses were never supposed to be severe. You have very few bricks-and-sticks guys in the CMBS space, and you had very few guys that understood CMBS in the real estate space, so if you could come in in 2009 and really understand the real estate, but also have access to the street, to buy CMBS CUSIP credit, there was a tremendous operational arbitrage.”
Ross identified his current investment philosophy at Triangle but was somewhat handcuffed by the institutional flavor of the shop. He wanted to asset manage and operate the real estate. (While at Triangle, he started his MBA at the Wharton School at the University of Pennsylvania, finishing it within six months after leaving in 2014.)
“You wouldn’t learn his kind of commercialism at a bank,” the global hedge fund manager said.
While a few of his investors said they were unsure of Somera’s ability to execute the same playbook in a downturn — “distressed assets in distress” — its track record will keep them interested.
“For lack of a better term, they’re shit kickers; they get shit done,” the global hedge fund manager added. “[Ross] is 33 and has the hallmarks of something pretty special. But, he’s just at the starting line.”
The new owner of SouthSide Works will get more time to develop the last three vacant parcels at the site, including two on the Monongahela riverfront, as part of a major overhaul that could include up to $25 million in investment.
Pittsburgh Urban Redevelopment Authority board members are expected to vote Thursday on whether to give New York-based Somera Road Inc. as much as four more years to develop the prime riverfront properties as the firm works to bring new life to the 34-acre retail, entertainment, residential and office complex.
Somera, a commercial real estate firm that targets distressed assets, took over SouthSide Works, site of a former steel mill, from Soffer Organization, the longtime owner, this summer.
In an interview Tuesday, Ian Ross, Somera founder and managing principal, said the goal is to bring the popular South Side destination back to life, particularly on retail side, which has fallen on hard times with empty storefronts dotting the streetscape.
Building a connection: Developer to break ground on 280-unit apartment complex at SouthSide Works
Somera, he said, is planning to spend $20 million to $25 million to revitalize the property. As part of its deal with the URA, it also has agreed to invest at least $1 million to upgrade the town square and other public spaces. Mr. Ross said that spending likely will end up closer to $2 million.
He declined to say what plans Somera had for the riverfront parcels, one of which is next to the Hofbrauhaus restaurant while the other is located between the Hyatt House Hotel and an office building.
But Herky Pollock, a CBRE retail broker who has been serving as a consultant to Somera, said the firm is exploring the “highest and best use” for the riverfront land.
“There are many different options in play, and they’re currently evaluating which adds the most to the overall vitality of the project,” he said.
As for the vacant retail spaces within the complex, Mr. Pollock has said in the past that he envisions a mix that includes entertainment, health and wellness, restaurants, and perhaps even daily needs such as a grocery.
Under its agreement with the URA, Soffer had until next July to develop the three remaining parcels. It would have paid $450,000 an acre for the land.
As part of the new deal, the URA, which owns the land, plans to lease the tracts to Somera rather than sell it, with the price increasing the longer it takes to get a project rolling.
A tale of two developments: SouthSide Works and Station Square look to rekindle their mojo
It is giving the firm up until July 1, 2022, to start developing the parcel next to Hofbrauhaus.
If Somera does so by July 20, 2021, it will pay $27,072 an acre each year under a 99-year ground lease. After that, the price per acre goes up to $55,000 until Nov. 1, 2021. And if Somera hasn’t started by then, the price jumps to $91,615 an acre.
Should the firm fail to start by July 1, 2022, the URA has the right to request proposals from other developers for that parcel as well as the one next to the hotel if no work has begun there.
If Somera does start development of the Hofbrauhaus parcel by July 2022, it will have until Oct. 12, 2023, to close on the land next to the Hyatt House Hotel. Annual lease rates for that parcel could vary from $27,072 to $78,209 an acre, depending on when work begins.
“We’re paying more if we take longer,” Mr. Ross said.
As with the other riverfront parcel, if the land next to the hotel is not developed by the deadline, the URA can issue a request for proposals to give others a crack at it.
The agreement also includes a provision to adjust the lease rate for the parcels by 5% every five years.
As for the third undeveloped tract, which is located at Sidney and South 28th streets, the URA will lease it to Somera long term at a nominal rate with a purchase option.
At least initially, Somera plans to activate and maintain a public-oriented space that could include a farmer’s market, a dog park or public art. URA officials said they structured the deal that way for that parcel because it is smaller and more difficult to develop.
Nathan Clark, the URA’s real estate director, said the agency decided on a ground lease rather than a straight sale for the riverfront parcels because it believes there is value in holding on to such assets. They also will provide a steady source of income for the agency.
“It’s not how we have traditionally done real estate. This seemed like a good opportunity to utilize the structure,” he said.
He and Robert Rubinstein, URA director of special projects, said the additional time given to Somera to develop the parcels is appropriate given the level of investment and commitments the firm has made to improve the complex, which has been a showcase for the city in the past.
“We think they have the balance sheet and the expertise to reinvigorate the retail portion,” Mr. Rubinstein said. “Retail is a tough thing. It’s just not here in Pittsburgh, it’s nationally. It’s continuously evolving and needs to be meticulously curated.”
Besides Hofbrauhaus, SouthSide Works is home to The Cheesecake Factory and other restaurants, a movie theater and apartments. It also is the location of the American Eagle headquarters and an Amazon tech hub.
Since Ian Ross founded Somera Road Inc. in 2014, the New York commercial real estate investment firm has done over 50 deals, totaling more than $1 billion and representing about 11 million square feet of space across nearly 40 U.S. cities.
The firm’s most recent acquisition: PPL Plaza in downtown Allentown, a property Somera officially added to its portfolio after submitting the top bid of $16 million at a sheriff’s sale last month.
The office building at 835 W. Hamilton St. and accompanying parking garage at 940 W. Linden St., essentially stuck in neutral for two years while foreclosure proceedings played out, fit into Somera’s focus on distressed, value-add properties in secondary markets that are in need of a fresh start. While the building only has a few tenants, Ross attributed the low occupancy rate to the prior ownership group being overburdened with debt after buying the property for more than $90 million in 2006.
But now, he told The Morning Call on Monday, the property is owned at the right price, giving Somera the ability to offer prospective tenants compelling rent pricing and capitalize on the nationwide trend of suburban office tenants returning to urban cores. With a brighter financial outlook, Ross believes PPL Plaza — due for a rebranding soon — has features that speak for themselves, namely an LEED Gold certification, a rooftop garden space, and architecture that leads Ross to say, “They just don’t build buildings this way anymore.”
“It’s hands down the nicest architectural construction product that we own in our portfolio,” said Ross, Somera’s managing principal. “Going back to the value proposition, we’ll be able to provide what’s hands down the best office space in the market at a fraction of the cost of new construction. One thing we love about our position here is we can provide better product at a lower price than our competitors, and we’re excited to see that next big company come to Allentown and excited to compete to be a space provider for them.”
Ross spoke to The Morning Call about the building’s condition, the property’s tenant prospects — the building was in the running for ADP before the payroll processor selected Five City Centerlast year — and a Kansas City project that Somera carried out that has some similarities to PPL Plaza. Here are excerpts from the conversation:
Q: In court documents, the property’s receiver mentioned the Plaza received interest from Blue Cross and Buckeye Partners as potential tenants. Are those deals still alive or are there companies interested in the building now that the foreclosure is over?
A: We’re actively engaged with a handful of prospective tenants that are compelled by the live-work-play environment that can be created in downtown Allentown, especially with the parking ratio that we’re able to provide at our building. There’s a great value proposition here, I think especially as compared to the suburbs. A lot of these suburban users are saying, “Not only is this not the environment that I want to be in out in the suburbs for my newer generation workforce, but if I move down there into the downtown, I can have the right environment at a cheaper price.”
With regard to potential tenants, there’s really no good reason that this building should be empty. I think it’s the worst-kept secret that ADP was strongly considering, and was actually at the finish line, of taking over this entire building. We weren’t really involved at that time, but I think the unfortunate truth there was tenants don’t like potential disruption. They were concerned that the prior ownership didn’t have the capital and the positioning, with regards to the capital structure, to be able to hold onto this asset long term. And I think there probably were concerns about an ongoing foreclosure battle, ongoing receivership, potential bankruptcy, and no tenant wanted to take that risk. But outside of those risks, which are clearly neutered at this point now that you have a sophisticated, low-capitalized owner that owns at the right basis, I think ADP absolutely loved the building.
Q: The Plaza was built in 2003. Are there certain parts you want to refresh?
A: When we look at our portfolio around the country, that’s a lot of times what we’re doing. We’re fixing distressed buildings. [Senior Associate] Basel [Bataineh] and I were in the market a couple days last week, and we were actively looking for ways to spend money improving the asset. The truth of the matter is: This building is in pristine, mint condition. The mechanical engineering, the plumbing, the building’s systems, everything is in perfect shape, even the rooftop garden still looks great. With regard to some of the aesthetic features in the lobby, we might do some upgrades there, but the design has stayed extremely well and the building shows great. For better or worse, there’s not a lot for us to do.
Q: How do you envision the property? Because when you look at development in downtown Allentown, a lot of the construction has been down the road closer to PPL Center. If the Plaza gets full, can it help that end of the district?
A: I think the PPL Tower is really the anchor of downtown, and I think our building is inside of that anchor. I think you’ll continue to see these four, five blocks infill inside of those anchors, and I think we’re on the right side of that building, if that makes sense.
Q: Do you think you’ll be hitting the market about the right time? Because City Center Investment Corp. has ADP taking 10 floors of the 13-story Five City Center being built at Eighth and Hamilton street, and then will need to build more office space.
A: Absolutely. With regards to our value proposition and our ability to provide space at highly compelling rates, I think we’re in a great position to attract the next large user to this building. There’s certainly no longer any noise around distressed ownership or anything of that sort. It’s an incredible asset, in great shape. I don’t want to knock any competition, but we can provide better space at a lower price. I think we’re certainly in the market at the right time, and we’re excited about seeing the next great company come to downtown Allentown.
Q: Is there a specific type of tenant you believe will be drawn to the building?
A: I think because of how well designed this building was, it offers itself up to a variety of tenants, whether that’s a single user that wants the entire building or whether that’s single-floor users. The building can be very easily multitenanted. Furthermore, because of the efficiencies of the floor plate, the floor also chops up really well, so if you wanted to look at two, three or four users per floor, we could certainly do that, as well. Again, we often have these problems in smaller floor-plate buildings or older vintage buildings — this is not that. This building was designed to perfectly fit a user, from 5,000 square feet to 250,000 square feet. I think it really leaves us very open to the kind of companies that can fit in here.
Q: When you look at your portfolio, is there a similar property that would serve as a good blueprint for what you plan to do to the Plaza?
A: There’s a building in Kansas City that we acquired in 2016 called the 3Y building, at 300 Wyandotte and the River Market. We bought that building, also architecturally significant, very similar in style, a lot smaller in scale. It’s about 100,000 square feet, all steel and glass, beautiful building that was only about 10 years old that was designed by HOK Architects, which actually occupied a majority of the building. In a similar situation, the building was overleveraged with too much debt and acquired by a tenant-in-common group at too high of a purchase price, where come renewal, HOK — the firm had renamed to Populous — Populous couldn’t get a compelling enough rate as compared to alternative options in the market.
We ended up acquiring that [mortgage] note, taking title of the property and, as of today, we are now 100% leased at the asset, fully occupied with multiple tenants and an average lease term of about eight years. It’s been a great success story taking that building from entirely vacant to entirely occupied.
PPL Plaza in downtown Allentown has posed something of a conundrum for its new owner, Somera Road.
The New York commercial real estate firm typically acquires distressed properties in need of some obvious renovations. While the PPL Plaza (or, its previous ownership group) has certainly faced financial distress, the 16-year-old LEED Gold-certified structure is already “hands-down the architectural gem” of Somera Road’s portfolio, founder and managing principal Ian Ross says.
“We’ve banged our heads against the wall trying to figure out how to make it a better space,” Ross said in the atrium of the building prior to a tour Wednesday.
He later said it might be the “nicest vacant office building in the country.”
Ross reiterated his conviction that the more than 200,000 square feet of office space is of superior quality to any other office building in the city, and he promised to lease it at cheaper rates than anywhere else downtown.
Prospective tenants like that value proposition, he said. A half dozen are actively looking at the seven full floors of office space, he said, and three are interested in the retail space on the southeastern corner of the ground floor. Somera Road hopes to begin announcing tenants in the next three to four months and have its first tenants move in this fall.
“The interest has been astounding,” Ross said. “We’ve barely gotten started.”
Somera Road, which owns 55 buildings with about 11 million square feet of space across nearly 40 cities, has hired original building architect Robert A.M. Stern to consult on some modest upgrades.
That includes a redesign of the lobby, including new furniture and removing security turnstiles; fresh foliage in “winter gardens” on the third and fifth floors; and some demo work on the top two floors to create more open spaces attractive to today’s tenants.
It also wants to bring food trucks to the outdoor plaza, as well as more events and seating, Ross said. (It will feature the main stage of the city’s Blues, Brews & Barbecue festival June 8).
“We want it to again be the focal point of downtown,” he said.
Somera Road officially added the office building and accompanying parking garage at 940 Linden St. to its portfolio after submitting the top bid of $16 million at a sheriff’s sale last month.
Liberty Property Trust built the $60 million project in 2003 for PPL Energy Supply, which later became Talen Energy after the parent company headquartered next door spun it off.
A firm led by investor Joshua Safrin bought the property for more than $90 million in 2006, taking out a $83 million mortgage. The debt proved too much, and it’s been mired in foreclosure proceedings the past two years following a mortgage default in late 2016.
The previous ownership group argued the financial distress was a result of an unfair playing field created by the city’s Neighborhood Improvement Zone, where developers can tap into certain state and local taxes to pay the debt service on their construction loans.
It filed numerous lawsuits against the city and the Allentown Neighborhood Improvement Zone Development Authority, including a claim that the tax subsidies offered competitors constitute a “de facto taking of the property for which just compensation must be paid.” Talen moved three blocks last year into City Center Investment Corp.’s Tower 6, where rent per square foot was up to 30 percent cheaper.
In April, Lehigh County Judge Doug Reichley ruled against the former owners.
Somera Road, the new owner, claims it too has been unfairly hurt by the NIZ. On May 9, it filed a notice of appeal before Commonwealth Court.
According to Lehigh County Court records, Somera Road took on Wells Fargo’s obligations in the mortgage foreclosure judgment. That amounts to about $56 million, Ross said. Somera Road bought Wells Fargo’s interests in the mortgage last year for roughly $18.4 million, according to Trepp, a New York firm that monitors commercial property mortgages that have been bundled into bonds.
Somera Road also was one of the investors that sustained a considerable loss on the JP Morgan Chase mortgage-backed security that included the PPL Plaza loan, Ross said.
“We think we have a viable claim,” Ross said. “There was an artificial supply created in this market that unjustly burdened this building.”
City spokesman Mike Moore declined to comment Wednesday on Somera Road’s claim.
The building still has a few tenants: PPL Gold Credit Union, a restaurant and a BB&T bank branch on the first floor, along with some PPL Electric Utilities employees on the third floor. Somera Road said the third floor will again be vacant in a few months.
While the firm is open to leasing all the office space to a single tenant, Ross said it’s leaning toward multiple tenants, with most taking one floor and a marquee player taking the top two floors, which features an outdoor garden.