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Playhouse Square/Cleveland, OH

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Cleveland Plain Dealer

Monday, November 08, 2010

PlayhouseSquare stars in its own real estate revival

By Michelle Jarboe, The Plain Dealer

PHOTO Joshua Gunter, The Plain Dealer

Tom Einhouse, vice president of PlayhouseSquare Real Estate Services, looks out the windows on the second floor of a vacant building at 1317 Euclid Ave. PlayhouseSquare is buying the building and plans to renovate it for offices and a restaurant.

CLEVELAND, Ohio — Behind the marquees of PlayhouseSquare, a real estate machine is chugging along.

The PlayhouseSquare Foundation, which has revived historic venues and attracted Broadway shows and more than 1 million people a year to Cleveland’s theater district since the 1970s, owns roughly 1 million square feet of real estate.

The nonprofit corporation also manages office buildings, industrial facilities, bank buildings and retail strips across the region and expects to grow through property acquisitions, a major theater redevelopment and an expansion into leasing and tenant representation.

Today, roughly 30 percent of the foundation’s revenue is tied to real estate. This week, PlayhouseSquare will buy a vacant building at 1317 Euclid Avenue. Within the next two months, it will acquire a building on East 13th Street for Cleveland State University’s theater, dance and arts classrooms and offices for the Cleveland Play House.

By the end of this year, PlayhouseSquare will control most of the block between East 13th and East 17th streets, north of Euclid Avenue.

The nonprofit’s model — part performing-arts presenter, part economic-development engine — has been mimicked by arts groups from New Jersey to London.

MAP James Owens, The PD

And while PlayhouseSquare’s pursuits might seem at odds with running the nation’s second-largest performing arts center, (Lincoln Center in New York City is No. 1) real estate has provided the foundation with a way to subsidize arts and education programs and to create what Art Falco, the chief executive, refers to as a "working endowment" to ensure the nonprofit’s survival.

"We’re not aware of any other organization, particularly in the performing arts, that has taken this approach," Falco said. "It’s just been an evolving strategy, as we have moved from renovations of the theaters to operations of the theaters to being a catalyst for neighborhood development."

Tom Schorgl, president of the Community Partnership for Arts and Culture in Cleveland, said arts groups across the country are looking for innovative ways to build on their strengths and shore up their finances.

"Arts and cultural organizations are looking at what they have in terms of endowments, cash reserves, everything that they can consider as potential increases in their equity as an organization," Schorgl said.

Running a real estate business wasn’t part of the plan in 1970, when the Playhouse Square Association, the precursor to the PlayhouseSquare Foundation, became a nonprofit group. A grassroots operation, the association fought to save five historic theaters — the Ohio, the Palace, the State, the Allen and the Hanna — from demolition. Opened in the early 1920s, the theaters deteriorated as Clevelanders moved to the suburbs and the glitter of television made the stage seem pass.

As the theaters slowly re-opened in the ’80s and ’90s, PlayhouseSquare expected developers to pile on with plans for restaurants, stores, offices and apartments in the district. Some private investors did buy buildings, but projects never materialized. So the nonprofit took charge, acquiring parking lots and office buildings and teaming up with Wyndham Hotels & Resorts to build a 205-room hotel at Euclid Avenue and Huron Road.

"It’s a big leap of faith for trustees to take on that kind of debt and development," said Larry Wilker, who led the foundation before Falco and still works in the theater business.

But buying and redeveloping real estate has allowed PlayhouseSquare to reap the financial benefits from people who stay at the hotel, work in the office buildings, eat at the restaurants and park in the theater district — money that, Wilker added, might otherwise have landed in private developers’ pockets.

In 1999, longtime real-estate hand Tim Luli left a consulting job to open a property-management operation for PlayhouseSquare. That division, now called PlayhouseSquare Real Estate Services, started out running the nonprofit’s properties. Since then, it has picked up real-estate consulting gigs for clients including Progressive Insurance, ShoreBank, Automated Packaging Systems and the Center for Children and Family Services. It provides maintenance and other services to private property owners, and it manages more than 1 million square feet of other owners’ properties in communities including Cleveland, Fairlawn, Middleburg Heights and Twinsburg.

PlayhouseSquare has $155 million in assets, with about $47 million in debt. The foundation runs on a budget of $60 million to $65 million a year and covers roughly 90 percent of its costs through ticket sales, real estate and other internally generated cash — in an industry where the average is about 74 percent. Donations cover the rest.

Each of the commercial properties is owned by a separate limited liability corporation, a set-up meant to buffer the foundation from risk. These corporations are responsible for $1.3 million in annual real estate taxes, a number that will go up with acquisitions and the upcoming end of a tax-abatement period on the hotel.

PHOTO Joshua Gunter, The Plain Dealer

The outside of the former F.W. Woolworth department store at 1317 Euclid Ave. PlayhouseSquare is renovating the neighboring Cowell & Hubbard building, at 1309 Euclid Ave. The pair of two-story buildings eventually could be topped with several floors of housing, once the residential real-estate market recovers.

PlayhouseSquare today is scheduled to close on the purchase of the two-story 1317 Euclid building, a former F.W. Woolworth department store that most recently housed the Haig Avedisian carpets business. Falco would not disclose the specific purchase price, but he said it is more than $1 million. He expects to finance a $3 million renovation of the property using PlayhouseSquare’s line of credit and federal and state tax credits for preservation of historic buildings.

The first floor of the building could accommodate offices and a destination restaurant, something PlayhouseSquare has been coveting for more than a decade. With Euclid Avenue restored through a rapid-transit bus project, Cleveland State University growing and the Cleveland Play House moving downtown, the district finally might attract a restaurant that is not dependent on theater traffic, said Tom Einhouse, vice president of the real estate division.

At 1309 Euclid Ave., PlayhouseSquare is remaking a two-story building long occupied by the Cowell & Hubbard Co. jewelry business. Kent State University’s Cleveland Urban Design Collaborative, a combined master’s program and community service organization, has taken much of the second floor. The ground floor could be used for another restaurant and, potentially, CSU’s student art gallery, said Jack Boyle, the university’s vice president of business affairs.

PHOTO Joshua Gunter, The Plain Dealer

A 60,000-square-foot floor of the Middough office building once was used to park cars. PlayhouseSquare is buying the five-story building and will lease it to Cleveland State University, which plans to move its theater, dance and arts classrooms there. CSU will sublease space to the Cleveland Play House, which is moving downtown. Case Western Reserve University also plans to take space in the building, for a graduate theater program.

CSU and PlayhouseSquare are putting together a deal for the five-story Middough building, at 1901 East 13th St. The office building will complement a $30 million overhaul of the Allen Theatre, which is being transformed from a 2,500-seat theater to a three-venue, 1,000-seat complex for the Cleveland Play House.

PlayhouseSquare plans to pay an undisclosed amount for the Middough building and lease the entire property to CSU. The university will then sublease space to Middough Inc., an engineering company that currently occupies two floors, and to the Play House. Case Western Reserve University plans to move its graduate theater program into the building.

The $10 million project will bring 700 students, faculty and staff to PlayhouseSquare and will open up CSU property along Chester Avenue for residential development. PlayhouseSquare expects to finance the improvements using bonds, federal historic preservation tax credits and New Markets Tax Credits, which are meant to spur development in low-income areas.

"This is something you don’t see anyplace else in the country, a facility that houses this many live theaters as well as the theater departments of two major universities as well as a major art department," Boyle said.

Along with the CSU and Allen Theatre projects, PlayhouseSquare still hopes to be an integral part of Cleveland’s District of Design, a swath of consumer-product makers, showrooms and stores along Euclid Avenue. The design district plan, led by the Cleveland Institute of Art and CSU, fell dormant during the recession as businesses stopped expanding, financing dried up and several potential tenants walked away. Now Einhouse is once again talking about filling empty spaces in PlayhouseSquare.

Boosting occupancy is a focus for Allen Wiant, a longtime real estate broker who left CB Richard Ellis in April to become a part of PlayhouseSquare Real Estate Services. His first priority is to promote PlayhouseSquare’s portfolio and market the neighborhood and district amenities to potential tenants. The Idea Center building, home to WVIZ/PBS and 90.3 WCPN, is about 91 percent leased. The Bulkley Building, where PlayhouseSquare has its offices, is 86 percent occupied. The Hanna Building, at 80-percent occupancy, is more of a challenge, and Wiant plans to pitch it to companies in need of small spaces, flexible leases and shared services.

By mid-2011, PlayhouseSquare’s growing real estate division could offer leasing and tenant-representation services, in addition to project consulting based on the foundation’s experience obtaining tax credits and other financing, restoring historic buildings and tackling complicated development deals. Wiant does not expect to compete with major brokerages. But he believes PlayhouseSquare Real Estate Services can create a niche working with local and regional companies.

"The reputation that PlayhouseSquare Foundation has and the work experience that we can point to is phenomenal," Wiant said. "It really allows us to talk to people in a very different way than coming from the for-profit world. They realize that we’re a very fiscally responsible organization, and we tend to look at things on a very conservative basis."

Falco said he has no interest in creating a real-estate empire. He sees real estate as a way to build security for PlayhouseSquare, which has focused most of its fund-raising on capital projects. The foundation has an $11 million endowment, far less than the standard for an organization its size. Eventually, Falco said, PlayhouseSquare will sell off properties and put at least part of the cash toward its endowment.

If real estate services become responsible for the majority of the foundation’s income, the nonprofit PlayhouseSquare might have to spin off its real-estate subsidiary for tax purposes. Falco admits that could happen within the next few years. For now, though, he is focused on making projects happen.

"Area development is part of our mission, and if we don’t do it, it doesn’t occur," Falco said. "It’s been entrusted to us and supported by our board that we should do this. At some point in the future when the market can support itself, we won’t have to do this sort of thing."

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