Hartford Business Journal

HARTFORDBUSINESS.COM | MARCH 18, 2024 17 Elliott B. Pollack, who represented the State House Square owners, was unsuccessful. The Stilts Building Shelbourne, Hartford's largest downtown landlord, sounded an alarm in 2022 about what it called "grossly excessive" property assess- ments stemming from the city's 2021 revaluation. The Brooklyn, New York-based real estate investment firm filed dozens of tax assessment appeals on properties it owns wholly or in part, including three major downtown office towers. Shelbourne paid $44.4 million for the 23-story, 579,613-square- foot Stilts Building in 2014. The city's 2021 revaluation placed the building's fair market value at $33.13 million. In January, New Britain Superior Court Judge Matthew Joseph Budzik agreed with Shelbourne's $18 million assessment. Among other issues, Budzik's ruling acknowl- edged the city's assessment wrongly included a 153,598-square-foot garage at the base of the building. Shelbourne claimed the parking structure belongs to the city, which receives all the parking revenue. Budzik agreed the city wrongly attributed $4.1 million in garage value to Shelbourne's portion of the Stilts Building. In addition to the $1.6 million refund, the lower valuation will save Shelbourne about $750,000 in annual property taxes, the firm said. Despite the court victory, the Stilts Building is still facing foreclosure, a legal action that was filed by lenders in June 2022, after Shelbourne missed several mortgage payments. Shelbourne said it has 20 addi- tional pending property tax assess- ment appeals in Hartford, including: • 350 Church St. (Metro Center): A 293,639-square-foot, 12-story office tower, valued by the city at a fair market value of $30.77 million. • 755 Main St. (Gold Building): A 26-story, 626,786-square-foot office high-rise valued by the city at $55.77 million. • 100 Pearl St.: a 13-story, 217,336-square-foot glass office tower valued by the city at $24.44 million. Shelbourne Chief Financial Officer Zach Feldberg said he expects a string of favorable court rulings in line with the Stilts Building decision. "It's indicative of the court's under- standing of value in a new world, but even more important because of the statute, the value as of October of 2021, which is when the assessment was based on," Feldberg said. "I guess the judge was very reasonable and fair and understood COVID and working from home, which is a seismic change for both the office market in Hartford and across the country. You could have understood on Oct. 1, 2021, there were going to be significant vacancies created, and downsizing by other tenants." The Stilts Building was 95% occupied when Shelbourne bought it a decade ago, Feldberg said. As of early March, the building was 57% occupied, and faces the expiration of "major leases" in the coming three years, he said. Feldberg said he hopes the city will recognize new values of commercial office buildings without protracted court cases, and find other ways to help beleaguered landlords. "We would hope that the asses- sor's office and corporation counsel would take a very good look at this decision and try and readjust their position to offer much more reasonable settlements based on the market," Feldberg said. 'Inventory constriction' For at least three years, brokers, landlords and economic develop- ment professionals have warned of increasing strain on downtown Hartford's office market. As hybrid and remote work became more established, some companies began ceding large portions of their office space as leases came up for renewal. At the end of the fourth quarter of 2023, 32% of downtown Hartford's 5.82 million square feet of Class A office space was vacant, according to real estate firm CBRE. That was up from an 18.1% vacancy rate recorded during the same period in 2019, before the pandemic took hold. As Hartford boosters are quick to point out, other cities are facing similar impacts from a deflated office market. Collapsing office values will cost the city of Boston up to $1.5 billion in property tax revenues over the coming five years, according to a new analysis by the Boston Policy Institute and Center for State Policy Analysis at Tufts University. Offsetting revenue from sinking commercial values would require a 25% to 30% hike in residential property taxes, according to the Boston study. A potentially significant tax burden shift from commercial property owners to homeowners is an issue Hartford will also have to address. Chris Ostop, managing director of advisory and brokerage firm JLL, said he predicts a wave of office building foreclosures and refinanc- ings will lead to lower commercial property values in Hartford and other major office markets. That reset will offer new and existing landlords financial breathing room to refurbish buildings and attract new tenants. That will even- tually help restore the office market's health, Ostop said. Philip Gagnon, principal of real estate broker and consultant Colliers in Hartford and New Haven, said he expects current trends will lead to "a lot" of Hartford's Class B and C office buildings getting knocked down or converted to Fighting foreclosure, Shelbourne says lenders are withholding rents needed to keep 23-story Hartford office tower running By Michael Puffer mpuffer@hartfordbusiness.com S helbourne Global Solutions is claiming lenders trying to foreclose on its 23-story "Stilts Building" office tower in downtown Hartford are denying access to the property's rental income, which is used to pay basic operating expenses. The move, Shelbourne contends, aims to force the Brooklyn, New York-based real estate investment and develop- ment firm to surrender the building. "They are trying to force us to turn over the keys," said Shel- bourne's Chief Financial Officer Zach Feldberg. "That's their goal. We are obviously fighting that and trying to figure out how the tenants' interests and our interests are protected." Shelbourne, on Feb. 12, filed a lawsuit against Wells Fargo Bank, its special servicer PNC Bank, and two other companies claiming it has been wrongly prevented from tapping rental income to cover property operating expenses. It's a separate case from the June 2022 foreclosure lawsuit Wells Fargo filed against Shel- bourne. That earlier suit contends Shelbourne missed several monthly payments on a $31 million mortgage for the Stilts Building, at 20 Church St. In May 2022, Wells Fargo sent a letter to Shelbourne demanding full repayment of $25.7 million in outstanding debt. Shelbourne said it has attempted to refinance the building's debt, but has been unsuccessful so far because of an increased vacancy rate and lenders' pull back from the office market. In its recent court complaint, Shelbourne contends PNC is not providing funds for operations, "jeopardizing the welfare and well- being of the tenants, and preventing the plaintiff from fulfilling its lease- hold obligations to the tenants." This lack of funding has threat- ened basic building services, including electricity, garbage collection and security, Shelboune contends. The lender is also refusing to pay broker commis- sions, according to Shelbourne. "What they are doing is basically stifling the market," Feldberg said. "Brokers refuse to show the building. That's extremely concerning to us." Shelbourne estimates it costs about $450,000 monthly to run 20 Church St., including taxes but not debt service. In addition to Wells Fargo and PNC's Midland Loan Services arm, Shelbourne's suit names Comput- ershare Trust Co. and Shrewsbury River Capital LP as defendants. According to Shelbourne's filing, Computershare Trust Co. has acquired Wells Fargo's trust busi- ness and may be the proper holder of the mortgage note. A Wells Fargo spokeswoman declined comment, referring questions to its special servicer. A PNC/Midland spokeswoman said the company does not comment on its customers or their business. Attorney Joseph J. Cherico, of law firm McCarter & English, who is representing Wells Fargo in the 2022 foreclosure case, also did not respond to a request for comment. Feldberg said the Stilts Building had a 5% vacancy rate when Shelbourne bought it a decade ago for $44.4 million, but occu- pancy has since dropped to 57%. He also noted there are "major leases" coming up for renewal in the coming three years. The Stilts Building currently has about 20 tenants, including law firms Cantor Colburn and Hinckley Allen, Big Four accounting firm Ernst & Young and CareCentrix, according to court records. Feldberg said the loan is part of a commercial mortgage-backed secu- rity, funded with investor money through Wall Street. He contends it's controlled by companies moti- vated by fees and with little interest in the property's outcome. Feldberg said the stress on office properties across the nation will eventually demand attention from federal lawmakers. Falling property values and rising expenses are going to prompt owners to surrender thousands of office buildings, he predicted. "It's wrecking the market and this damage is not yet under- stood," Feldberg said. The "Stilts Building" office tower in downtown Hartford. PHOTO | COSTAR Continued on next page

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