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St. Paul’s promise: The mean task of bringing business to the Capital City

Zoe Prinds-Flash

Zoe Prinds-Flash

I. A downtown land spat

In the middle of North Robert Street in downtown St. Paul, a 6,000-square-foot plaza sits in the shadow of the U.S. Bank Center, behind a bus stop. Left over from 1960s-era redevelopment of the block, it’s since become an eyesore, home to a forlorn fountain and a tribe of pigeons.

St. Paul’s public housing authority owned 375 N. Robert Street, but had no use for it. The parcel was unbuildable because adjacent buildings’ overhangs poked into its airspace. The city’s only hope was to transfer it into private hands, where it could at least generate some taxes.

Ramsey County valued the property at $326,400. It was still a hardy chunk of downtown with potential for some imaginative revenue scheme in the hands of the right capitalist. The city begged to differ. Its appraisal produced a clearance price of $30,000.

In the fall of 2017, Madison Equities, a major St. Paul real estate corporation that managed all the surrounding properties, proposed using the plaza as a patio for adjoining restaurant space that had been empty for years. Outdoor seating could attract a new tenant. Madison Equities offered $2,500.

Andrew Hestness of the Housing Redevelopment Authority says city policy is to sell land at or above its appraised value. Yet sustained negotiations couldn’t persuade Madison Equities to improve its bid.

In June and July, union janitors picketed Madison Equities buildings, alleging the company exploits workers.

In June and July, union janitors picketed Madison Equities buildings, alleging the company exploits workers. Susan Du

Last summer, Hestness beamed a notice of sale through the “early notification system,” an antiquated listserv the city uses for land deals initiated by unsolicited offers. The city, he announced, would give Madison Equities a $27,500 write-down.

The notice wound up in real estate developer John Mannillo’s inbox. He owned several downtown buildings in decades past, but now filled his days working with a litany of neighborhood committees, including the government watchdog group St. Paul Strong. It annoyed him to see Madison Equities chisel 90 percent of the value from a slice of public land.

He accused the Housing Redevelopment Authority of being a poor steward of the people’s property. The city challenged Mannillo to vote with his own dollars if he so believed in the plaza’s potential.

Feeling confrontational, he bid the full $30,000, piecing together a plan to renovate the plaza into a food truck court. Downtown suffered from a dearth of good ice cream, he argued, hoping to force Madison Equities’ hand.

“It just irritates me—because I’m a St. Paul person, I live here, I pay taxes here, my career has been here—to see the city mismanaged,” he says. “Downtown is struggling. Why are we getting ourselves constantly into a worse situation?”

To Mannillo, 375 N. Robert St. was a microcosm of systemic threats keeping St. Paul down—the perpetual underestimation of its assets, and the bottom feeders doing business on the cheap with little consideration for the city’s health.

Suddenly faced with competing offers for what was supposed to be a throwaway parcel, the city retreated to mull its options.

II. Undervalued, underrated, overlooked

Powerhouses Ecolab, Securian, and Travelers all call downtown St. Paul home. But a truer barometer for corporate investment is the rental office market, which reflects persistent kinks in the capital city’s economic engine.

St. Paul’s total universe of competitive office space is shrinking. Since 2005, it’s shed 1.3 million square feet due to tear-downs and conversions to other uses, such as housing. Meanwhile, downtown’s newest office building is Infor Commons, built in 1999.

Despite diminishing supply, office vacancies hover stubbornly around 20 percent—one of the highest rates in the metro. Its rental prices, when adjusted for inflation, are decreasing. That these depressed statistics have persisted in today’s piping hot market is cause for self-reflection, says Julie Bauch of the real estate firm Bauch Enterprises, past chair of the Building Owners and Managers Association. St. Paul should be benefiting from the business activity transpiring elsewhere in the metro, pumped by low interest rates and full employment.

Across the river, Minneapolis is delivering new offices and trading towers, gaining more than 1 million square feet in the past five years. Suburban businesses gravitate to downtown’s fitness centers, rooftop patios, and co-working spaces. Farmers markets and food trucks pull feet to the street. The Downtown Improvement District employs a brigade of friendly ambassadors keeping sidewalks clean and visitors oriented.

Lee Krueger, president of the St. Paul Port Authority, a government development agency, views Minneapolis and St. Paul to be more fraternal than identical twins, fundamentally incomparable. Whereas Minneapolis has pursued ruthless redevelopment strategies to sometimes aesthetically questionable ends, St. Paul has preserved more of its classic buildings.

Yet that’s created some critical obstacles to attracting the same level of investment, Krueger says. Much of St. Paul’s aging stock is structurally obsolete. Growing businesses seek larger footprints than it has to offer.

As a government town, St. Paul also hosts state agencies prioritizing rock-bottom rents over modernity or environmental design.

The St. Paul Downtown Alliance’s Streets of Summer program is trying to bring life to barren public spaces.

The St. Paul Downtown Alliance’s Streets of Summer program is trying to bring life to barren public spaces.

And despite St. Paul’s old-world feel, glittering music halls, relative affordability, and some of the best hole-in-the wall and luxury dining in the Twin Cities, Minneapolis poses formidable allure.

“Employers and businesses want to go where their employees want to be, and people want to work in Minneapolis,” says Pete DuFour, VP of office leasing at Colliers International, who’s noticed that much real estate activity in St. Paul consists of tenants shuffling from one building to another, rather than bringing in new business from afar.

“If you’re 24 years old, getting out of college, it’s more fun and cool to go work in Minneapolis than St. Paul.”

III. A bedroom beyond the river

To offset the scarcity of interested tenants, many downtown office buildings are being retrofitted as apartments.

Urban planning groups such as the International Downtown Association say 10 percent of St. Paul’s total population—or 30,000 people—should reside downtown. About 10,000 currently do, a sign of unmet potential.

The broker community generally agrees there’s no better fate for bygone buildings with little commercial interest. The old post office and the original Pioneer Press newsroom are living distinctive second lives as trendy apartments. Several others have followed suit with conversions of varying intention and success.

Developers are scrambling to meet the Twin Cities’ insatiable housing demand, says Mike Zipko, who manages public affairs for developers. “The market has got a greater demand for residential right now, unfortunately, than commercial space.”

Which comes at a cost.

The state taxes residential space at just half the rate of commercial per dollar of value, says Mark Haveman of the Minnesota Center for Fiscal Excellence, a government spending researcher. That means residential conversions reduce funding for city services and schools.

In 2016, the Minnesota Supreme Court gutted one of St. Paul’s vital revenue streams when it ruled the city’s practice of charging downtown churches street maintenance fees was unconstitutional.

The city argued nonprofits should help pay for the same roads and services everybody uses—especially in a town where one-third of properties are tax-exempt—to no avail.

Moreover, policy think tank Citizens League studied the long-held claim that St. Paul was overburdened with nonprofits and found it untrue. It has no more than Minneapolis or Duluth. Still, its remaining tax base isn’t as productive due to its residential-commercial blend, forcing the city to work two to three times harder, Haveman says.

The Local Government Aid program is another measure of prosperity. Each year, the Twin Cities collectively pay more than $2 billion in state taxes, intensely subsidizing the rural reaches of Minnesota. A portion of that returns to Minneapolis and St. Paul.

According to a complex Department of Revenue formula, Minneapolis has a greater “need” for services than St. Paul because more of its homes were built prior to 1940, and more suburban commuters use its roads. Yet the state gives St. Paul more than 10 percent of its taxes back, while Minneapolis receives only 5.6 percent. Minneapolis, with its booming development and density of jobs, is calculably more capable of taking care of itself.

The confluence of these trends—years of stagnation in outside investment, lost office space, and diminishing tax capacity—is driving St. Paul into an economic bind, says Jack Hoeschler, a developer and lawyer who represented churches in their lawsuit against the city.

He points to the housing conversions in Lowertown, which is “terrific from a downtown vitality point of view.” Yet the economic impact on the city and public is to actually reduce the tax-paying capacity of that property, he says.

“Indeed, there is recognition that St. Paul is a large neighborhood east of downtown Minneapolis.”

IV. The man who owns St. Paul

St. Paul faces another peculiar challenge. There’s just one major landlord downtown: 75-year-old Jim Crockarell of Madison Equities. By purchasing property when it falls on hard times, he’s amassed an empire of 18 buildings spanning 3 million square feet.

The crown jewels of Madison Equities’ portfolio are also St. Paul’s most iconic buildings: U.S. Bank Center, the Alliance Bank Building, and the First National Bank Tower with its gleaming “1st” sign. Under Crockarell’s management, these buildings advertise some of the lowest rental rates in town, according to the Building Owners and Managers Association’s annual surveys. It’s a point of contention among competing landlords trying to maintain a certain standard of value.

Lately, Crockarell has been trying to answer the clarion call of residential conversion. Several Madison Equities buildings, including the east tower of First National Bank, have been slated for transformation.

“We’ll see if we get anywhere,” says Jim Stolpestad, founder of Exeter Group, who likens Crockarell to Donald Trump. “Some people think that Crockarell is part of the problem with downtown St. Paul.”

Crockarell is building a big enough machine that his name has become indivisible from the market. Some within the broker community hope he’ll embrace his influence and give more to special events like the Winter Carnival, and opt in on their collective efforts to keep downtown’s streets and parks clean.

But so far, he seems more the traditional developer, focused on projects that make sense to him rather than the city at large, says the Port Authority’s Lee Krueger. “I would love to see him be more involved like some of the other St. Paul landlords and participate in city initiatives and participate more in, you know, the culture of the city.”

At least among some, Cockarell doesn’t have a reputation for playing well with others.

When 39-year-old Claudia Ibarra first heard of Madison Equities, it was 2013, and she was cleaning bathrooms at U.S. Bank Center eight hours a day.

Rumors traveled among St. Paul’s cleaners as Madison Equities bought up buildings and replaced union workers with every acquisition. When the company purchased U.S. Bank Center, Ibarra moved to First National Bank. Soon it too became Madison Equities’.

Instead of a job with health care, sick leave, and vacation, Ibarra wound up on the Service Employees International Union’s (SEIU) layoff list, looking for jobs beyond St. Paul.

“He has taken away the work of many people. He has sent them far from their homes,” Ibarra says of Cockarell. “He has damaged the economy of the poor.”

SEIU accuses Madison Equities’ contractor, ROC Commercial Cleaning, of minimizing wages in order to outbid more ethical companies, and skirting labor standards by using workers hired off the books by even smaller subcontractors. The Department of Labor, which investigates direct employers, hasn’t substantiated complaints against ROC.

Crockarell denies the implication that he’s anti-union. His choices are pragmatic, not personal, he says.

“We don’t have any notion of whether a union or a non-union company is better. We’d be very happy to have a union company if they could demonstrate they were a quality company at a very competitive price. So far, we just haven’t found that match.”

Crockarell’s intra-family strife has also spilled over into business. In 2014, Madison Equities sued Crockarell’s son and longtime business partner, Rob Crockarell, over nonpayment of $100,000 father and stepmother once loaned him to buy a house.

Rob argued there were no attempts to collect the debt for almost eight years. His parents only called it in to prevent him from suing the family business for a buyout, according to Rob’s affidavit.

He lost that lawsuit, but initiated another revealing court war. Rob accused his father of overcharging tenants, maintaining his broker license by having others mark his attendance in continuing real estate classes, and misclassifying employees as independent contractors.

Rob couldn’t stomach these “unethical” practices, according to his affidavit. “I wanted to be able to make decisions for myself and manage my own business, instead of having to accept decisions that I disagreed with.”

Meanwhile, a whistleblower leaked confidential company information to Madison Equities’ tenants. According to court records, emails addressed from “unionjobsmatter” accused Crockarell of cutting building costs by firing union cleaners, yet failing to adjust tenants’ leases in kind, allowing him to pocket millions. Crockarell insisted the allegations were false.

Another dispute arose between Crockarell and restauranteurs Joe Kasel and Kevin Geisen, who owned Eagle Street Grille and Fitzgerald’s, formerly known as Salt Cellar. Born and bred in St. Paul to big Catholic families, they were well-known small-business owners.

In 2015, a limited liability company registered to Crockarell’s wife extended a $2.4 million loan for Kasel and Geisen to build a third restaurant, Ox Cart Ale House, inside Madison Equities’ Stadium Ramp building in Lowertown. It would offer casual American fare with a rooftop bar overlooking CHS Field.

A year later, the landlord took Kasel and Geisen to court, accusing them of dodging rent. The restauranteurs cried foul. Crockarell had told them not to worry about rent while Ox Cart closed that winter to restructure, they argued in court.

The company didn’t dispute this. Rather, its lawyer argued the men shouldn’t have relied on alleged oral agreements when their written contract clearly entitled the company to collect all $2.4 million of its loan, plus back rent, in the event of a default.

Ultimately, Madison Equities’ hospitality group swallowed Kasel and Geisen’s three restaurants.

These cases didn’t go to trial, and didn’t have findings of fact to parse Madison Equities’ treatment of tenants. Still, the episode left St. Paul’s broker community leery of Madison Equities’ tactics.

“We’re an ethical company,” Crockarell says. “We follow all the rules and regulations, we pay all our bills, and I think most people in St. Paul respect us as being a very credible company.”

As one of Ramsey County’s biggest taxpayers, Madison Equities employs 400 people and provides downtown St. Paul with assorted dining and entertainment, Crockarell says. He challenges his detractors to show they’ve done the same.

V. Conscious capitalism

When Chamber of Commerce President B Kyle considers the spate of bold new developments on St. Paul’s horizon, all signs point to a glorious renaissance.

Los Angeles developer AECOM has proposed four skyline-transforming riverfront towers including more than a million square feet of office space. Kraus-Anderson wants to consolidate St. Paul’s scattered state agencies on a new government campus resurrected from the bones of an old Sears store near the Capitol. Minneapolis’ Ryan Companies is building an ambitious complex of office, retail, and housing on more than 120 acres in Highland Park where Ford once manufactured trucks.

The problem with St. Paul has more to do with “narrative” than fact, Kyle claims, encouraging brokers to recognize the city’s chronic underdevelopment as an opportunity.

Though she cannot say who these developers are or when they might reveal their plans, Kyle promises a slew of investors are St. Paul-bound.

“The economy is still good and continuing to grow,” Kyle says. “I’m not even being Pollyanna. That’s really good news for what’s going on in St. Paul.”

Still, brokers have doubts. New development poses new challenges. State agencies currently renting downtown may vacate for the Sears site. They wonder how AECOM will fill a 40-story tower with the business muscle to justify construction costs. Ryan has asked St. Paul for $107 million in tax subsidies, suggesting development of one of the Midwest’s most desirable parcels wouldn’t be possible but for financial aid.

Some suggest St. Paul’s landlords could make tangible improvements by hiring professional security, keeping grounds swept, and their skyways properly cooled in summer, heated in winter.

Without naming names, most landlords don’t manage their properties well, says Mike Salmen of real estate firm Transwestern, who believes downtown St. Paul already has all the qualities it needs to attract tenants, but lacks building owners willing to open their wallets.

“For a long time—and it’s probably true today—it’s an exception to the rule if you’re investing heavily in your building amenities and common areas,” he says. “To the extent that buildings in downtown St. Paul start to do that, they’ll start to see occupancy rates increase, they’ll see rental rates increase.”

When brokers talk about admirable developers practicing faith in St. Paul, certain names recur. There’s Pat Wolf, who reinvented the former Woolworth’s store as a verdant co-working space charging market-defying rents. They also cite Rich Pakonen of the inspired Osborn370.

The tower used to house Ecolab’s headquarters, built for a single occupant in 1968. Its floor plates are small, a seemingly insurmountable obstacle typical of downtown St. Paul.

Pakonen is a housing developer. Partners Clint Blaiser, Tanya Bell, Schafer Richardson, Scott Burns, and John Bergstrom are all successful entrepreneurs of varying real estate experience. Their St. Paul roots run deep. Osborn370 was conceived from the hypothesis that, despite Minneapolis’ long shadow, St. Paul can supply what the business world demands.

Using 100 percent union labor, the consortium took the building apart and put it back together. Today, the floors feel spacious. The views are panoramic. A common lounge flaunts all the posh hallmarks of a creative corporate environment to which ping-pong-playing young upstarts invariably gravitate.

To underscore the unsubtle ideology of the building, the ground floor coffee shop is a Beaningful—a job-training enterprise of the West Side nonprofit Neighborhood House, which has been assisting immigrants and refugees since the 19th century.

Capitalism and social good needn’t be mutually exclusive concepts, Pakonen insists.

One of his first tenants was Blake Bristow of Reeher, a data startup that helps universities fundraise. Boasting 30 percent annual growth and a metastasizing workforce, he scoured the Twin Cities for a headquarters.

Most tech workers may be based in Minneapolis, but Reeher’s new hires are typically graduates of St. Thomas University and the University of Wisconsin-Eau Claire—the east metro’s college pipeline. So Bristow chose Osborn370, where he could carve out a niche.

“We saw how these guys were trying to bring ‘why’ to the table, create a powerhouse of tech in St. Paul, which was our vision,” he says. “We wanted to get around that.”

In St. Paul, likability plays an inextricable role in business, says Ted Davis, a communications consultant who promoted Osborn370.

“If all you’re doing is looking for the lowest price, you’ll put up with a lot of things,” he says. “If you’re looking for quality, if you’re looking for what you want to tie yourself to, a good reputation, you’ll do other things.”

VI. The most livable city in America

To overhaul old prejudices about the city, St. Paul’s Downtown Alliance has been studying the feasibility of launching a business improvement district mirroring that of Minneapolis—a private-sector lift to keep the streets safe, clean, and green. This summer, it booked a fleet of art and music exhibitions to “surprise and delight” key intersections.

“When we look at other cities across the country, we see that literally every city larger than St. Paul has an improvement district in their downtown,” says Alliance president Joe Spencer. Board members include some of St. Paul’s most prominent CEOs. The game plan involves deploying them to spread the gospel.

Yet permanent programming would require buy-in from a majority of downtown building owners, per state law. Jim Crockarell believes “the jury’s still out” as to whether he’ll participate.

“We’re trying to educate him,” says Jim Stolpestad of Exeter Group, who advocates an improvement district with or without St. Paul’s biggest landlord because “clearly something should be done.” Minneapolis may have a united Downtown Improvement District, but there are other examples of gerrymandered districts, he says. “We could draw the boundaries around him.”

Last month, more than a year after Crockarell and rival developer John Mannillo began sparring over the 375 N. Robert St. plaza, the matter finally came before the city’s Housing and Redevelopment committee for a vote. By then, Crockarell had submitted a new bid for $32,500, and city staff wanted to accept it. They just couldn’t envision the food truck court of Mannillo’s dreams.

Mannillo claimed the city denied him the opportunity to bid higher, and ignored his proposal offering Madison Equities the option of leasing the land.

Property manager Rick Rossie spoke for Madison Equities. The company didn’t realize the parcel’s worth when it made its initial offer of $2,500, he claimed. Regardless, Madison Equities had since become the higher bidder with the better proposal to create a patio for a long-vacant restaurant space.

Council member Jane Prince, who represents the East Side, asked Rossie to take a message home:

“We would love to see you being more responsive to the needs of our city in terms of quality and property management,” she said pointedly. “I want the city to be more intentional about looking for buyers on property that we own, and I want to do business with entities that are invested in the health and vitality of downtown.”

Yet Rebecca Noecker, the council member who represents downtown, backed the sale to Madison Equities. The committee followed suit, requesting the company commit to the city’s interests—including preserving public access to the skyway—in writing before finalizing a deal.

Afterward, Mannillo lingered in the hall with his hands stuffed in his pockets, wearing a bemused smile.

“At least I made the city $30,000,” he said with a sigh.