Shell Game

While its owner clashes with the city, the Sears building languishes
Michael Dvorak

There aren't many outward signs of life in the hulking old Sears complex at the intersection of Chicago Avenue and Lake Street in south Minneapolis. Grass sprouts through the parking-lot asphalt. Since Sears abandoned the 72-year-old site at the end of 1994, graffiti artists with no fear of heights have left their marks on the brown bricks high up on the main building. An American flag flaps atop the tower. A sign facing Lake Street touts the redevelopment of the complex as the Great Lake Center and lists the numerous government agencies that have lined up to help fund the $100 million project, which is to encompass a whopping 1.9 million square feet in the Phillips neighborhood.

But so far STA Development Corp., which has owned the 19-acre site for more than two years, has managed to attract only a handful of tenants. The primary occupant is a nonprofit organization called Minnesota Diversified Industries (MDI), whose tenancy predates STA's purchase. And all is not harmonious between tenant and landlord. MDI sued STA for breach of contract this past spring in Hennepin County District Court, alleging that the developer has refused to replace an increasingly leaky roof.

MDI general counsel Elmer B. Trousdale believes STA doesn't have the money to fix the roof and is delaying repairs while trying to line up more financing. "What they want to do is replace the roof as part of a major redevelopment of the entire three-building complex, and we don't think that they have the financing in place for that," asserts the attorney. "But their duty to replace the roof is not conditional on their getting money to redevelop the entire area."

STA has countersued, seeking to evict MDI for violating its lease. "They've never been happy with the lease that we negotiated with Sears," retorts Trousdale, who says that until MDI filed its lawsuit STA hadn't raised any objection to the majority of issues mentioned in the counterclaim.

STA president Ray Harris says he can't discuss the lawsuit. As for Trousdale's statement that his company is short of funds, he says, "I'm not in a position to give you a response on that. I don't think that's the issue." Yet at an August 31 hearing in the matter, STA attorney Virginia Bell told the court, "We do not have the funds to replace the roof at this point," and argued that placing MDI's rent in escrow to help pay for the roof would create a "hardship" for STA.

Ray Harris is perhaps best known as the developer of Calhoun Square, which opened in 1984 at the intersection of Lake Street and Hennepin Avenue, and whose anchor tenants now include Famous Dave's, Figlio, and Borders. For a time he also held development rights to the City of Minneapolis's star-crossed Block E parcel downtown, which he lost when he was unable to secure financing. At 140,000 square feet, Calhoun Square is less than one-tenth the size of the Sears complex, which Harris says is "twice the size of the IDS building" in terms of available space. Harris will also tell you that few developers boast a résumé that includes what he's trying to pull off. "No one's done a 19-acre, 1.9-million-square-foot renovation," Harris says. "It's one of the largest in the country."

He and his partners first expressed interest in the Sears complex in 1997, after other redevelopment attempts there had failed. They purchased the site in 1998 for $5.9 million, with a $2 million mortgage assist from the Minneapolis Community Development Agency (MCDA) and a $200,000 grant from the Powderhorn Park Neighborhood Association. A 1999 MCDA state filing on the project waxed confident about a $98.4 million complex with a mix of light-industrial and retail use that would bring about 4,000 new jobs to an economically troubled area of south Minneapolis. But today the agency is singing a gloomier tune.

In a June letter to the developers, an exasperated MCDA executive director Steve Cramer tallied the substantial amount of money the MCDA had helped bring to the table to date: more than $23.6 million in public funds, including the MCDA's mortgage; $8.5 million in federal grants and loans for a planned parking garage; $4.5 million from the Metropolitan Council for pollution abatement; $3 million in state bonding money to help Hennepin County acquire space; and more than $3 million for a planned Metro Transit hub. The federal designation of Minneapolis as a so-called Empowerment Zone helped the project secure another $1.4 million in federal grants, Cramer noted; with an additional $17 million in public funds required to complete the parking garages, public investment in the project would top $40 million. But while public money has flowed in--$7.2 million has been spent to date, according to the MCDA head--STA has generated precious little cash of its own. Wrote Cramer: "Now is the time for STA to do its part to get the project underway."  

Two key potential tenants, Hennepin County and Allina Health System, have not committed to the project. Richard Johnson, deputy Hennepin County administrator, says the county is interested in locating a service center and some offices on the property, and perhaps a medical clinic as well. But Harris, he says, is asking too much for the space. "We're committed to the area, but it has to make some economic sense for us," asserts Johnson, adding that the county rejected STA's most recent proposal. Allina spokeswoman Sarah Stoesz says the Minnetonka-based healthcare company has not yet come to a decision on whether to relocate its corporate headquarters to the site: "We're not sure yet that that building is going to meet our needs."

Says Cramer: "I think they're simply quoting rates that are way, way above market." The MCDA executive declines to get specific but says he is familiar with the negotiations involving Allina and Hennepin County.

Harris disagrees. "I think there's some real confusion here," he says, in reference to his asking prices. "I don't think that that's the case at all. I think we're very competitive."

One tenant who has signed a lease can't get access to his space. Tom Reynolds, executive director of the Whittier Community Development Corporation, says his nonprofit leased 40,000 square feet to house a subsidiary, Southside Ventures, which aims to serve as a small-business incubator. Reynolds says that he had hoped to be up and running by September 1 but had to push back the date to January because he has been denied access to the freight and passenger elevators. "There are so many internal problems that are occurring within the development itself that we are basically on hold," he says, mentioning the MDI lawsuit as a factor. Still, Reynolds, whose agency has an option to lease additional space, is optimistic about the long term: "We have a great interest in becoming an equity partner in the development."

Barry Bosold, a minor partner in STA who later sold his interest in the venture to Harris and STA executive vice president David Jasper for an undisclosed sum, brought Reynolds to the project. Bosold says that while he greatly admires Harris, he thinks his former partner is stretched too thin. "It's been pretty disorganized," says Bosold, who now runs his own real estate firm. "I think they've been trying to cover too many bases simultaneously. I have enormous respect for Ray Harris. My loyalty to him notwithstanding, it takes more than one guy to make something like this happen.

"We signed the lease and we walked in and they couldn't deliver," Bosold says of the Whittier deal. "That's an internal problem--they've got an internal management problem that's pretty severe if you can't deliver. It doesn't encourage people like me to bring you deals."

Though sales have been slow, STA turned down at least one potential tenant. Michael Krause, executive director of the nonprofit Green Institute, says he was interested in space to house the group's ReUse Center, which sells donated building materials and provides jobs for neighborhood residents. "I told Ray that I was ready to sign a letter of intent for 30,000 square feet," Krause recalls of conversations this past spring. "They basically said they weren't interested--that we weren't the kind of tenant they were looking for. They didn't even want to negotiate with us."

Harris confirms Krause's version of events. "It would set a tone," the developer explains. "It would set an image for the project that is just not right for the rest of the things that we're thinking of doing."

Harris also says he's close to working out a deal to give Tom Reynolds access to his space, and that he has leased space to four additional tenants, all of them tech companies. All told, he asserts, he has leased more than 120,000 square feet in addition to MDI's space (which encompasses more than 440,000 square feet). But he has so far been unable to lease space in the tower building (which includes more than 1.1 million square feet), Harris complains, because there aren't enough existing parking spaces and Minneapolis city officials are dragging their feet on their commitment to construct a garage. (Earlier this summer city officials refused to go forward with the garage because Harris hadn't lined up enough tenants to justify the expense.)

"Do I think STA can pull off that development? My answer is no," says the MCDA's Steve Cramer. Would the city consider attempting to wrest control of the project from Harris, or trying to buy the property from him? Responds Cramer: "There are, I believe, some options."  

Harris, too, professes to be reviewing his own options. "I guess we're looking at some other alternatives that I'm not prepared to talk about at this point," he hedges, alluding to a "different mixed use" for the site. But he hastens to add, "There's no intent to close the door on a future working relationship with the city."

At this point, it's unclear what might possibly break Harris's stalemate with the city. "We're at an impasse," sums up Minneapolis City Council member Brian Herron, in whose ward the site is located. "I don't know if STA has the wherewithal to do this or not. The bottom line for me as a council member is that this project has to get done. This is one of the most significant and important projects for south Minneapolis, not just for the Eighth Ward. I'd hate to see the work that they have started have to be finished by someone else, but at the same time we have to be reasonable and fiscally prudent."

Harris says he's undaunted by the skeptics and the legal problems. "The Great Lake Center still needs to happen," he insists. "This is a very much underserved part of the Twin Cities. We're looking at ways to make this project work. Our mission has not changed."

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