State will pay $12 million for former Merritt tower Move to save $3.4 million in annual rent

February 03, 1993|By Timothy J. Mullaney | Timothy J. Mullaney,Staff Writer

The state of Maryland plans to buy one of the city's most distinctive office buildings, the old Merritt Commercial Savings & Loan building at 6 St. Paul St., in a $12.2 million deal that would save the state an estimated $3.4 million a year in rent.

The move would allow the state government to replace about 30 percent of the space it leases in the Baltimore area for back-office governmental operations and could leave state officials with as much as $11 million more to spend as they continue to exploit the soft office building market by buying more space while prices are depressed.

"I think it's a huge deal," said Steven Gassaway, a broker at Casey & Associates, a downtown real estate firm. "It's double to triple any deal done over the last several years and removes a building that has been a black mark on the market since it was built."

Thomas C. "Tim" Jackson, Casey's director of market research, said last month that removing 6 St. Paul Centre from the market would cut the vacancy rate for newer office space downtown to 19.9 percent, from 22.4 percent.

"We're getting $3 of original construction cost for $1," said Martin W. Walsh Jr., secretary of the state Department of General Services. "We're talking $3 million or more of rent avoidance every year. And years from now we're going to have the dominant skyline building in Baltimore ready for resale."

The decision to buy 6 St. Paul Centre marks the end of the first phase of a state office-buying binge and closes the door on the city's most spectacular real estate failure of the 1980s.

The tower has for years been the city's most controversial office building. Completed shortly after the 1985 collapse of Merritt, it was derided as the "ego trip" of Gerald S. Klein, former Merritt chief executive, and came to be a symbol of the overreaching that led to the failure of the Maryland Savings Share Insurance Corp., a private insurer of savings and loan deposits.

The building was, however, mostly a phenomenon separate from the collapse of the broader real estate market, standing 70 percent empty -- or more -- even while the 1980s' real estate estate boom was still in full swing. Emblematic of the building's problems was the fact that its largest tenant, the accounting firm of Laventhol & Horwath, went out of business.

The building has been owned by Chemical Banking Corp. of New York since 1991, when the bank foreclosed on a $30.1 million loan. The building was appraised in late 1991 at $30 million for tax purposes, but that figure was reduced to $18 million on appeal.

One reason for reduced value was that 6 St. Paul is only 14 percent leased and has at times accounted for nearly 30 percent of the vacant Class A office space in Baltimore.

Critics have faulted its bold architecture and small floor sizes, while tenants have also been put off by the lingering taint of the failed S&L, whose principal owner, Mr. Klein, had the 28-story building designed to house Merritt's headquarters and other commercial tenants on the lower floors. His own penthouse was planned for the building's slender spire.

Mr. Klein was later acquitted of criminal fraud charges connected with the 1985 collapse of Merritt.

The money for the purchase would come from $13 million the General Assembly approved last year to pay for office acquisitions. The General Assembly reserved the right to approve specific deals, Mr. Walsh said. A review by legislative spending committees and the state Board of Public Works could be completed in time to allow a closing next month.

"It sounds good to me, but I haven't focused on the letter," said Sen. Laurence Levitan, chairman of the Senate Budget and Taxation Committee, referring to a letter Mr. Walsh sent him yesterday explaining the deal.

"This acquisition is about saving money," Gov. William Donald Schaefer said in a statement. "This deal will allow the state to avoid lease payments of more than $3 million a year and will bring employees and citizens into quality office space."

Mr. Schaefer has asked for an additional $20 million to buy and renovate offices in fiscal 1994, which begins July 1. Mr. Walsh said $10 million would be used, if approved, to finish the interior of 6 St. Paul Centre. Commercial landlords typically don't finish the interiors of office space until they lease it, and most of the building has gone unoccupied since 1985.

That would leave $11 million for the Department of General Services to keep shopping. Commercial real estate sources have said they believe the next buildings the state will buy are the Shillman Building at 500 N. Calvert St. and the Munsey Building at 7 N. Calvert St. Mr. Walsh wouldn't confirm or deny that suggestion.

"So far [the speculation] is one-third right," Mr. Walsh said. "We have another building; it was just a question of which one came in first. I'm not going to tell you the name. We could be very near the end."

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