Downtown building owners, landowners don't always equate

A quirk in downtown property ownership from an earlier time has come to light twice now as the city of Cedar Rapids pushes ahead with its flood-recovery rebuilding effort.

Both the construction of the city's new convention center and the renovation of the city's Paramount Theatre, it turns out, have required the city to hunt down and negotiate with the owners of land different from the owners of the buildings on the land.

The building owners are easy to find - the city, for instance, owns the theater. It gets more complicated with the land owners.

The Paramount Theatre, for instance, sits, in part, on land owned by descendants of early Cedar Rapids property owners in a lease arrangement dating to 1926.

Over at the convention center site, project manager John Frew initially thought he had one property owner, Jon Dusek, president/CEO of Armstrong Development Co. of Cedar Rapids, to deal with on the purchase of property in the 200 block of A Avenue NE for the convention center.

However, Frew, president/CEO of Frew Development Group, came to learn that Armstrong Development owned the parking garage and two office buildings there, but only four of five lots on which the buildings sat. The fifth lot was owned by three elderly sisters who were leasing the land to Armstrong in a long-term lease.

“The difficult part was locating the owners, finding their representative and convincing them to sell,” says Frew.

The phenomenon of having one owner of land and a different owner of buildings on the land first came to light last month as the Cedar Rapids City Council accepted an appraisal setting the fair market value at $419,232 for land under the actual theater portion of the city's Paramount Theatre building.

Part of the building's $35 million flood-recovery renovation is being paid for with the use of historic tax credits, and the investor in the tax credits is requiring that the city own both the building, which was given to the city in 1975, and the land under it, Rita Rasmussen, the city's senior real estate officer, explained in a report to the council last month.

Rasmussen's report states that the current 100-year land lease for land under the Paramount began in 1926, and she lists the land's owners as the Trust of Viola Elsenbast; the Elizabeth Naibert Revocable Trust; James F. Simon Trust; Charles L. Simon; Lois Ann Winkler; Mary K. Simon; Courtney Strong; Mary O. Strong; and Smulekoff Investment Co.

Gary Streit, an attorney at Shuttleworth & Ingersoll in Cedar Rapids, who is handling the sale of the land, says that the negotiation for the sale is concluded at the price approved by the City Council last month.

Streit says the owners view the sale as a way to support the effort to renovate the historic Paramount Theatre, though he adds that the lease was sufficiently old, payments were divided up into 48ths and the return on investment “wasn't so hot.” The sale price, he says, was arrived at by considering the income stream that came from the lease and from the value of comparable sales of bare land.

‘A throwback'

Streit says land leases in Cedar Rapids are something of “a throwback,” adding that the arrangement was apparently common downtown at one time in the city's history. Such was the case with former YMCA at First Avenue NE and Fifth Street NE and the US Bank building, he says.

David Lodge, senior vice president at Guaranty Bank & Trust Co., says the land under the former Perpetual Savings & Loan Association building, 110 Second Ave. SE, sat on leased land. In fact, Lodge, who worked at Perpetual at the time, recalls the financial institution and the landowner disagreeing on the terms of a new lease. At the point, the building owner and landowner each had an appraiser, and the lease called for the two appraisers to appoint a third if no deal could be reached.

“The lease can be a little testy when it matures,” Lodge says. In fact, at the end of the day, the building owner can be at the mercy of the land owner, “and you know what, guess who gets the building at the end of the lease? The landowner,” says Lodge.

“'You got your building on my land, and, guess what, the lease is up,'” Lodge jokes of a “worst-case scenario” for a building owner on leased land. “You aren't going to haul it away. I suppose they could, out of spite, tear it down.”

Lodge suspects that land leases once gained some favor years ago because land owners wanted to maintain an ongoing income stream and may not have wanted to suffer the tax consequences that can come with an outright sale.

Armstrong's land

Armstrong's Dusek says he learned that the Armstrong Centre, which had been Armstrong's department store, had three land leases under it when he arrived at the company in 1990. Ultimately, the company was able to buy the land, in part, by convincing the owners that a sale made more sense than monthly rent payments, he says.

One of the land leases, under what today is the Armstrong Centre's Food Court, was owned by John Ely Jr., whose family arrived in Cedar Rapids in the 1840s.

“That might have taken me eight to 10 years of infrequent communication,” Dusek says of his purchase of land from Ely, who died in 2007 at age 88. “I put it out there that we were interested in the purchase, but it just took a long time. Eventually, probably, he was trying to clean up his estate.”

Armstrong Development was nicely positioned in 2010 when the city needed to purchase the 200 block of A Avenue NE, where Armstrong had a parking ramp and two office buildings, for the city's new convention center.

Convention center project manager Frew soon discovered that writing a check to Armstrong Development, which was paid $5.24 million for its property, still left one of five lots under the Armstrong property in the hands of another owner, three elderly sisters.

“My grandfather built the parking ramp, and for whatever reason, he wasn't able to purchase that one piece of land, but he was able to get a long-term land lease,” Dusek explains. He says the company sent out lease payments for some 50 years.

Frew says it was not clear that the city was going to be able to buy out the owners of the land lease for the convention center, so Frew says he obtained permission from the U.S. Economic Development Administration, which is providing $35 million for the project, to continue the lease if necessary. In the end, the city bought the land lease for $141,000.

Still used

Scott Byers, a Realtor at Gibbs Lamb Drown Commercial in Cedar Rapids, says the practice of the land lease continues to be used today, though he says he's participated in one such arrangement in 35 years. That was before his recent 16-acre retail development, Marketplace on First, across First Avenue East from Lindale Mall. Nine of the development's 16 acres are on leased land, land which had sat under the former Menard's store, which also rented the land.

“The owners informed us they never sell,” Byers says. As a result, Byers arranged to lease “the dirt” for 80 years from the owner, an entity located in New Jersey, he says.

Byers says such leases always need to be for an extended number of years or banks won't lend to the building owners for fear of not having the mortgage satisfied before the land lease ends. Being forced to lease land meant he needed to borrow $4 million less to develop the site for Marketplace on First, and he says he was able to fashion land lease payments to be of a size “reasonably” similar to what his payments would be on a 30-year mortgage.

“So for the first 30 years, you say, ‘OK, that's about a neutral event economically,'” Byers says. “Then one has to say, ‘What happens after that?' And you just have to decide if like the ground well enough to be able to swallow those next 50 years of land lease payments.”