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Buffalo is starting to lure out-of-town money for real estate development

Harvey Kaylie is a bit of a rarity in Buffalo – an outsider willing to join an insider’s game.

Kaylie, an entrepreneur who founded an electronic circuits company in Manhattan, showed up in Buffalo a few months ago, when he put up $27 million to buy One Seneca Tower at foreclosure.

The wealthy businessman lost the half-hour bidding war – the lender wasn’t going to let the city’s tallest office building go for such a discount – but he hasn’t given up on it, or on Buffalo. He still hopes to buy the tower and its parking ramp from the lender, and he’s eying other opportunities as well.

“I believe Buffalo is growing, and is in the process of rejuvenation. From what I’ve seen in my visits, it’s alive and dynamic,” Kaylie said.

He’s part of a small, growing trend. The positive press Buffalo’s renaissance has received is translating into an infusion of real estate investment from outside.

There are about two dozen projects in and around Buffalo funded by about $350 million from out-of-town investors, according to Buffalo News estimates. That includes about $50 million each for local projects led by Sinatra & Company Real Estate and Ciminelli Real Estate Corp. but does not count state-led projects like the Buffalo Billion or speculative projects like a proposed redevelopment of the former Seneca Mall site in West Seneca.

“It’s really beginning to show up on a lot of these investment bankers’ radar screens because of all the good things that have been happening in the region,” said local developer Paul Ciminelli, whose firm used a Wall Street investment bank to bring in outside money from New York City and Chicago to support medical projects like the $110 million Conventus building.

These investors aren’t just plunking down cash to buy small suburban retail plazas or old apartment buildings. They’re participating actively in new development projects in the heart of downtown Buffalo. And they’re bringing tens of millions of dollars to support local firms doing the work.

High profile buildings include the HarborCenter, built by Bills and Sabres owners Terry and Kim Pegula; the Conventus building developed by Ciminelli, but largely funded by outside money; and the Market Arcade Building on Main Street downtown, bought by Sinatra & Co. with outside help.

“Everybody seems to want to be a part of Buffalo’s renaissance right now,” said Statler City owner Mark Croce, who spoke to Kaylie’s representatives about investing in or teaming up on the Statler.

To be sure, while some investors are interested, the excitement so far remains reserved among major out-of-town developers. Many seem content to stay out of a secondary market perceived to be dominated and better understood by homegrown players. Except for niche fields like student and affordable housing and travel hotels, the big actors – with their money, ideas, creativity and experience – are sitting on the sidelines and watching from a distance.

“It’s a huge learning curve to do a ground-up project in a market that you’ve never worked in before,” said James Dentinger, president of McGuire Development Co. “Ground-up construction and approvals is a very complicated process that requires a lot of local knowledge.”

Rather than go it alone, some investors are helping fund projects by locals that wouldn’t have been feasible in the past. “There’s big New York money that’s been looking around and snooping around at opportunities,” Croce said. “These are serious people with serious money that are now viewing Buffalo as a positive environment and investment.”

Reputation spreading

Construction in the Buffalo region has been booming. More than $5.5 billion of projects have been undertaken during the past three years – completed, underway or announced – and the pipeline of new projects continues to grow.

Some of the biggest are government-sponsored, including Buffalo Billion projects, like the 1 million-square-foot SolarCity plant on South Park Avenue. But the vast majority are smaller, using personal equity, tax breaks, tax credits and private money.

“Buffalo’s a great place to do what we do,” said Anthony Ceroy, vice president of development at KCG Development LLC, an Indianapolis firm that is spending $39 million to convert the former A&P warehouse at 545 Swan St. into 147 apartments, parking and retail space. “It’s a place that hasn’t had a tremendous amount of development for quite some time. It has all the bones and infrastructure without major bumps and pains on that side, and everyone we’ve talked to has been so pro-development that it makes it easy to get people excited about what’s going on there.”

Several other out-of-town investors also are poking around real estate circles. “People are asking more about Buffalo than I’ve ever been asked,” Ceroy said. “You’re going to have more attention in the future. You certainly have our attention.”

Michael Vlock remembers being shocked at the “disrepair and decline” he saw in Buffalo when he last visited more than 20 years ago. Today, though, he and his wife have a much different impression, as they have put more than $50 million into the city as the primary partners for Buffalo developer Nick Sinatra.

“We’ve dedicated a lot of resources to Buffalo based on his knowledge and loyalty and dedication to the city,” said Vlock, who manages the multibillion-dollar portfolio for the Pritzker/Vlock Family Office. His wife, Karen, is the granddaughter of the Hyatt Hotels founder. “It’s just great to see resurgence like this. It’s a very satisfying thing.”

Local knowledge is key

Some out-of-towners have long viewed the low property prices in Western New York as a prime opportunity for investment, but not for much more. Wealthy individuals and families, as well as institutional investors, have bought individual retail and apartment properties for the steady cash flow from lease payments. And over the last 20 years, Michael Hananel’s WNY Metro Horizon Realty, Anthony Kissling of Kissling Interests and Eran Epstein of E Square Capital LLC bought up multifamily buildings around the city to amass rental portfolios.

But they’re exceptions.

“Buffalo is a unique market, and it’s not going to be for everybody,” said Paul Asher Brick, founder and principal of Asher Bristol LLC, a New York City-based asset management firm. “It certainly has its challenges, but I’m in Manhattan, and there’s nothing you can buy with a decent rate of return.”

But Buffalo’s rental and lease rates are much lower than most larger cities, limiting how well an investor can do. “The reason there’s no out-of-town developers in Buffalo is because they can’t make the kind of returns they make in other parts of the country,” said local developer Rocco Termini of Signature Development Buffalo LLC. “Plus, they’re used to getting huge increases in value, and we don’t have that here.”

Additionally, the scale of the projects in Buffalo is much less likely to attract large capital investments. Many institutional investors, for example, want deals of at least $25 million before they’ll even look at them, but “there aren’t many of those in Buffalo,” Sinatra said.

And because of the low rents, projects in Buffalo need tax credits or other government incentives to bridge the financing gap. “Every project has something, whether a tax credit or something else, to make it work. They don’t work on their own,” Termini said. “There’s nobody outside the region that cares that much about Buffalo that they’re going to waste their time trying to get all those government funds.”

Inside game

Additionally, there’s a big difference between leading a development or investing in someone else’s project, especially from out of town. “In every mature market, there are many seasoned developers and investors who always have an advantage over an outside firm that is not here every day with the pulse of the market,” said David Chiazza, executive vice president at Iskalo Development. “It’s a risky business that becomes even more risky when you step outside your turf.”

As a result, despite repeated efforts by city officials and local economic development leaders, successful firms from larger cities like New York, Toronto, Boston, Philadelphia and Chicago aren’t setting their sights on Buffalo as a place to plant their flags for new projects.

“There are not a lot of developers out there who develop major projects out of their markets unless they come with a large new tenant in hand,” said William Paladino, CEO of Ellicott Development. “Most assume insiders or locals have a significant edge in terms of acquiring the land, the construction and labor costs in the area, and the relationships and politics associated with winning.”

That’s evident from the results of several recent initiatives to garner outside participation. Officials from both the Brown administration and Kaleida Health solicited hundreds of known developers across the country, in hopes of attracting proposals for two large vacant lots in downtown Buffalo, as well as the sprawling Millard Fillmore Gates Circle Hospital and Women & Children’s Hospital of Buffalo campuses.

But while there were inquiries and expressions of interest from out of town, the only responses in all four cases came from deeply rooted insiders. “Buffalo is a secondary market, and it’s primarily controlled by local developers that have a long history within the marketplace. So because of that, it’s very difficult for an out-of-town developer to be competitive,” Ciminelli said. “It’s not a conscious effort to keep other developers out. It’s just a long history.”

Kicking tires

Besides Kaylie, Rochester-based Morgan Management and Boston-based Winn Group of Companies have both looked at partnering with Croce on the Statler. Morgan snapped up several multifamily buildings. And at least one Toronto firm with “larger projects under their belt” wants to “break into the Buffalo market,” Croce said.

“We view Buffalo as a market with great potential to preserve and create mixed income housing,” said Ed Cafasso, spokesman for Winn, the largest manager of affordable and military housing, and the No. 5 multifamily housing manager in the country, with about 95,000 residential units in 23 states. “It’s clear the city has a number of wonderful historic buildings that are candidates for conversion into badly needed housing, as well as many existing multifamily housing communities that could benefit from new investment... If things work out, we would love the opportunity to work in Buffalo as well.”

And Kaylie’s local agent, Alla Rabinovich of Recckio Real Estate & Development, said she also represents investors from South Florida and New York, who are also looking at Buffalo. “It’s definitely out-of-town money in a big way,” she said. “There’s a lot that may happen.”

For his part, Kaylie, whose Brooklyn-based company Mini-Circuits makes radio and infrared frequency processors, had never considered investing in Buffalo before. But the Long Island resident learned about the changes in the city from one of his aides more than a year ago, and became intrigued as he began researching opportunities.

He already owns real estate elsewhere, not only for his company’s facilities but also investments in housing complexes in Atlanta, Colorado and the Chicago area, with 600 units in all.

His surprise bid for One Seneca caught most people off-guard, but he said he has some specific ideas for reusing the 40-year-old building. Moreover, he says he has the financial capacity to do it on his own. And he insists he’s not just in it to flip. “Whatever I do, I want to do it for the long-term. I want to do it so it’s good for the city and it’s good for me,” he said. “I would like to make an impact.”