Werner Minshall

When the Tower and Galleria at Erieview in Cleveland was sold in 2002 to Minshall Stewart Company for a mere $30 million (its original cost in 1987 was $43 million), Cleveland's leaders wondered who this out-of-towner was and what his plans were. As it turns out, Werner Minshall's father served for 12 years as a Congressional Representative for a district in Cleveland's suburbs, and Werner Minshall moved out of town in the mid '70s after college. While the developer works mainly in Washington, DC, Denver and Columbus, the purchase of the Galleria and Tower is a major addition to his portfolio. Cool Cleveland sat down with him on the Ritz-Carlton Concierge Level, looked out the window at Cleveland's Downtown, and discussed his views on how to develop older cities, his plans for the Galleria, the convention center issue, and his potential political ambitions.

On The Tower and Galleria at Erieview, from the MSScompany.com website:
The property will undergo a significant renovation and repositioning program to return the asset to its former Landmark status. Among the major projects to be completed will be façade renovation, reconfiguration, and beautification of the building’s entrances and lobbies and re-tenanting of the Galleria. The retail portion of the Galleria will be leased to a mix of local and national retailers that service the 5 million square feet of office tenants that surround the property.

Cool Cleveland: What made you think about buying the Tower and Galleria at Erieview located Downtown? What vision did you have for it?
Werner Minshall: I was born in Lakewood, spent the first two years in Cleveland, then my father was elected to Congress and moved us to Chevy Chase, MD. Because I was a problem student, I was shipped out to boarding schools when I was in 7th grade. I lived in Massachussetts, Maryland, and South Carolina while spending every summer at our home on Kelley’s Island, near Sandusky, Ohio.

So the Cleveland connection is strong all through your life? In 1968, 1970, and '72, I was involved in my father’s campaigns against Bill Stanton, Ron Mottl, and Dennis Kucinich; all three we won by increasingly smaller margins. In 1974 my father retired after 20 years in Congress. At that time I was a senior at the University of South Carolina, and when I graduated, I moved to Cleveland.

Why Cleveland?
I considered Kelly’s Island to be my home, and I knew Cleveland well from my campaigning; I also had ideas about pursuing a political career...

What’s the status of those plans?
They have been shelved. My family is not wealthy, yet we’re better off than 90% of other people, but we don’t have trust funds. My father said, “Don’t go into politics, go into business first.” I spent 1976 and 1977 in Cleveland - two of the coldest winters in Cleveland ever. My wife worked for Alcan Aluminum in Erieview. She remembers four-hour commutes from Lakewood to Downtown.

I hope you don’t have one of those cottages on Kelley’s Island...
That’s all we have is a cottage..After two years of that...Look out the window [at the increased development]. I saw this in 1977, and knew we ought to buy these buildings and turn them into condominimums. I tried this for two years and said, 'Screw this,' and then moved back to Washington, DC. I remember there wasn't a decent restaurant in Cleveland except the Theatrical, and maybe the Tick Tock Tavern in Lakewood. We moved to Washington DC thinking we’d live there a couple of years, then have kids and move back to Cleveland. But my real estate career took off, my business was in Maryland, and that was the end of that story. We started in the mid '90s looking for other assets to buy. I’m a value oriented investor...

Meaning what...?
Meaning I like to bet on intrinsic value, rather than something that’s going to increase in value.

You’re not speculative?
I’m not speculative. People might laugh at that statement, but that’s how I see it. We started in Columbus in the late '90s and made a lot of money down there. We laid a few more bets around the turn of the century: 80 Broad Street and 100 East Broad Street. One is Key Bank, and the other is Bank One.

You would think with those tenants those would be great properties.
The rental income market went from $20 to $12 square foot between last Quarter of '01 and the first Quarter of '02. That’s what happens, and you move on. We’ve retained good occupancies; we’re only 8% vacant in a market that is 25% vacant.

How did the Galleria at Erieview come about?
I started looking in Cleveland with Jim Breen [of Breen & Fox], and spent 3 or 4 years looking at a variety of products. In 2001 he bought the IMG building, but I passed on the deal. Because of all those efforts, I became interested in the Cleveland market. I chased the Erieview asset since 2000, and bid on it three times. Twice when Jacobs owned it, and once when Connecticut General owned it, and finally ended up buying it in 2002. What I saw was a fairly vibrant office market that had problems. But compared to the $60-$70 per square foot that I paid in Columbus, I could buy it for $30 a square foot in Cleveland.

What problems did you see in Cleveland?

The same problems I saw in Nashville, Boston, Washington, Indianapolis: as center cities have become more expensive, and as real estate analytical software has become more adept, those two facts have merged. Meaning that as little as 10 years ago, companies couldn’t analyze their space costs very efficiently. As the software became more sophisticated, that analytical improvement merged with the need of companies to become leaner. That would be what you would call the shareholder value era of our country. When companies began operating less and less in the interest of their CEOs and employees and cities, and began worshiping at the grail of the shareholder value thesis, what began to occur were companies like National City Bank, TRW, and Bank One, which were the touchstones of their community, with local ownership that was intensely involved with their community. And all of a sudden, they said, “Shareholder value is what we’re all about,” and that’s primary to all other interests. So now they looked at their cost structure, but it was harder. Now, a company can ask a broker to compare a property in Cleveland to a property in Bay Village or Gates Mills, and take that and compare it to Tennessee, or for that matter, Mexico City. And you can find the cost of the property, the county and city tax structure, and now real estate decisions become strictly cost decisions and they lose the allure of the locational benefits. For instance: why be in a big city, why be on the top floor of a tower, because now your company cares nothing about being in a great urban environment, it becomes a question of efficiency.

Are you re-thinking this formula?
Not at all. It says to me that the decision to be in a particular place is last in line behind all the other considerations. As a real estate owner, I have to first be in a position to compete on cost, and second, where can I compete on asset and location quality. Another way to look at it is in NYC, you can still compete on asset quality and be second on cost because of the desirability of that location, but in Cleveland and every other secondary or tertiary location, decisions are being made on cost.

What does that tell you about Cleveland and your plans to acquire properties?
It tells me that you have to compete on cost first, but if you don’t have an asset that's worthy...you have to have the chance as a seller, to compete on cost.

What is worthy?
Access, convenience and visibility. If you don’t have these, you won’t be able to compete on asset quality.

I’m assuming that Cleveland is very competitive on cost?
Not really. The issue of cost competitiveness is interesting. The city of Cleveland and its Downtown assets are now cost competitive with Rockside Road and the suburban office parks, but the cost of it is the diminution of the value of their assets. If you had 20 million square feet worth at $100 per square foot, you have $2 billion. But you have to drop your rate 30% to compete with the suburbs, so the total value goes from $2 billion to $1.5 billion, and your tax receipts have been diminished by 30%. That’s why the school system is feeling some pain right now; some things need to change. Cleveland needs to be a better and cooler place to do business, then Cleveland can attach a premium to the Downtown location. Right now you have to discount the Downtown location, and there are two reasons for that.

Why?
There’s a 30% increase of cost in Downtown due to the cost of parking. So if you lease at $18 per square foot and you have 4 people per thousand, and those people need to park Downtown, someone needs to pay for that. Either the company needs to pay for that, or they have to pay people more to afford the parking. At the rate of $70-$150 a month for surface parking, that adds to the rental rate about $5-6 dollars a square foot. So the true cost of leasing downtown is not $18 per square foot, but $18 plus $5 or $6.

What are your thoughts on the Greater Cleveland Partnership’s report, “Cleveland On The Edge?”
They found out that Cleveland, because of its incessant demand for more money from its residents and businesses, is finding it in the form of taxes. It is no longer one of the least expensive places to raise a family, as it was when George Voinovich was Mayor and Governor. Why would I want to be in the middle of the Midwest in a place that is going to hell in a hand basket, if it’s one of the cheapest, but not if it’s one of the most expensive?

Then why would you invest in Cleveland?
I found an asset that was incredibly compelling [The Tower and Galleria at Erieview]. But I felt that the city has nowhere to go but up.

What about intrinsic value?
We only paid $30 a foot, when it would cost $150 a foot to replace. So that’s the intrinsic value.

Isn’t that contradictory to your philosophy of intrinsic value?
In my market, you buy bricks and sticks, and you buy income. We bought the income 40% cheaper than you could in Denver, and 50% cheaper than you can in Washington, DC. If you invested with us, the income would return to you from day one, almost 14%. There’s huge inherent risk, since the income is going down and going away.

But if you thought it was going down and going away you wouldn’t have bought it....
Yes, but we have income for the next 7 years. We have good tenants like McKinsey and Dix & Eaton, with long-term lease agreements.

So it can fail in 7 or 8 years and you’re OK with that?
We’re not OK with that; the risk we took here was our ability to lease the property. But the risk we took was in light of the income that was coming in over the back of the boat. We’ve leased over 200,000 square feet in 18 months. Think about that.

Well, it depends upon what rate you’re leasing it at.
That’s right. People are coming in now and expecting the same sale prices we gave 18 months ago.

So the Cleveland market is starting to come back?
Sure. We quoted a deal at 40,000 square feet, a corporate headquarters from another state. Is it coming here or staying in another state? And if it comes here, does it go Downtown or in an Eastern suburb? The guys from this company are from Cleveland, they want to be in Cleveland, but they’re from the East Side and they don’t necessarily want to be Downtown.

So how do you change that?
We’ve been very micro in terms of our discussion today. The macro picture is a lot different. So how does a city go from competing only on price to competing on style and desirability?

For one thing, you make the city a cooler place to be...
I personally think that what you’re doing [with Cool Cleveland.com] is a very, very compelling start. But you have to be able to unleash the entrepreneurial spirit. And the way you do that is with classic Reaganomics: cut regulations and cut taxes, and let people do what they want. Imagine if you’re a 26-year-old kid and you want to buy a place in Tremont, and you want to add a unit, do you know how much bullshit you have to go through? Zoning, planning review, permits, historical; but that’s how you make your region more attractive.

So what’s wrong with Cleveland?
People are used to being abused with the process here. I was with Lee Pool, who left Rocky River in 1970, drove their furniture and two kids to Bozeman, Montana where they settled. He became a rancher and a ranch hand; now he’s one of the most successful real estate developers. He’d like to locate a company called Liquid Planet in the Galleria. Why couldn’t we keep a guy like this in Cleveland? We’re not unlike United, Delta, or Northwest - known as legacy airlines. They are dinosaurs. Cleveland is a legacy system just like these airlines; they have imbedded systems, embedded pension systems and a cost structure that is totally uncompetitive. Cleveland has labor contracts with the police and teachers, and their one-party government systems. And the town is totally and absolutely risk averse. They have to compete with the Jet Blues, Independence Airs, Southwests and Continentals.

What can we do?
I challenged this real estate group to think differently...

Which group?
I’m not going to tell you, but they are prominent owners of Cleveland real estate. I asked them to bring 3 ideas that Cleveland could implement immediately. I brought my ideas, and these ideas were roundly hooted out of the room, and no one else came up with even one other idea.

So it’s not just our government leaders who are clueless, it’s the business community as well?
I wouldn’t call them clueless. I would call it an inertia here that is born of the one-party system, and the one primary economic development force of the city. You have a very close-knit business community.

Would you call it incestuous?
That’s inflammatory, and really just a collective judgment. They reach decisions very slowly, with a lot of deliberation, but not much action. And that is not reflective of the energy that is here. But this inertia is reflective of the energy that was here in the '50s and '60s. It all about “Let’s get all the big boys in the room and decide for everyone what to do. And by the way, what we do had better benefit those big guys, or we’re not going to do it.”

What are you trying to do to change it?
I’ve got some ideas, and I’m trying to change the dialogue in this city from the bottom. I’m talking to members of city council. And I’m talking with, what do you call yourself?

Alternative media?
Talking with the alternative press, and we’re talking about a couple of things: we need to get out of people’s way. You can create a free regulatory zone, get rid of zoning requirements and permitting requirements and let people do whatever they want in that zone. You can create that district by fiat and take it out of the regulatory mess.

Have any other cities done that?
Let me think about that.

You also have to think about brownfields and abatement.
So, how do you do it is the question. The Cleveland Clinic is trying to build a new heart center. The Mayor can say, "I want your permit application to flow through my office, and I will sign your permit." There are probably a hundred reasons why she thinks that’s illegal, but so what. That’s why you have lawyers. You just have to get it done. The design review board was started by the last Planning Director...

And Cleveland has unique neighborhoods...
Right now there’s an automobile dealer at Kamm’s Corners, and the Design Review board is asking the dealer to do another $150K in streetscape improvements to get his permit to expand. The dealer is coming to Mike Dolan saying, "These guys are making me spend all this money."

Well, the city values its attractive neighborhoods and storefronts, which can’t be found in the suburbs, and they want to maintain them.
By the way, I’m chair of the planning commission of Kelley’s Island. I understand having controls on the way things look. But the problem is, you have bureaucrats today and they don’t know anything about this. You know, there are alternatives. Here’s another thing you can do today: you have a Port Authority that sits on 50-60 acres on the Lakefront. A guy named Pete Spittler put together a great idea to put a convention center down there. But what’s interesting is that he has accessed that property and tied the Port Authority into the West End of Downtown, and through a grid network, you have not just 50 acres of land, that I think Wolstein owns. The point is, the city has an asset out there that they control with the Port Authority [to use eminent domain], and they have the ability through the Federal Government...The state of Ohio is powerful and should be awash in Federal money, but it's not because they are all Republicans in Congress, who are chairing transportation: Bayner, Oxley, Regula, La Tourette, Teaberry. The state of Ohio has so much power, it is ludicrous that we’re not getting more bang for our buck. The Port Authority land can be condemned by the city, or moved quickly. And while the move is taking place, you can be in a planning process for the access to that property. You can do a quick-take for road projects. Then when the Port Authority moves, you can put an RFP [Request For Proposals] out for development, and you’ll have every developer in the country bidding on that property within four years.

What else do you think can be done quickly?
Tax reform, and access to the Port Authority. The third thing is the city’s main competitive problem with the cost of parking. As part of the convention center project, they could turn the existing convention center into a huge parking garage and sell those spaces for a dollar a day.

Why hasn’t that happened yet? Don’t you think there are a lot of political pressures and campaign donations from the entrenched powers and owners who are benefiting from the current status quo?
You've got people who make things happen, people who watch things happen, and people who don’t know what is happening. You can be whichever one you want. Someone needs to come in, be bold, and not be afraid of their political system.

Why hasn’t that happened?
Because you have a one party system here, and it’s been just as bad here in Cleveland with the Democrats as it is in Columbus with the Republicans. Tell me, why does a Republican legislature raise taxes and run a huge deficit? It's a real question.

Why are you in Cleveland?
I love this town, I love the Midwest, and I love the people. Every time I come here, I’m happy. I’m comfortable, it’s my home. I’m not really frustrated by the lack of initiative on the part of politicians, because I think that markets will do what markets will do, and they change directions. And Cleveland will get to the point where everyone thinks that we have to change. In Cleveland, you have a racial situation that harkens back to the 1950s; it is one of the most racially divisive situations I’ve ever encountered. The black and white people are talking right by each other. It’s because they are stuck in the issue of “If you want to do something, I’ve got to get something.” Cleveland never went beyond civil rights to find what makes a better worth for your community. Now after decades of Democratic rule, and hundreds of millions of dollars being poured into the city, you have to ask, 'What have we done that hasn’t worked?' You can’t just throw more money at the schools. The solution is family-based, church-based and community-based around improving things, and not “What have you done for me lately?”

You’ve encouraged groups like the Hungarian Museum, Thrive art gallery, and other Cleveland-based businesses to move to the Galleria. You even talked about making it a center for Cleveland-style culture. Talk about the Cleveland connection to tenants at the Galleria.

We started out and aggressively looked for local Cleveland companies to put in there. We ran into issues with the cost of putting them in the Galleria. We went after a bakery and a pasta manufacturer, but they needed large infrastructure improvements to move in. Light manufacturing, like Ohio City Pasta - it was just too expensive. So we switched to a different tack. We’ve put three local designers in there, and we’ve got Glenn Cutner to open up a men’s custom clothing shop. He’s one of the finest haberdashers in Ohio; I’m wearing his shirt right now. We’re keeping the shoe repair in the Galleria. It sounds trite, but these guys are artisans, they repair shoes by hand, and it’s a lost art. We’ve recently repainted the Galleria and got rid of the columns, and we're marketing it to a couple of restaurants and coffee shops. We are experimenting, too; we put a sushi restaurant in there, but people thought it was fast food sushi. It will be a combination of national retailers out on Ninth Street, and we’ll work with local retailers with a low base rent, plus a percentage of gross sales.

At what point would it make sense to dispose of the Tower & Galleria?
You buy an asset like this so infrequently, the real value to us is to refinance and hold it. How often can you find a value like that?

But if in a few years you could sell it for a huge profit?
I may not want to pay the capital gains, and I can take money out by refinancing and not pay taxes. We can put condominiums on top of the [Erieview] building. Or we can bring back Top of the Town, which we’ll be able to do within 18-24 months. Do you remember that restaurant? We’ve got to complete our HVAC [Heating, Ventilation, Air Conditioning] retrofit. We’ve got some pretty cool plans for adding condominiums to the top of the building or we’ll put a restaurant in.

The Galleria is by far the largest of the commercial properties you hold. Is there any pressure on your company to have that property perform quickly?
Oh sure. Yeah, absolutely. You‘ve got the Tower that drives the economic picture, with steady tenants. The property itself is spectacular.

It was a bold and special place when it was first built...
What I saw was not a mall, but a spectacular structure. I don’t know what it will be yet. We’re getting closer today than we were a year ago. When we bought it, I thought 12th street was the front. So we spent a lot of time and money designing a new 12th Street entrance, but the front is really Ninth Street; it took me a year to figure that out. So we decide we were going to redesign the Galleria, and we’re going to do it by subtraction. So we eliminated the columns, repainted, and repositioned some of the furniture, then we bought some new umbrellas. We got rid of the shrubbery around the food court outside, and we’ve increased the sales in the food court. What happened next is, all of a sudden, we have a different vibe, and we’ve been working with the new vibe for 2-3 months now. We’re talking to a number of restaurants to open up all the stores to the inside of the Galleria, with tables and chairs. All the stores, from restaurants to art galleries.

The residential market in Downtown Cleveland is starting to heat up. Do you plan on adding any residential properties to your portfolio in Cleveland?
We’re going to go look at the May Company in about two hours. There’s opportunity there. In markets that are in distress, there is opportunity. If this Erieview building was in any other market, I wouldn’t have had a chance.

Last year, you had proposed using the Galleria and Erieview and adjacent land to the East as a site for a new Convention Center. Why do you think your proposal wasn’t looked upon favorably?
Two reasons. One, Cleveland is very parochial. In the image of Clevelanders, that 12th Street location might was well be in Georgia. It’s just not part of Downtown.

Even though it’s right by the Rock Hall.
Right. They don’t see that it was always part of Downtown. In spite of the fact that it is 6 blocks from Cleveland State University and 3 blocks from the Plain Dealer. I can’t tell you the number of people who told me that my plan tied together the ring that pulled together the entire Downtown, even since the urban renewal of the 1960s, which cut away that side of Downtown. All that land over there is owned by individuals.

And easy to buy...
And young entrepreneurs could get in on the action. Rather than put it over here by Terminal Tower.

Which is owned by Ratner, so no one else can really benefit from it.
So, if you’re not connected to the power structure, you can’t get attention.

Are you involved in any of the current discussions among the Cleveland business community to build a new convention center?
Not really.

They are moving forward with discussions.
You ask me if I’m involved. The answer is this: I’m putting together a team to bid on the process and build it wherever the authority wants to build it. I care where they build it, but I care more that it will be built. I think the Forest City location is completely wrong and would be detrimental to the city. I think the original site on Public Square was better, our idea was better, even the existing convention center was better. The process was completely flawed. The idea of taxing people on a location that hadn’t even been decided is ludicrous.

Are you in favor of the effort to build casinos in Cleveland?
No. It may well be in the future, but not currently. I think that the casino discussions should be carefully considered. In Maryland they discussed it and said, “Do you want your sons and daughters going to croupier school or to become scientists?”

Your father, Congressman Bill Minshall, was a U.S. representative from the West Side of Cleveland. How have you benefited from his political connections?
It was a much bigger district back then, from Shaker to Bay Village. Sure, I’m a political junkie. I admire politicians.

Every consider running for office in this region?
I’ve considered, but no conclusions. I’m taking my father's advice: I need to raise more money first. I see politics as bettering the community; it’s an obligation to our community.

What solutions would you suggest for this region?
I think that you [Cool Cleveland.com] are part of the solution here. Young people have to have the ability to get a stake in the game. The existing power structure has got to go away and let some young guys in. Otherwise, we all go down.

How do you do that?
You’ve got to have a quiet revolution. People have to get pissed off. Young people under the age of 30, black and white, have to say they’re not going to take that shit anymore. Someone has to say these things to the power structure. The black community keeps the white politicians afraid, so they can get what they know they can get. There are some good politicians here, like Frank Jackson, and he knows about economic development, but he’s caught in a mentality of a zero-sum game. If you’re going to get something, then I’m going to get something. He doesn’t operate that way, but that’s the environment in Council. He has to stand up and say, "Economic development and growth is what we need." You cut taxes and cut regulations.

You’ve been living near Baltimore, which is similar to Cleveland in many ways, and you work in Denver which is a similar size to Cleveland. Describe the similarities and differences.
Cleveland and Baltimore are very similar, both have close knit, strong corporate and business leadership. Industrial. Denver is an oil town and a cow town.

Do you remember growing up in Cleveland? What were your impressions of the city?
I didn’t really grow up here. I spent my summer with my aunt in Lakewood, Ohio at Clifton Park and at my parents' place on Kelley’s Island.

You do business in many cities around the US. Describe how doing business in Cleveland is different.
The regulatory environment is tougher. Other than that, it’s about the same. Here’s the difference in Cleveland. The solution here is that here you’ve got to have growth. Without growth, you don’t have velocity or desirability. In Denver you have a lot of growth, and an economy that can turn around on a dime, and a government that gets the hell out of the way. Here you have a much slower environment, things don’t happen as fast.

What do you think Cleveland needs to get it out of its current slump?

It needs to develop pro-growth policies from a taxation and regulatory point of view. The city of Cleveland’s economic development team must do a better job developing downtown. It’s about demeanor and attitude; you have to want to compete for every single deal, and compete aggressively and take charge. The Mayor has brought Joe Marinucci over from the Downtown Cleveland Partnership, and he’s done a good job. And businesses need a quick response, so you'll want to work with them. I’ll give you an example: there’s a roofing company coming into Cleveland, and they got grandfathered in, and they didn’t need sprinklers, then 6 months later the Fire Marshall came over and said they needed to invest $150K in sprinklers. The Mayor should have come out on the front page and told the Fire Marshall to stuff it, and we’re not going to chase businesses out of town. It sends a message that we’re going to protect businesses here. She [Mayor Campbell] is a friend to business, but she doesn’t project that as she should.

You’ve been quoted in the Cleveland papers as having voiced what a lot of Cleveland business types only mutter in private about Mayor Jane Campbell: "She's not a stupid politician. Her problem is that she does not intellectually understand business or business development." What is your opinion of the current Campbell administration?
From what I can see, the administration is definitely changing their approach.

Is their attitude toward business changing?
I definitely think they are. There’s more we can do as a business community to help the Mayor be successful. She is making efforts to play the hand that she has been dealt; being more pro-active in attracting business to the city. The system is inherently flawed with left-wing democratic ideology that has taken hold here over the past few decades.

You include the Voinovich years in that assessment?
Sure. It was the '90s and the Clinton administration that espoused a pro-business philosophy.

He was Reagan reborn on economic issues...
You now have a Democratic party that has thrown out the conservative economic viewpoint...

You mean we have a Republican party that has thrown out the conservative economic viewpoint.
You have both Republican and Democrat. You want to allow the entrepreneur who wants to open a building to bypass going through 6 layers of bureaucracy. Much of capitalism is really a confidence game, but I believe things are changing in Cleveland. You look out the window here [from the Concierge Suite of the Ritz-Carlton] and see a construction crane.

That’s Gus Georgalis building his urban condo project, Pinnacle.
You’re seeing development now for the first time that I can remember. Political leadership has to get out in front of an issue and get a hold of it and hold onto it like it’s the last dime on the street. They have to compete for every deal that's in the suburbs of Cleveland. As a businessman, I understand that, but as a career politician, they probably don’t understand.

Interview and images by Thomas Mulready (:divend:)