Western Reserve Building

The Western Reserve Building complex, on West Ninth Street in downtown Cleveland, could be sold in the wake of a foreclosure ruling and a judge's decision on issues tied to a nearly decade-old loan agreement.

(Michelle Jarboe/The Plain Dealer)

CLEVELAND, Ohio - A court decision handed down this week could lead to a sale and redevelopment of the Western Reserve Building, an eight-story office complex in the Warehouse District.

On Tuesday, a Cuyahoga County judge ruled in favor of a lender in a foreclosure case that sprang from a dispute over the terms of long-running real estate debt.

Developer and building owner John Ferchill is on the hook for a nearly $4.3 million personal loan guarantee, according to a decision by Common Pleas Court Judge Kathleen Ann Sutula. Affiliates of the Ferchill Group owe close to $19.7 million on the building, which is likely to sell for a fraction of that outstanding balance.

Sutula also gave the go-ahead for a foreclosure on the property, a wedge-shaped mash-up of a late-1800s structure and a 1990 addition on Superior Avenue, between West Ninth and West 10

th

streets. But the path forward isn't completely clear.

The lender is a subsidiary of the Ohio Carpenters' Pension Fund. Pension representatives and an attorney handling the litigation didn't respond to requests for comment Friday. Ferchill was not available, but one of his lawyers described the ruling - in a case that was filed only last year but has roots dating back a quarter of a century - as a mixed bag.

"I know it seems like a bad scenario for John," said Jon Pinney, managing partner at the Kohrman Jackson Krantz law firm. "The truth is, we're pleased that there's a resolution. We're hoping that this allows all parties to move forward, and that John resolves a legacy issue that has been out there for a long time."

The historic Western Reserve Building was designed by noted Chicago architect Daniel Burnham's firm and completed in the early 1890s. Developer John Ferchill built the eight-story annex a century later.

The foreclosure decision doesn't necessarily mean that the Western Reserve Building will end up in the lender's hands or be auctioned off, Pinney added.

"There appear to be interested developers," he said. "We're working in cooperation with the lender. ... Our expectation is that a foreclosure is not necessary."

Pinney wouldn't identify potential suitors for the 145,000-square-foot building, which is roughly half-full after the departures of tenants including KA Architecture.

Early this year, though, a proposal to turn the complex into a mixed-use "innovation hub" popped up on a list of projects that the Greater Cleveland Partnership, the local chamber of commerce, recommended for partial funding through the state capital budget.

The chamber mentioned OneCommunity, a data- and tech-focused nonprofit that since has changed its name to DigitalC, and real estate developer Fred Geis as potential partners in the project. The plan didn't make the cut for state funding as part of the two-year capital budget.

But the digital district concept hasn't died. On Friday, Geis said he's still interested in the idea and intrigued by the building, which he views as a long-term office play - not an apartment conversion like other downtown office properties that have struggled to keep corporate tenants.

"It's a tired old building that, if it doesn't get some tender loving care soon, will fall apart," Geis said. "It basically will rot on the vine. It's a shame, because it's a building that could be a really viable building for the city of Cleveland. This could be a great B-class office building. We still would love to put an innovation district in here."

The heavy debt load and arguments with the carpenters' fund have made it tough to market, invest in or sell the property. Public records show that the building also carries a tax delinquency of more than $235,000, including penalties and fees. The county estimates that the complex, which includes 20 underground parking spaces, is worth only $5.3 million.

The historic building, on the Superior Avenue corner, was designed by famed Chicago architect Daniel Burnham's firm and constructed in the early 1890s. Ferchill developed the annex to the north a century later.

Developer John Ferchill and a subsidiary of the Ohio Carpenters' Pension Fund have been unable to reach an agreement on the debt-laden Western Reserve Building.

The recent litigation is unusual for several reasons.

First, the debt at issue actually tracks all the way back to a bundle of late 1980s and early '90s loans that the pension fund acquired in 2005, according to court records. Second, Ferchill and the fund engaged in a decade of debate, negotiations and extensions outside of court. Third, Ferchill is the one who filed the lawsuit.

In September 2015, he initiated a contract case against the pension fund subsidiary, claiming that the lender acted "in bad faith" in managing the loan under a 2007 amended deal and that the legal system was the only way to cut through "ambiguities" about the amount of the guarantee.

Basically, Ferchill argued that the pension fund put him in a corner, with a loan that was impossible to repay or refinance, and then ignored requests to approve lease deals, discuss modifications, sell the building for less than the outstanding debt or otherwise work things out.

The developer also argued that his personal guarantee should be reduced or eliminated, based on terms of the loan agreement, because of Ferchill's spending tied to office leases over the years and the pension fund's behavior.

The lender countered, seeking the balance due on the loan, which has been in default for years; money from the personal guarantee; and a foreclosure.

"I think there will be some sort of settlement," said Alex Jelepis, the longtime leasing representative for the Western Reserve Building and executive managing director at the Newmark Grubb Knight Frank real estate brokerage downtown. "But, again, I don't know that. You can't sell the building for $19 million. ... It's going to require some capital investment. It's a great location. I've always been a big fan of that building."