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Petroleum Building investors longing to bid Minnesota Guys farewell

  • The Wichita Eagle
  • Published Wednesday, May 14, 2014, at 6:07 p.m.
  • Updated Sunday, June 22, 2014, at 7:03 a.m.

Photos

Toenails – that’s how Kyle Hughes thinks about what’s left of the Minnesota-based developers Michael Elzufon and David Lundberg.

After several years of wrangling with Elzufon and Lundberg over the Petroleum Building, Hughes wants to say goodbye to them in the worst way.

He and partner Emmanuel Kolluri have had offices in the building at 221 S. Broadway for more than decade and recently bought eight floors there. Elzufon and Lundberg still own a small piece of the office building and 20 percent of the parking garage, but their stake is headed for tax sale.

It’s been a long goodbye, filled with unpaid bills, unpaid taxes, wrangling with banks and demands from the city. At this point, Elzufon and Lundberg are still barely hanging on but will soon be gone.

“The toenails that are left will be clipped,” Hughes said, with a smile.

Overly ambitious

The developers, known around Wichita as the Minnesota Guys, came to town in 2004 with big smiles and big promises. They left a pile of wreckage in their wake.

Chronically underfunded and spectacularly overambitious in the number of troubled office buildings they bought – a dozen buildings totaling more than 1 million square feet, or 25 percent of downtown space – they never made the investments or found all the tenants needed to sustain their momentum. And when the banks stopped extending credit and the economy slowed, most of their investors went into foreclosure and their vendors, creditors and taxes went unpaid.

Today, investors big and small have taken over those buildings and are making investments. Most are small local investors such as Hughes and Kolluri, or Adul Arif at Sutton Place, although there are still a few big investors, such as Security National Life Insurance Co. of Salt Lake City at 125 N. Market, formerly Wichita Executive Centre.

What they have in common is that they are now competing against one another for a relatively stable number of tenants.

Tom Johnson, Martens Commercial, said the vacancy rate for downtown Class B – older, but still decent – offices is between 25 and 30 percent.

Filling up a downtown Class B building is doable, he said, but the building has to be nicer and better maintained than its competitors, and have convenient parking.

Downtown’s best space, dubbed Class A, has a vacancy rate of 7 to 9 percent, he said. The property at 125 N. Market could see some benefit from the higher demand for nicer space after the investments made by Security National, he said.

But what everyone hopes is that Wichita’s moribund economy will come to life again, providing a lift for everyone in the form of more demand for office space of all kinds.

Bryce Baker, vice president for real estate at Security National, said he remains optimistic that his company’s investments will pay off.

“We see ourselves as well positioned in the market,” he said. “As you see a rebound, we’ll be there to take advantage of it.”

‘Tenants in common’

Huges and Kolluri had been tenants in the Petroleum Building – Hughes is a residential appraiser, and Kolluri is overseeing an office as chief technical officer for Nomise Systems, a medical software company – since the 1990s.

They watched and wondered when Elzufon and Lundberg bought the building in 2005, split the floors into separate properties and sold them off, mostly to small-time California real estate investors in 2005 and 2006. It turns out the practice, called “Tenants in common,” was a disaster for most of the players.

The investors, living in a far more expensive state at the height of the property bubble, were looking to reach the good life through real estate investing. Together, they paid between five and 10 times what the Minnesota Guys paid for the building. Then things went bad financially for the investors, for the Minnesota Guys and, eventually, for the tenants.

“We were worried that we’d come in one day and there’d be no electricity,” Hughes said.

Eventually all of the Petroleum Building floors went into foreclosure.

Today, things are moving in the right direction, Kolluri and Hughes said. The building was 48 percent occupied last summer and is now 98 percent leased, after some low-price lease offers.

“God knows we’re not make any money,” Hughes said with a laugh.

Still, they’re looking ahead to making some sizable investments once they get the building fully under their control.

Another competitor

The one big worry, they said, is the impact on the pool of potential tenants of having the nearby Finney State Office Building come on the market.

The Finney building, which is owned by the city of Wichita, has housed several state agencies and 700 employees for 20 years. But the state refused to renew the lease when it came up.

Some state employees have already left for new locations, and the state says it plans to move the 550 employees of the Department of Children and Families next year.

If that space suddenly comes on the office market, life for all downtown landlords will become much more difficult.

“The elephant in the room is the Finney office building,” Hughes said.

Reach Dan Voorhis at 316-268-6577 or dvoorhis@wichitaeagle.com. Follow him on Twitter: @danvoorhis.

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