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NASA Glenn’s budget goes up $14 million, but includes the possible elimination of 22 local jobs — P. 5 Will downtown Heinen’s have enough space in unique setup at former Cleveland Trust building? — P. 6
Measure is costly one for MAC
A HOME WITH A VIEW A look at new luxury living in Beachwood
Cost of attendance is being added to athletic departments’ growing list of expenditures When the Power 5 conferences passed a full cost of attendance measure during the NCAA’s annual convention last month, it was viewed as a necessary benefit for collegiate athletes. After all, what’s another few million bucks for 64 football programs that, according to a CNN Money analysis, combined to bring in $2.8 billion in 201314? But for the 12 universities in the Mid-American Conference, paying for the full cost of attendance — essentially a stipend for each athlete that is estimated to be worth $2,000 to $4,000 annually — is another sizable expense for athletic departments that already are relying on their universities for at least 70% of their budgets. “It’s difficult for them to generate additional income on their own,” said Todd Turner, the president and founder of West End, N.C.-based College Sports Associates, which is doing an assessment of Kent State’s athletic programs. “The television dollars aren’t there for them, their stadiums are smaller. You don’t have to be a math whiz to figure it out. They’re all challenged.” Turner, a former director of athletics at four prominent NCAA institutions (the University of Connecticut, North Carolina State University, Vanderbilt University and the University of Washington), says only about “20 to 23” collegiate athletic departments in the nation generated more money than they spent last year.
Change comes with a cost In the MAC, producing enough revenue to cover the increasing costs of salaries, scholarships and operating expenses is every bit as big of a challenge
06
See MAC, page 9
Page 5
SHALE IS SUFFERING Declining oil and natural gas prices have led to plenty of regional cutbacks By DAN SHINGLER dshingler@crain.com
Remember the good old days, when a shale drilling story in Ohio usually was about some company coming here and spending billions on mineral rights leases or midstream processing plants and creating jobs like they were penny candies? Most do; it was only last year. How things have changed. More than six months of declining oil prices, along with low prices for the Utica shale’s natural gas, have turned things around — and turned the almost daily shale news from good to bad.
“There hasn’t been a shortage of bad news for about the last two months now,” said Shawn Bennett, executive vice president and spokesman for the Ohio Oil and Gas Association. Or, as another industry insider put it, anonymously: “This is really starting to suck.” Those were the reactions of many in or attached to the industry last week, as Youngstown’s bright and shiny new steel mill announced it would be closing for three weeks starting in “mid-February.” Its owner, France-based Vallourec Star, said it was responding to a slowdown in demand for the steel tubing the plant makes for drillers — a softening that oc-
curs less than three years after the $1 billion facility opened. At the same time, TMK IPSCO, a Russian-owned steelmaker, said it would cut up to 75 people as it slowed down work just across the Ohio River in Beaver County, Pa. The moves often are a last resort by companies that have been desperately hoping things would turn around quickly. Vallourec had already reduced its production schedule, renegotiated some supply contracts and cut its use of outside contractors, but it wasn’t enough. “The economic realities we are facing require additional action,” the company See SHALE, page 13
7
ALSO INSIDE: NEWSPAPER
74470 83781 0
STAN BULLARD
By KEVIN KLEPS kkleps@crain.com
MIDDLE MARKET Businesses in this segment account for nearly 40% of the jobs in the state ■ Pages 15-19 PLUS: ADVISER ■ CHALLENGES ■ TAX TIPS ■ & MORE
Entire contents © 2015 by Crain Communications Inc. Vol. 36, No. 6
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Small Business Matters i Want more information and resources on this week's topics, ideas and events? Go to www.cose.org/smallbizmatters.
PRESENTED BY
52 TIPS FOR YOUR BUSINESS
#6: Combat the Naysayers “The world is moving so fast these days that the man who says it can’t be done is generally interrupted by someone doing it.” ELBERT HUBBARD
Negative Nancy. Pessimistic Pete. We all know the type, the doubters of the world that are all too eager to share their negative perspective. New ideas are often met with cynicism. From the electric lightbulb to the television to personal computers, the history of invention and entrepreneurship has been plagued by naysayers – well-intentioned or not. We asked a few successful local entrepreneurs how they overcame negativity. ¸-PYZ[ V `V\ combat naysayers by just doing it HAVE A and believing in PLAN your dream. I have never really paid much attention to naysayers. There is a KPZ[PUJ[ KP LYLUJL IL[^LLU VWPUPVUZ [OH[ are worth considering and people that are just doubters. However, I am a huge proponent of having a team brainstorming
session on any endeavor I am doing. I have a great group of individuals around me that make it easy to decipher through what is realistic to consider and what is just a doubter’s perspective. Also, having a well thought out plan that solves a problem makes it KP J\S[ [V OH]L UH`ZH`LYZ ¹ Justin Carson, President, Platform Beer Co. “The best remedy is to surround yourself with positive people. When I run across people who doubt what I am doing, I use it as motivation. If you have done your homework, are convinced SURROUND there is a marYOURSELF ket for your WITH product or service, and POSITIVITY know that you can make headway in that market, my advice is to take any constructive criticism and ignore the rest. Use critics’ comments as fuel because they typically come from a place of insecurity or general negativity, both of which have no place in the life of a successful LU[YLWYLUL\Y ¹ James Vaughan III, Vice President, JDD Inc.
“Having a good idea and a lot of determination can quiet HAVE the naysayers. My hus- DETERMINATION band, Mike, and I are very determined people, so those who know us were more curious about our ideas than skeptical. But those that didn’t know us, or our background, questioned everything from our taking on this challenge at this time in our lives to the actual location we chose for the Music Box Supper Club. Once ^L VWLULK [OL UH`ZH`LYZ HSS I\[ ]HUPZOLK ¹ Colleen Miller, Program Director and President, Music Box Supper Club i
Hear more from these entrepreneurs at COSE’s Annual Meeting, “A Celebration of Northeast Ohio’s Small Business Rule Breakers.” Visit www.cose.org/annualmeeting for more information or to register.
February 9
Best of Tech Creativity, imagination and entrepreneurial spirit are at the heart of the 9th Annual Best of Tech Awards, which recognizes outstanding tech companies and entrepreneurs in the region.
Think you or one of your clients or customers are “Best of Tech?” Submit your nomination by Feb. 20 at www.cose.org/ohtech.
By The Numbers
1 in 5 Approximate proportion of the 1,909 FY14 SBA loan approvals in Cleveland District area made to startup or new businesses.
COSE Annual Meeting Feb. 26 “HERE’S TO THE CRAZY ONES, THE MISFITS, THE REBELS....” - STEVE JOBS At COSE, we love rebels like you and we want to celebrate the many accomplishments and successes you achieved by doing things a little bit differently. Channel your inner rebel at our annual meeting and hear stories from business owners who have broken the rules and found great success. Learn about their moments of uncertainty, excitement and their drive to defy the norm and pursue their passions.
SOURCE: SBA CLEVELAND DISTRICT
Connection Calendar COFFEE WITH COSE Networking Event TUESDAY, FEBRUARY 17 8:30 – 10 AM, FREE Panera, Rocky River Register at www.cose.org/events
HEIGHTS-HILLCREST AREA CHAMBER BUSINESS BREAKFAST SERIES
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THURSDAY, FEBRUARY 19 8 – 9:30 AM COST: $10 HRCC MEMBERS; $20 NON-MEMBERS 700 Beta Banquet and Conference Center Register at www.hrcc.org/events
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CONTENT PROVIDED AND PAID FOR BY THE COUNCIL OF SMALLER ENTERPRISES
Check out www.cose.org/events for all the latest happenings.
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CRAIN’S CLEVELAND BUSINESS
WWW.CRAINSCLEVELAND.COM
Walsh’s new venture mixes his passion and commitment
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By JEREMY NOBILE jnobile@crain.com
Visit
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1350 Euclid Ave, Suite 300 Cleveland, Ohio 44115
A thirst to be a part of something bigger than himself has driven Daniel Walsh Jr. his whole life. It’s why he gravitated to team sports like baseball and basketball throughout high school and college, why his list of community service could fill a book, and why he pursued careers with KeyBank and Huntington National Bank to help secure financing for real estate developers and local companies. It’s also why the lifelong Clevelander has launched his own business here — a real estate private investment firm dubbed Citymark Capital — in the midst of the city’s renaissance. “I’m just passionate about Cleveland. I love this place, and I think we’re in a really exciting moment,â€? Walsh said. “This isn’t just a destination. It’s more about what’s next and seeing this momentum continue for our kids and their kids for many years to come.â€? Walsh, 46, recently capped off his tenure with Huntington to start his new private equity firm. He served the bank as Greater Cleveland regional president since April 2010, transitioning from KeyBank, where he began his career in 1996 and left as executive vice president and manager of the bank’s real estate capital markets group. Walsh now lives in Shaker Heights with his wife, Molly, and two children. He studied law through college, earning his degrees from Case Western Reserve University’s Weatherhead School of Management and his juris doctorate from the Illinois Institute of Technology ChicagoKent College of Law. But during law school, where he also earned an environmental law certification, he discovered a penchant for corporate dealmaking and real estate, inspired by the economic impact new and rehabbed developments can have on neighborhoods. Walsh’s new company effectively marries his passions for real estate, cutting deals and his hometown. Currently operating out of a space on the 27th floor of One Cleveland Center offered by Cleveland Research Co. — an independent investment research firm whose principals, including CEO Eric Bosshard, have invested in Citymark and share an alliance with it — Walsh is beginning the fundraising process. “Now we can be affiliated with an effort to accomplish something this big in Cleveland and across the country,â€? Bosshard said. “We’ve grown here ‌ and established a national reputation for excellence. It’s great to invest in something we think will do the same.â€?
Plan of attack Citymark will invest primarily in new, mixed-use and multifamily urban developments in major markets
MCKINLEY WILEY
Daniel Walsh Jr. left his position at Huntington National Bank to start his own private equity firm. nationwide from Boston, Los Angeles and Dallas to Chicago and, of course, Cleveland. Walsh as part of those efforts plans to leverage connections he made at KeyBank, where his work focused on making deals and raising capital for real estate projects. Citymark’s projects will focus on new construction, value-add acquisition and entity-level investments, which will all be primarily equity based. Projects Citymark will consider will be valued between $10 million to $100 million. In light of regulations, Walsh declined to comment on the fund’s investment period, anticipated rate of return and how much money he’s looking to raise. The time is ripe to launch his business, Walsh said, because of an attractive investment environment. He cited a real estate market with projected stability throughout the next several years marking the investment period, a growing hunger by millennials for multifamily housing in urban centers and low interest rates. “Given the strength of the apartment rental market nationally and locally,� Walsh said, “I expect there to be sufficient investor demand to support the business model.� In terms of staff, Walsh said he’s about to go into “hiring mode.� He intends to hire about five or six people in the short term, but sees potential to grow to a group of 12 in as many months. While it will focus largely on new, mixed-use developments, Citymark isn’t ruling out the possibility for other projects, such as acquisition
Volume 36, Number 6 Crain’s Cleveland Business (ISSN 0197-2375) is published weekly at 700 West St. Clair Ave., Suite 310, Cleveland, OH 44113-1230. Copyright Š 2015 by Crain Communications Inc. Periodicals postage paid at Cleveland, Ohio, and at additional mailing offices. Price per copy: $2.00. POSTMASTER: Send address changes to Crain’s Cleveland Business, Circulation Department, 1155 Gratiot Avenue, Detroit, Michigan 48207-2912. 1-877-824-9373. REPRINT INFORMATION: 212-210-0750
or historic rehabs. With Citymark fixing its sights across the United States, Walsh also has an opportunity to share the story of the Cleveland renaissance, which he expects could draw even more developer and investor attention to the region. “Historically, Cleveland hasn’t attracted a lot of institutional capital from pension funds or insurance companies saying they want significant Cleveland exposure,� Walsh said. That may be largely because investors tend to be drawn to new developments — the focus of Citymark — while many of Cleveland’s recent projects involve rehabs of old spaces. “Even with all that, I feel like we’re at a time now where we can launch Citymark to raise capital to invest in Cleveland, hopefully helping create more institutional capital flow into those markets to invest in Cleveland deals,� Walsh said. “But I’ll be doing this across the country in all urban areas.�
Still committed to CLE Regardless of the time and challenges involved with launching the next chapter of his career, Walsh has no intention of trimming back his commitment to the Cleveland community. “It’s probably what I get asked most about,� Walsh said with a smile. “I do plan to stay very involved with a lot of these Cleveland groups even though we’re launching this business.�
Subscriptions: In Ohio: 1 year - $64, 2 year - $110. Outside Ohio: 1 year $110, 2 year - $195. Single copy, $2.00. Allow 4 weeks for change of address. For subscription information and delivery concerns send correspondence to Audience Development Department, Crain’s Cleveland Business, 1155 Gratiot Avenue, Detroit, Michigan, 48207-9911, or email to customerservice@crainscleveland.com, or call 877-824-9373 (in the U.S. and Canada) or (313) 446-0450 (all other locations), or fax 313-446-6777.
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5
New luxury apartment complex in Beachwood includes amenities that total 60,000 square feet
STAN BULLARD
The Vue brings plenty of perks The Vue, above, a new luxury apartment complex in Beachwood, has 60,000 square feet of amenities, including a board room, at right, and workout room, bottom right. Below is NRP Group principal David Heller, who says the developer designed the building “for the way people live today.”
By STAN BULLARD sbullard@crain.com
STAN BULLARD
CONTRIBUTED PHOTO
CONTRIBUTED PHOTO
Viewing The Vue, the new luxury apartment complex in Beachwood, brings to mind visiting a ritzy hotel or even a resort. But The Vue is not for a short-term vacation. On a guided tour, David Heller, a principal of Vue developer NRP Group of Garfield Heights, said the just-opened building is designed “for the way people live today.” “The reason we feel we have an opportunity here is the lifestyle,” Heller said. “People don’t just live in their apartments. They want to live in their surroundings. Few buildings offer amenities like these.” Asked if he believes the suburban suites will sap energy from the highly active downtown Cleveland apartment scene, he said he sees them as different markets. “Growth downtown is for the long term and sustainable,” Heller said, so much so that NRP has “set its sights” on a downtown housing opportunity it plans to pursue but is too nascent to discuss specifically. The firm will start constructing a community this summer in Cleveland’s Detroit Shoreway neighborhood, Heller said, and NRP is sizing up a project in a southern suburb he would not identify. If that sounds aggressive, that’s NRP. The company is building a dozen marketrate apartments across the country, a growth initiative to complement its long-term and continued commitment to affordable housing developments. Experience from projects See VUE, page 22
NASA Glenn’s rising budget includes cuts Despite $14 million jump in funding, local research center still might be forced to eliminate 22 positions By CHUCK SODER csoder@crain.com
More money, fewer employees? Funding for NASA Glenn Research Center appears to be on the way up, and the center has secured a key solar power project it had been coveting. Even so, the center might have to eliminate the equivalent of 22 federal employees through attrition and buyouts. The union that represents NASA Glenn sci-
entists and engineers is trying to fight the proposed cuts, which would affect less than 1% of the 3,000-plus federal and contract positions at Glenn. The overall budget, however, looks reasonably good, according to center director Jim Free. The space agency is slated to give NASA Glenn a total of $581 million for fiscal year 2015, which ends on Sept. 30 of this year. That’s $14 million more than the $567 million the initial allotment Glenn received from
NASA last year — which was not a great year for NASA Glenn’s budget. Sure, it’s only a 2.5% increase, and Glenn’s budget is still much smaller than it was years ago. But Free said he feels good about Glenn’s future. For one, the center finally got the go-ahead to buy the key components of a solar electric propulsion system that could play a big role in NASA’s future deep space adventures. The broader agency is trying to develop technology that would eventually allow it to
put an astronaut on Mars. The solar propulsion system would help it get there. The project gives Glenn a role in the future of space exploration, according to Nick Gattozzi, vice president of government advocacy for the Greater Cleveland Partnership. The organization has been working with Ohio’s congressional delegation to secure money for that project and Glenn as a whole. “It’s the direction in which the agency is See NASA, page 21
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CRAIN’S CLEVELAND BUSINESS
WWW.CRAINSCLEVELAND.COM
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Heinen’s foray into Cleveland’s urban core will fill the need for a full-service grocer that offers a swath of locally sourced products, prepared foods and a comprehensive wine and craft beer selection to office workers and the burgeoning residential population. But co-owner Jeff Heinen said there still is some uncertainty about whether the $10 million, 27,000square-foot upscale store has been sufficiently configured into a historic building at East 9th Street and Euclid Avenue that originally was the Cleveland Trust Co. Some adaptations to the store’s layout and delivery schedule may need to be made. Meanwhile, the weeks and months following Heinen’s Feb. 25 grand opening will offer insight into whether downtown’s residential population has reached a level that can sustain brisk business seven days a week. The residential population reached 13,000 residents in 2014 but is expected to nearly double that figure in the next seven years, to about 25,000, according to estimates from the Downtown Cleveland Alliance. “We’re at the beginning of what we hope will be continued momentum for development and housing demand in downtown Cleveland,” Heinen said. “Our challenge is to put as much into the store as possible. We’ll find out whether we have enough space or need to make some changes.” The store is located within the historic Italian Renaissance-style rotunda, the centerpiece of which is a century-old stained glass domeshaped ceiling supported by massive marble columns. A series of murals depicting farming and the development of civilization in America surrounds the dome, painted by artist Francis David Millet, who died on the Titanic. Unlike the clean lines of aisles featured in a typical boxy or rectangular suburban store, the urban grocer’s departments and kitchen/storage are segmented between three floors and four levels. The perishables — meats, deli, seafood, bakery, prepared foods, a garden/superfoods salad and soup station — and an Equal Exchange Fair Trade Coffee Shop surround the cylindrical first-floor center, which will offer seating for about 50. Down a couple steps off the rotunda, a labyrinth of long, narrow aisles, and refrigeration units, shelf the produce, dry goods, dairy and frozen items. “It could get a little tight back here. Don’t bring a suburban mentality to an urban store,” Heinen said. Below the rotunda, a maze of concrete hallways lead either to an industrial-sized kitchen, refrigeration units, employee break room or loading docks. “There will be a learning curve
S Jeff Heinen in the new downtown Cleveland location.
HEINEN’S HOURS: Monday through Saturday: 8 a.m. to 9 p.m.; Sunday: 8 a.m. to 6 p.m.
EQUAL EXCHANGE FAIR TRADE COFFEE SHOP: Monday through Friday: 6:30 a.m. to 5 p.m. Saturday and Sunday: 8 a.m. to 5 p.m. associated with getting all the product from down here up to the other floors,” Heinen said.
Keep on truckin’ The downtown Heinen’s will offer about 10,000 items, or 25% of what a suburban store carries. If product demand exceeds expectations, deliveries to the docks could become tricky. “We send multiple trucks a day six days a week to our suburban stores, but our delivery trucks for this space are smaller,” Heinen said. “We may have to make several deliveries a day from our Warrensville Heights warehouse, and that could get expensive.” Up on the second-floor, craft beer coolers and wine shelves encircle the balcony lounge, which is accessible by elevator or steps. Eight draft craft beers, self-serve wine Cruvinets and a small appetizer station invite customers to socialize or have a drink while they shop. With additional seating for 50, this spot could become a popular destination within the store. Heinen said narrower, smaller grocery carts recruited for the urban store should alleviate space concerns when this area inevitably fills up. John C. Williams, founder of Ohio City-based Process Creative Studios and the architect behind the project, has worked with the grocer on nearly 20 other store openings or expansions, but this project required its own unique blueprint. Among the design challenges were funneling plumbing, heating and air conditioning equipment through the space, and venting the kitchen hoods, without disrupting the structure’s integrity. “We had to go through the bow-
els of whatever space we could find,” Williams said. He restored the formerly lowered ceiling heights to as close to their original height as possible, carefully hiding sprinkler lines, while exposing upper-level windowsills that haven’t been seen in 60 years. “We approached any infrastructure changes delicately and sensitively,” Williams said. “This is one of the most important historic buildings in the region. Heinen’s is a perfect alignment for the space.”
Money matters There’s a certain financial gamble to opening in the urban core. Heinen explained that the typical suburban store isn’t profitable for about three to four years. “It’s difficult to change people’s habits when you first enter a new market,” he said. “We’ve looked into coming to downtown Cleveland for a long time, but the population base wasn’t there, and the developer would want you to immediately be profitable.” The third-generation grocer’s history and regional geographic footprint reflects its long-term investment to its hometown. The Warrensville Heights-based operation operates 22 stores — including 18 in Northeast Ohio — and has signed a letter of intent to open its 23rd store later this year in Chagrin Falls. He said Geis Cos., which developed The 9 hotel and apartment complex of which Heinen’s is a part, understood the grocer’s projected profitability timeline and desire to have a presence in downtown Cleveland. “We’re lifelong Clevelanders who had the opportunity to come into this iconic space and make an investment in the city,” Heinen said. “We’re in it for the long haul.”
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CRAIN’S CLEVELAND BUSINESS
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At left, one of the entrances to the new Heinen’s. At right, the first floor of the rotunda will feature prepared foods, deli, meat and seafood counters and seating. The second floor will have wine and beer, and it will offer a tasting area with small plates and seating. Below, the stained glass ceiling and murals by Francis David Millet.
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10.99%
$1,595,988
Note: Returns are shown in U.S. dollars after fees. Date of inception for Nowacki Asset Management is May 2nd, 2011. Nowacki Asset Management (NAM) is a registered investment advisory firm specializing in value-oriented investment management. All client assets are included in one composite and invested using a value-oriented strategy. NAM claims compliance with the Global Investment Performance Standards (GIPS®). The S&P 500 Total Return index is subject to volatility and the NAM composite may or may not be more volatile than the index. Past performance is not aguarantee of future performance. Investments carry risks and the potential for loss. Results as of 10/31/2014 are still subject to final verification by an independent third-party. NAM only uses short-term margin or leverage to buy securities after a client commits to deposit funds and the funds are in the process of being transferred, but the money has not yet completed the transfer process. To receive a list of composite descriptions of NAM and/or a presentation that complies with the GIPS standards, contact Michael T. Nowacki at (440) 488-6936 or write Nowacki Asset Management, 29525 Chagrin Blvd. Suite 301, Pepper Pike, Ohio 44122, or michael@nowackiassetmgmt.com.
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Ownership change shouldn’t be rocky for rubber company Shift from Veyance to ContiTech AG is chance to grow, CEO says By RACHEL ABBEY McCAFFERTY rmccafferty@crain.com
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It’s a major deal in the rubber industry at large, but locally, officials expect the transition from Veyance Technologies Inc. to ContiTech AG to be a smooth one. The 1.4 billion euro, or $1.6 billion, sale of Fairlawn-based Veyance to Continental AG in Germany officially closed Jan. 30, nearly a year after it was first announced. While there’s often a lot of restructuring in the rubber industry, that’s not the case in this acquisition, ContiTech CEO Heinz-Gerhard Wente said in a meeting with news media last Tuesday, Feb. 3. There’s really no overlap in the markets the companies serve, Wente said, so this offers a chance to grow, aside from a few antitrust-required divestures outside the United States. The ContiTech division has a focus on rubber and plastics technology, while Veyance had a product focus on conveyor and power transmission belts, as well as hoses. The acquisition is the thirdlargest in Continental’s history and the largest for ContiTech, the division Veyance joined, Wente said. And the “strategic� acquisition is certainly the largest in the nonautomotive OEM industry, said Wente, who plans to retire at the end of April. Before the acquisition, about 44% of ContiTech’s business was in the non-automotive OE sector; now it will be about 56%, based on 2013 data, said Bruce Kendrick, the company’s vice president of
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human resources for the Americas. There really is no “dominant party� in this acquisition, Wente said, and the management will be taking what he called a best-ofthe-best approach during the transition. ContiTech doesn’t acquire companies to run them as they are, Wente said, but it is important that the cultures fit together. “This is of high importance to us,� he said. The former CEO of Veyance, John Hamilton, opted not to join ContiTech early in the process, Wente said, so there’s a new leader in the Fairlawn office: Charles Seymour. Seymour, who had been the vice president and general manager of Veyance’s North American business, now is serving as the executive vice president of ContiTech NAFTA and the head of the conveyor belt group in NAFTA. And the company found an “efficient� operation in Fairlawn, which is why ContiTech decided to make the site its North American regional home office. The site, which employs about 200 people, will oversee about 8,000 employees and all of ContiTech’s business in North America. Before the acquisition, the Fairlawn location oversaw all of Veyance’s business across the world. For at least the first year, wages and benefits for employees will stay the same until the companies bring the compensation structures together, Kendrick said. The company will be phasing out its Goodyear-branded prod-
ucts (Veyance spun out from Goodyear in 2007), Seymour said, but the makeup of the products won’t change. Production of the Goodyearbranded products has to cease within 30 days, Seymour said, and the company can’t sell them after six months, though customers are allowed to finish selling their inventory. Seymour said that while the previous owner was supportive of the company’s direction, ContiTech has a “common focus on the rubber industry.� The two companies share the same opportunities and challenges, and ContiTech is looking to learn as much from Veyance as it brings to the company, he said. “We’re very excited about the opportunities this presents us and our customers,� Seymour said. And while Wente said he believes the company is among the “leading players� in the businesses in which it’s active, market share isn’t the top order of business. “We really think we have to have the best solutions for our customers,� he said. Fairlawn Mayor William J. Roth Jr. said he was glad to hear ContiTech had chosen the city for its regional center. Roth was part of a team who visited the company in Germany last April to discuss the sale. Roth said he was impressed with the company, and that the meeting had helped to lessen the city’s concerns, though the company had been exploring all its options. “We appreciate the fact that they’re staying,� Roth said.
Investment sales played ‘small ball’ in ’14 By STAN BULLARD sbullard@crain.com
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After the smoke cleared on a busy year for investment property sales, the dollar volume of Northeast Ohio commercial transactions in 2014 proved smaller than it initially seemed. Alec Pacella, a property investment sales specialist who also serves as managing partner of the NAI Daus realty brokerage, said, “It was like a baseball game with a lot of singles and doubles and a triple, but no home run. It was small ball.� Pacella estimates Northeast Ohio investment property sales of more than $1 million fell 10% to a collective $714 million in 2014 from $790 million in 2013. (The statistics cov-
er income-generating property owned by real estate investors; they exclude purchases of buildings by users for their own use.) “There was a lack of the splash deal, no $100 million deal everyone would talk about,� Pacella said, such as the sale of a large downtown skyscraper or a large portfolio. Consider the largest deal in the region on Pacella’s list: the $50 million sale of the Plaza at Chapel Hill shopping center in Cuyahoga Falls to Toledo-based Devonshire REIT by an affiliate of Pepper Pike-based Visconsi Cos. The deal led the list, but in the end, it’s a very big open-air shopping center anchored by a Giant Eagle store. However, Pacella noted a differ-
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ent benchmark for 2014 activity: There were more, but smaller, transactions than in the prior year. He estimates there were 109 transactions of $1 million-plus in 2014, up from 79 in 2013. The reason? There were 70 sales of properties for less than $5 million that totaled $170 million in 2014, compared with 39 transactions above $5 million that accounted for $544 million of the activity. The volume of smaller deals reflects the most tantalizing aspect of last year’s investment sales scene: the appetite of real estate developers and owners to bag older office buildings in downtown Cleveland for potential future rebuilding as See SALES, page 22
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as competing with the likes of Alabama and Ohio State in football. At the IMG Intercollegiate Athletics Forum in December, University of Toledo vice president and athletic director Mike O’Brien said the presidents of every MAC school had agreed to provide athletes with the cost of attendance — a move schools outside the Power 5 conferences are not yet required to make. Kent State director of athletics Joel Nielsen told Crain’s he anticipates the MAC’s 12 members will enact cost of attendance for the 2015-16 school year, but each institution “will make their own decisions on the COA, and what sports they intend to cover.” Northern Illinois already has said it will provide the cost of attendance for all of its athletes. Nielsen said the remaining MAC universities, including Kent State, are reviewing their options. For Kent State, which has 18 athletic programs and a budget of $26.2 million, providing a stipend for all 425 of its athletes could cost the university more than $1 million. “There are challenges of resourcing our programs, and almost everything we see coming at us down the road, from two weeks ago to into the future, involves more cost,” Nielsen said. “That’s difficult for us to handle when our tuition is going up, and salaries and other things are rising. To add another component on to that, especially with the unknown to it, most people will probably reply that it will result in more challenges.” Tom Wistrcill, the director of athletics at the University of Akron, said covering the cost of attendance “is much-needed for student athletes.” But Wistrcill estimated the measure would cost the Zips between $600,000 and $700,000 per year. That would represent an increase of as much as 2.7% for Akron’s current athletic budget of almost $25.4 million. “That’s still a very sizable amount,” Wistrcill said.
‘There’s always been a gap’ MAC commissioner Jon Steinbrecher told CBS Sports last fall that the cost of attendance would mean an extra $500,000 to $1 million for each member of the Clevelandbased conference. By big-time college football stan-
dards, that’s less than the salaries of many assistant coaches. In the MAC, it’s a more difficult adjustment. Akron’s 2014-15 budget projections included $6,439,489 in revenues — a 7.2% increase from the year before, but a total that was almost $19 million short of the cost of its 19 athletic programs. Scholarships accounted for nearly 29% of the Zips’ $25,355,121 budget. Kent State projected that its 201415 athletic revenues would be $5.7 million, which is $20.5 million below the Golden Flashes’ budget and almost $2 million less than the $7,640,427 the school is spending on salaries and wages for the department. “There’s always been a gap, let’s be honest,” Wistrcill said of the difference between the Power 5 schools and midmajors such as Akron. “But it is growing. It’s something we all have to account for and discuss as we look toward the future. “We also don’t want to overreact now,” he added, “because 10 years ago, we could have never predicted it would look like what it does now.”
Schools provide bulk of budget When USA Today ranked the athletic department revenues of 230 NCAA Division I schools in 2013, the data showed a common theme for the MAC. The conference’s members fit into a pretty tight range — all 12 ranked between 77th and 112th, with revenues ranging from $21.3 million to $29 million. But referring to the dollar figures as revenues, at least when it comes to the MAC, was misleading, since the schools combined to receive 70% of that money from their respective universities. The USA Today data for the six MAC members from the Buckeye State — Akron, Kent, Bowling Green, Miami, Ohio and Toledo — showed an average athletic budget of almost $26.2 million, of which a combined 66.5% came from student fees (55.6%) and school funds (10.9%). As a whole, the MAC had an average budget of $26.5 million, with more than $18.5 million (70%) courtesy of student fees and school funds. “It’s institutional support or student fees,” Nielsen said of the primary source of funding for MAC athletic programs. “That’s the term we use in our industry.” The Kent State AD estimated that the percent of athletic department
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The University of Akron debuted the $61.6 million InfoCision Stadium for a win over Morgan State on Sept. 12, 2009. funding that comes from institutional support is “somewhere in the high 60s to the low 80s” for each MAC school. When the Akron Beacon Journal reported Jan. 19 that Kent State was assessing all of its athletic programs, Nielsen told the newspaper that “everything is on the table.” Otherwise, it wouldn’t be a true evaluation, he said. That led to some speculation about the impact more expenses, such as the cost of attendance, would have on midmajor athletic departments. Steinbrecher, the MAC’s commissioner, said he “would urge peo-
ple to not overreact” to Collegiate Sports Associates’ review of Kent State’s athletic department. “I’ve not called the president or anything, but I think any time you have a new president (as Kent does in Beverly Warren), you’re likely going to do a top-down review of the institution. “This is very consistent with that. It’s just that sports is a segment (of a university) that receives significantly more media attention.” Turner, who is leading the assessment of Kent State, wouldn’t comment on the Golden Flashes specifically, but he believes once schools implement the full cost of atten-
dance, athletic programs likely will get cut. The most likely victims, he said, will be men’s Olympic sports, since those aren’t protected by Title IX. Schools that have 20 or 21 athletic programs might trim the total to 16, Turner said, and universities that have 17 or 18 programs might reduce the number by three. “They’re studying it now,” he said. “Nobody in the MAC, for instance, would want to reduce their commitment to student athletes. No one wants to drop a sport, but the reality of it is without additional funding, in order to stay competitive, they’ll have to make decisions. They can eliminate programs, reduce scholarship values or reduce the amount of scholarships they offer. They might not want to, but they might have to.” Kent’s Nielsen said the MAC’s revenue opportunities are limited, though the 13-year, $100 million media rights deal that the conference signed with ESPN last August provided a nice bump. “In another way, it’s unlimited because we’re not in a sold-out (stadium) capacity or have personal seat licenses that are sold out,” Nielsen said. “I guess you could say there’s a lot of available inventory at MAC schools.” Bowling Green’s 2014-15 athletic budget includes $7 million in revenues, an admirable number for the MAC, but a total that is $5 million short of the combined amount the school is paying in department salaries and scholarships. “Generating revenue is a challenge every day, regardless of if there is new legislation,” said BG director of athletics Chris Kingston. “We’re trying to move the needle every day.”
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PUBLISHER:
John Campanelli (jcampanelli@crain.com) EDITOR:
Elizabeth McIntyre (emcintyre@crain.com) MANAGING EDITOR:
Scott Suttell (ssuttell@crain.com)
OPINION
Wrong way Step right up, folks, because Gov. John Kasich is playing the tax-shifting shell game once again. His “Blueprint for Ohio,” as he’s calling his twoyear operating budget proposal, contains more of what we’ve come to expect. Hiking taxes here so you can trim them there is no way to balance a state’s budget. This latest fiscal sleight of hand would increase taxes by $5.2 billion to compensate for the $5.9 billion in income-tax cuts he’s proposing. It would result in a net tax cut of $523 million. Don’t be fooled, though, because many of the socalled winners in Kasich’s budget will still end up losing. Many of the budget decisions billed as business friendly actually hurt those doing and wanting to do business in the Buckeye State. And many of those same decisions that supposedly will benefit the lower- and middle-classes will likely do more harm than good. Kasich’s $72.3 billion biennium budget plan would continue the governor’s march toward lowering — and eventually eliminating — personal income taxes, this time decreasing the rate by 23% over the next two years. To pay for this cut, sales taxes would go up 0.5 percentage points, from 5.75% to 6.25%, and sales taxes would be applied to some services not currently taxed, such as cable TV bills. It also continues Kasich’s push to move the state’s tax system toward being consumption-based rather than income-based. Unfortunately, this shift to a more regressive form of taxation means everyone pays the same amount regardless of how much money they make. As for the small business tax break the governor is proposing, which would exempt from the income tax small businesses with annual gross receipts of $2 million or less, the impact would be minimal, saving these businesses a few thousand dollars annually. Scot Drenkard, economist and manager of state projects for the Tax Foundation’s Center for State Tax Policy, said a modest reduction in taxes for all taxpayers would be more beneficial than Kasich’s plan. Drenkard recently wrote that “cutting individual income taxes by excluding a whole class of taxpayers costs a lot to state coffers and won’t give the economic growth that Gov. Kasich wants.” Kasich also proposes raising the Commercial Activity Tax, the state’s general business tax that is based on receipts, from 0.26% to 0.32%. An increase in the CAT will deter economic growth by sending the message that the cost of doing business in Ohio is too high. The governor appears convinced that his plan to cut income taxes and increase other taxes, including the state sales tax, will benefit businesses and, ultimately, all the residents of Ohio. We don’t question his sincerity. But he’s wrong. And this plan is bad for business.
FROM THE PUBLISHER
The colorful legacy of the Gay Games Last August’s Gay Games — like the straight community together. It helped sun, sandals and margaritas of summer create allies. It helped create talent to — seem so long ago. put on future events. It helped inspire But for Nigel Jarvis, the Gay Games in some volunteers. It helped create a platCleveland are really just starting. form to legal change — we’ll see if that Jarvis is a researcher and senior lecturhappens. It opened people’s eyes and er at the University of Brighton in Engstarted conversations.” land. His expertise is sport, tourism and He also mentioned a likely increase in leisure studies, which means tourism and more local gay he studies sports for a living. and lesbian sports groups. More specifically, he studies The most significant legawhat sports and sporting cies? He believes they are the events can mean to people personal, social and political. and communities. The Games changed minds He was in Cleveland last and attitudes. They showed summer interviewing scores of the diversity under the LGBT people, gay and straight, to get umbrella. And they lowered a qualitative foundation of our barriers, sparking conversaregion’s environment and attions that probably weren’t titudes toward the LGBT com- JOHN happening before. munity. He’ll be back in two CAMPANELLI “One straight woman I inyears and then in five years to terviewed said her family, who do more research. He also wants to see never asked questions about sex or sexthe Browns and Cavs play. Research, uality, asked, ‘Oh your company’s inright? volved in the Gay Games, what’s that all He’s interested in the legacy the Gay about?’ Husbands were asking their Games left on Northeast Ohio and has wives, ‘What’s the different between submitted a research paper with initial transgender and transvestite?’ ” findings. The legacy of the Gay Games on local “On a simple level, the event was sucbusiness is not something Jarvis singled cessful,” he told me via Skype last out for research. But Tom Nobbe, the exmonth. “It helped bring down stereoecutive director of Gay Games 9, is seetypes. It helped bring the community toing it. gether. It helped bring the gay and Nobbe says companies were able to
spotlight and celebrate their employees and build their reputations as inclusive organizations that value gay and lesbian workers. That’s gold for retention and recruitment. The Games also revealed to many local companies the importance and profit potential of a customer demographic they may have ignored. “The LGBT demographic tends to be very loyal to companies that have been supporting,” he said. “And if they haven’t been supporting, they do not hesitate to show their displeasure.” There is also a tangible legacy to Gay Games 9. The event was the first to finish in the black. The surplus will be split between the Akron Community Foundation and the Cleveland Foundation, becoming endowments for LGBT-related grants. The amount of the surplus? Nobbe said that will be revealed during a special City Club event on Feb. 19. An apology — In last week’s column, I quoted Ray Paganini, CEO of Cornerstone IT in Mentor. But I wrote “Joe” instead of “Ray” as his first name. That’s an embarrassing mistake. When I apologized to him last week, Ray was far more forgiving and understanding than he should have been. In other words, Ray’s no ordinary Joe.
TALK ON THE WEB Re: Public Square renovation, traffic changes
land at Hopkins or the county airport. — Robert Fritz
Someone please tell me how this plan is a positive thing for downtown traffic, or frankly has any tangible benefit to the city. — Jeff
As we were dropped at Hopkins for a flight to New York recently, the shuttle driver offered the best line I’ve heard so far: “We are arriving at United’s entrance, the Art Modell of airlines.” The whole bus laughed out loud! — Margy Judd
Re: Cleveland Hopkins after United’s hub departure Now is a good time to shut down Burke. Hopkins can easily handle all of Burke’s traffic. The lakefront is largely wasted. We should come up with a plan to make condos, marinas, parks, bike trails and other useful things where Burke is now. The private aircraft can
Re: Browns ticket price hikes The Browns forced us season ticket holders to buy seat licenses, which we must forfeit if we do not renew at the new prices. They are worth thousands of dollars,
depending on how many seats you have. So cough up, forfeit, or hope someone will buy the license and sit through 40-0 losses. — Mauler I don’t understand why Browns fans paid even previous prices when the Browns organization cannot put a competitive product on the field. Any other business would be seeing a declining customer base. Yet Browns fans continue to pay good money for an inferior product. Even just watching them on TV is a wasted three hours every Sunday. And it never feels like we’re rooting for them to win — just not to lose. Sad. — TruthHurts2013
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TALK ON THE WEB (CONTINUED) proud to support Ivan Schwarz & the Greater Cleveland Film Commission Join the GCFC as they celebrate the Oscars at
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CLEVELAND BROWNS RENDERING
The $120 million renovations to FirstEnergy Stadium, which include a new field-level hospitality suite that will debut in 2015, aren’t enough of an incentive for many Browns fans to pay higher ticket prices. Waaaait a minute. When these people were pushing the sin tax, they claimed that they could not raise ticket prices to cover the cost of stadium upgrades. Ironically, they now have BOTH a sin tax and a price increase, justified by stadium upgrades they did not pay for. How is it that Browns fans put up with this deceit and avarice in the factory of sadness? And for those of you who could afford only the $19 tickets in the nosebleed section, they gave you the most painful 163% increase. Contemptible. — Robert E. Chalfant For the first time in many years I took my kids to a game this past year, against the Texans. It was not the best game to have picked, but being at the stadium was fun, especially with the kids. Overall, it was a really good experience. I was in fact surprised how low the prices were. I didn’t know they were lowest in the league, but I was surprised. We were in the upper deck family section, around $35 each. I thought that at those prices, we’d come more. I get the need to raise prices, but the Browns really are a joke for the last 10 years. So sorry, I won’t be there at 50 bucks a seat. We’ll keep going to the Gladi-
ators — $2 beer and no need for the snowmobile suit, and I don’t care if they win or not :-) — 196638
Re: Shaker Heights/ Van Aken upgrades It is great to see commercial redevelopment happening in an inner-ring suburb in desperate need of increasing its tax base, which now falls totally on the back of residential homeowners. My concern centers around how redevelopment would include both centers on each side of the rapid tracks. In fact, the west side is almost worse than the RMS side. The problem is different ownership and how to get it all together. I have heard about the city parcel to the north, but how about the old auto dealership, which has been empty for years? What is needed is a comprehensive plan that ties the three separate components together. Also do not be afraid of a more dense solution. And create some real architectural character that reflects the historic nature of Shaker and not create another suburban-modern redevelopment. One more comment: Let’s not forget sustainability and use of green energy. — Neil Dick
Sun ay, February 22
Well, good luck with this project. Residents of the “Upper Van Aken� area, as well as all of Shaker Heights, have been promised this dramatic makeover for years. Early promises were for completion more than five years ago. The resulting flight of retailers from the area has left the two shopping plazas that face the rail line a poor reflection on Shaker Heights. The long-abandoned car dealership across Warrensville Center Road has seen weeds, graffiti and broken windows. The result: plummeting property values throughout the neighborhood because of promises unfulfilled. The Ratner/Miller/Shafran family is from Shaker Heights, and many live there still. I’m excited about what they are attempting to do. However, if they can’t spur the city to commit to the remainder of the big-picture plan, then no one can ... and no one will. And that will destroy what is left of this beautiful residential area that sits steps from a wonderful public transit asset. — Stephen
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Re: Akron native’s BevBoy on ‘Shark Tank’ I’ll take four BevBoys and one swimming pool please. Love it! — Dick Maggiore 1955
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GOING PLACES
Bledsoe
Milenius
JOB CHANGES ENGINEERING TEC INC. ENGINEERING & DESIGN: John Milenius to director of mechanical engineering; Tony Bledsoe to senior designer; Adam Kilbourne to director of marketing.
FINANCE CITIZENS COMMERCIAL BANKING: Paul V. Taffe to senior vice president and relationship manager. FIRST NATIONAL BANK OF PENNSYLVANIA: Benton H. Elliott Jr. to senior vice president and wealth management marketing director, Northwest region.
FINANCIAL SERVICE HW&CO.: John P. Fleischer to
FEBRUARY 9 - 15, 2015
Send information for Going Places to dhillyer@crain.com
Kilbourne
Taffe
president, CEO; Steven C. Anderson to principal; Lindsay Glavan and Russell Majkrzak to senior managers; Kirsten Thompson to HR director; Kelsey Clarke and William Cope to seniors; Audrey Cahn to accounting specialist; Katie Kukwa to marketing coordinator; Summer Azam to HR generalist; Carrie Carley to bookkeeper; Kevin Hollis, Ali Moran and Jude Riedy to staff accountants; Marina Pearson to revenue cycle specialist; Cathy Robinson to senior manager; Christopher Schneider to administrative assistant. SKODA MINOTTI: Todd Jackson, Crystal Schwendeman, Jennifer Lees and Jessica Barlock to staff accountants; Megan Last to senior learning and organizational development specialist; Lisa Demshar to business development associate; Erika Buzalka
Elliott Jr.
Talbot
Gerberry
Hren
Strub
Bodkin
to paraprofessional.
LEGAL
to managing attorney.
TRINITY PENSION CONSULTANTS: Beth Cecconi to senior manager, defined benefit services.
JACKSON LEWIS P.C.: Kathleen M. Tinerello and Karina R. Kendrick to associates.
STAFFING
HEALTH CARE LODI COMMUNITY CARE CENTER: Kathleen Talbot, M.D., to family medicine physician.
MCCARTHY, LEBIT, CRYSTAL & LIFFMAN CO. LPA: Nicole M. Hitch-Clark to principal; Michael R. Houston to of counsel.
SUMMA HEALTH SYSTEM: Rob Gerberry to senior vice president and general counsel.
THOMPSON HINE LLP: Jurgita Ashley, Heather A. Bartzi, Richard A. Freshwater, Stephen R. Penrod and Matthew David Ridings to partners.
INSURANCE
MANUFACTURING
MEDICAL MUTUAL OF OHIO: Mark Hren to vice president and controller, financial reporting and analysis; Keeli Strub to director of customer insights; Marleen Bodkin to director of corporate financial reporting; Jennifer Collister to director of HR services.
WILD REPUBLIC: Heather Banchek to human resources manager; Colleen Engels to brand manager, toys; Bob Hill to Northeast regional manager; John Ziemianski to director of global demand management.
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MARKETING MELAMED COMMUNICATIONS: Kenn Dowell to vice president, community outreach.
NONPROFIT CLEVELAND FOUNDATION: Michael D. Murphy to chief marketing officer; Monica Brown to vice president, human resources. LEGAL AID SOCIETY OF CLEVELAND: Michael Attali to supervising attorney; Abigail Staudt
DIRECT RECRUITERS INC.: David Fishbach to director, life sciences.
BOARDS LEGAL AID SOCIETY OF CLEVELAND: Frank DeStantis (Thompson Hine LLP) to president; Vanetta Jamison, Elizabeth Rader and Karen Giffen to vice presidents; Ronald Johnson to secretary/ treasurer. SHOES AND CLOTHES FOR KIDS: Tracy Jemison II (Glenmede Trust Co.) to chair; Allan C. Krulak to chair emeritus; Dennis Rose to vice chair; Gerald Broski to secretary; A. Lamont Mackley to treasurer. ST. VINCENT CHARITY DEVELOPMENT FOUNDATION: Tim Panzica (IQ Advisors LLC) to chair.
AWARDS PROFESSIONAL CONVENTION MANAGEMENT ASSOCIATION: Swathi Ravichandran (Kent State University) received the 2014 Distinguished Educator of the Year Award.
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SHALE
It adds up That was tough to take in Youngstown, which, after weathering decades of a tough economy following the closure of its old steel mills, was just beginning to feel good about itself and the steel industry again. “All of us knew it was a boom and bust business, and you can’t predict the cycles,” said Guy Coviello, vice president of government affairs for the Youngstown/Warren Regional Chamber of Commerce. “But even though we knew it, I think we all kept that knowledge in a closet somewhere.” Vallourec’s bombshell came on the heels of U.S. Steel announcing it was idling its plant and more than 600 workers in Lorain, where it also makes Oil Country Tubular Goods. It also followed a slew of announcements from drillers and midstream pipeline and processing operators, saying they were slashing their budgets for 2015. For instance, at the end of January, Dallas-based Caiman Energy said it was canceling a proposed $70 million natural gas processing plant that would have begun processing up to 200 million cubic feet of gas per day beginning in 2016. But what might be most worrisome is the cutbacks that drillers have announced. As the industry’s front line, their activity determines not only how many people will be needed to work the region’s drill rigs, but also how much sand, steel, equipment and contractor services will be needed in the year ahead — not to mention the number of people who were counted on as future customers at hotels and restaurants that have sprung up across rural eastern Ohio. Bennett points to the steel mills closing as a prime example of how shale drillings economic tentacles affect not just the oil and gas industry, but entire supply chains and even whole communities. When all of the employees and subcontractors, just at a mill, are considered, the impact can be huge. “You’ve got maybe 750 workers (including U.S. Steel contractors) in Lorain, another 700 or so at (Vallourec) Star and then 75 at TMK IPSCO — you’re talking about 1,500 families being affected,” Bennett said.
This might take a while Now, the question is: How quickly can and will things rebound, and when might that happen? Many who have been in the indus-
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said in announcing the closure. “In developing and implementing these steps, we have taken all measures to minimize the effect on our Vallourec Star employees. However, we are at a point where some employees will be affected. This is unfortunate but cannot be avoided.”
CRAIN’S CLEVELAND BUSINESS
REGIONAL SHALE CUTBACKS FEB. 4: France-based Vallourec Star announces it will idle its new, $1 billion steel mill in Youngstown for three weeks, citing slackening demand for the steel tube it makes for drillers. FEB. 2: Houston-based Gastar Exploration Inc. cuts its drilling budget for the third time since September and says it will curtail drilling in Appalachia. In total, it cut its 2015 budget from a planned spend of $257 million to $103 million, which is down 46% from the $192 million it spent in 2014. FEB. 1: Pennsylvania’s TMK IPSCO announces it will cut employment at its steel pipe plants in Beaver County, laying off 10% of its workforce of 750 people. JAN. 26: Hess Corp. announces it will cut its drilling budget in the Utica by 42% in 2015, spending about $290 million instead of the $500 million it spent in the play during 2014. JAN. 22: Chevron says it will lay off 162 workers as it restructures its operations in the Marcellus and Utica shale plays. JAN. 22: Two drillers active in the Utica and Marcellus shale plays announce cuts as natural gas again dips below $3 per thousand cubic feet. Denver-based Antero Resources said it would cut its 2015 drilling budget to $1.8 billion, down 41% from $3 billion in 2014. Louisiana-based Stone Energy, meanwhile, said it would cut its budget by almost 50%, to about $450 million this year from $895 million in 2014. JAN. 9: U.S. Steel announces it will idle its steel pipe mill in Lorain, laying off more than 600 steelworkers as demand for its products slumps along with drilling activity. DEC. 24: Pennsylvania-based driller Rex Energy says it will cut its 2015 spending by 44%, from an anticipated $350 million to about $200 million. However, it says it hopes to increase its production in Appalachia by 33% by focusing on its best assets and increasing efficiencies. try for much longer than the Utica shale has been in the news point out that the oil and gas industry always has been cyclical — if not sometimes swinging outright from boom to bust. It has happened before, most notably in the 1980s, but as long as people keep burning oil and gas, the industry always comes back. Coviello certainly hopes that’s the case. He said he has faith that companies such as Vallourec, which is no stranger to the industry’s cyclic nature, know what they’re doing and would not invest $1 billion in a steel mill without being sure of its longterm viability. “You always cringe. No one wants to see people lose their jobs, especially us (in Youngstown),” Coviello said. “But over the long term, we’re still confident. This is a cycle, and it will cycle back.” But Bennett — whose job involves working to stave off Ohio Gov. John Kasich’s continuing attempts to increase oil and gas severance taxes in Ohio — said he’s worried the industry won’t snap back the way some predict or hope. For instance, he doesn’t think oil prices will go back up to $100 a barrel any time soon (they were at
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about $52 last Thursday, Feb. 5), and they might not even be able to hold onto price levels much lower than that. OPEC and U.S. drillers are locked in a production war over market share and each group wants the other to curtail drilling so prices will go back up. But, of course, once they do go up, so will production and the supply of new oil. “People see $65 oil, so they start operating (drilling) again, and as a result, the price goes back down,” Bennett said. “Once it goes up, we can’t assume we’ve weathered the storm.” If midstream projects, including gathering pipeline systems, continue to get slowed down or put off, that would make it tougher for drillers to start back up here, since they could not get their oil and gas out of Appalachia to more lucrative markets. And it takes time to restart a drilling program, once it’s stopped. “It remains to be seen how long this downturn will last,” Bennett said. “You have some analysts saying it will be two years or more. It will take a year for the industry to get comfortable, back on solid ground and moving forward.”
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California firm puts its faith, and money, in MAI Capital By DAN SHINGLER dshingler@crain.com
JASON MILLER
MAI managing director Scott Roulston
When a California-based investment group needed an adviser to manage investments in the oil and gas midstream industry, it didn’t turn to Texas, Oklahoma or even Louisiana. It came to Cleveland. Irvine, Calif.-based Vertical Capital Markets Group has introduced two new mutual funds, its Vertical Capital MLP & Energy Infrastructure funds, which are being managed by Cleveland-based MAI Capital Management. One, which has the ticker symbol VMLPX, is open to retail investors with at least
$5,000 to invest. The second, with the symbol VMLIX, is open to institutional and high-net worth investors with at least $25,000 to invest. The funds will invest in the master limited partnerships (MLPs) that often are used to finance midstream infrastructure, like pipelines, gathering systems, gas processing plants and oil refineries. It will also invest directly in companies that operate in the oil and gas midstream, said Vertical Capital president Bayard Closser. His company specializes in alternative investments, including mortgages looking for a secondary market in
the wake of the nation’s foreclosure crisis, and was looking for a way to invest in the oil and gas industry. It found MAI through the two firm’s mutual auditor, Cleveland-based Cohen Fund Audit Services. “We think it’s a great long-term play and presents a nice income stream,” Closser said of the midstream sector. “And we really, really like what MAI has done in this space.” What MAI has done, for the most part, is to generate hefty returns for investors. The firm was named one of the top three in the nation, in terms of oil and gas MLPs, for the 12 months ended Sept. 20, 2014, by Pensions & Investments, a sister
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publication of Crain’s Cleveland Business. For that one-year period, MAI earned a gross return of 43.1% on its MLP assets, P&I reported. The firm has not yet released its subsequent results, but to be sure they will be down — as is the case for just about anything else attached to the oil and gas industry, in light of oil prices that have dropped by more than 50% in recent months. However, while some companies in the sector have seen their stock prices fall by half or more, MLPs are only down about 14% since Sept. 30, according to the Alerian MLP Index, which tracks MLPs in the oil and gas midstream. Closser said that’s OK; he expected oil and gas investments to get hit in the short term. But MLPs and other investments in midstream industries will rebound, he predicts, and perhaps quickly. “These assets have been impacted with the price of oil — probably overly impacted,” Closser said, showing a bit of his contrarian side. “I think it’s a very good time to be investing in this space.” Part of his optimism is based on the role that the midstream operators play in the industry, he said. That’s because, in most cases, pipelines, processing centers and other midstream operators don’t rely on the price of oil and gas for their profits. They are “toll takers,” Closser said, and collect for each unit of volume that they move or process, regardless of the price of the hydrocarbons involved. “It doesn’t matter what the price of oil really does, it’s going to get transported,” he said. “And it’s the same for natural gas. These assets have been impacted with the price of oil — probably overly impacted.” As for MAI, which normally deals with institutional investors and high-net-worth individuals, the deal provides a way to offer its acumen and services to a broader market and to smaller investors, said MAI managing director Scott Roulston. Typically, when an investor gets into a master limited partnership, they must report their share of the partnership’s income to the IRS, via a K1 form issued by the partnership. That adds a level of complexity that most small investors don’t want, and often requires that investors file for extensions when the forms are not sent out before April 15, he said. “A lot of investors don’t like K1s,” Roulston said. By investing in a mutual fund, investors can avoid having to deal with the K1 form (the fund manager does that), and simplify their tax return. They also have an investment that they can easily get in or out of, just like other mutual funds. MAI didn’t start a fund of its own, in part, because of the expense of doing so, Roulston said. Now, it will get to manage a fund, not have to set it up, and won’t have to handle the bulk of sales or administrative work. Vertical Capital Markets has a total of $155 million under management. MAI, formerly the wealth-management division of the Clevelandbased sports management firm IMG, has approximately $3.8 billion under management.
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MIDDLE MARKET
THE MIDDLE MARKET: NORTHEAST OHIO ◆ About 1,300 middle market companies are here. ◆ Top four middle market industries: Manufacturing; professional services (from accounting to health care); wholesale trade; and resale trade. ◆ Nearly 500,000 employees here are working in middle market companies. ◆ About $49 billion in annual revenue is being generated by these businesses. Source: Doug Farren, associate director, National Center for the Middle Market. *For the above numbers, middle market businesses are defined at those generating between $10 million to $1 billion in revenue. Image: iStock
EMBRACING THE MIDDLE WHAT IS THIS SEGMENT AND WHY IS IT IMPORTANT? By JEREMY NOBILE jnobile@crain.com
These businesses aren’t your typical mom and pops. But, they aren’t your behemoth corporations, either. Instead, these ventures fall right in the middle — not quite giant, but not quite small — and they account for about 37% of all jobs in Ohio and $226 billion in combined revenues. So what exactly is the middle market? The National Center for the Middle Market, which
was formed about three years ago out of a multiyear partnership with GE Capital and Ohio State University’s Fisher College of Business, defines the segment as those businesses with between $10 million and $1 billion in revenue. The average age of a middle market company is 31 years, said Doug Farren, assistant director at the center, which works closely with policymakers and other groups, including the Greater Cleveland Partnership. These companies are inherently different from startups See MIDDLE, page 18
This is the first installment of a bimonthly focus on the middle market. The next section will appear April 13.
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CRAIN’S CLEVELAND BUSINESS
ADVISER
WWW.CRAINSCLEVELAND.COM
FEBRUARY 9 - 15, 2015
MICHAEL F. PAPARELLA
Driving middle market value through Corporate M.P.G. Corporate M.P.G., as defined here, is different than what might first come to mind. It is not a reference to the average miles per gallon of your corporate fleet. Instead, it is an acronym for the three attributes that professional investors evaluate when considering an investment in middle market companies. In Corporate M.P.G., M denotes management team or the quality of the team; P indicates past performance or the historical financial performance of the business; and G represents growth potential offered by the company. Management team quality typically is the most important consideration, and the most difficult to measure. Past financial performance is the most often cited attribute, and it is common practice to infer future results from historical financials. However, we all know that is not true. Nonetheless, understanding the company’s past business plans and goals, and assessing the management team’s ability to perform over a three- to 10-year period, can give some comfort that the performance
Paparella is managing director of Signet Capital Advisers in Cleveland, which offers M&A and business advisory solutions for middle market companies. was not a random occurrence and should, with reasonable expectation, continue into the future. The growth prospects provide the “sizzle.” It seems that most middle market companies lack a well-articulated, implementable and measurable three-year growth plan.
Investors and lenders take comfort in, and will generally attach value to, a sound, well-thought-out plan that can serve as the roadmap to get from current revenue and profitability to projected revenue and profitability. Ideally, this plan should allow for revenue and profits to grow at 10% per year or more. Whatever the actual growth rate, it must be supportable to be believable. Let’s examine a recent example of two transactions from 2014 in which one publicly traded company acquired another publicly traded company in the same industry and of approximately the same size and providing a very similar set of products and services. In the first deal, Enterprise Products Partners acquired Oiltanking Partners in October 2014 for a remarkable 43 times trailing EBITDA (earnings before interest, taxes, depreciation and amortization). Oiltanking Partners was generating approximately $250 million in annual revenue. In the comparative transaction, NGL Energy Partners acquired
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TransMontaigne Partners, with $150 million in annual revenue for a good, but far less, multiple of 14 times EBITDA. In fact, if TransMontaigne transacted at the same EBITDA multiple as Oiltanking Partners, it would have received over $3 billion more in enterprise value. When evaluating each company’s historical financial performance (the “P”), we see that Oiltanking Partners realized a five-year compound annual revenue growth rate (CAGR) of 20%, while TransMontaigne realized a five-year CAGR of 3%. The five-year EBITDA CAGR for each company was 21% and 4.5%, respectively. In evaluating other measures, such as gross margin, EBITDA margin, ROI and so on, Oiltanking Partners consistently outperformed TransMontaigne in every category by a wide margin. Oiltanking’s outperformance continued through the “G,” as it built itself a growth engine that appears to provide promise far into the future. It invested approximately 40% of its total revenue from the past three years, compiling an infrastructure that will accommodate very significant growth over the next five years. Conversely, TransMontaigne left the cost of building its growth engine to the next owner. Consider
THE MIDDLE MARKET IN OHIO Middle market companies account for 37% of the state’s total employment and generate 20% of all revenue created by businesses in the state. Below are some other findings included in a 2014 report by the National Center for the Middle Market: ■ 64% of Ohio middle market firms improved overall performance in the past year ■ 73% increased gross revenue ■ 74% grew their workforce ■ 52% believe their company is outperforming competitors ■ 87% expect gross revenue to increase
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■ 59% expect employment to increase ■ 82% are at least somewhat confident in the local economy ■ 80% are at least somewhat confident in the state economy ■ 62% are at least somewhat confident in the national economy ■ 42% are at least somewhat confident in the world economy
Source: “State of the Middle Market in Ohio,” 2014, National Center for the Middle Market. Middle market, for the above information, is defined as companies with annual revenues of between $10 million and $1 billion.
THE MORNING ROUNDUP: The day’s business news from Ohio’s daily papers
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this, if growth potential was the only measuring stick, Oiltanking received an “extra” value for the business equal to 10 times its investment in growth. While we do not have complete detailed information regarding each company’s management team, we can infer the best case, which is to say that management’s performance is fairly well represented by the historical financial performance and each company’s growth position. When the M, P and G come together in one package, investors and lenders get excited about the opportunities that are ahead for such a well-positioned business. This was made evident in the transaction above — two companies, of similar size, in the same industry, providing the same set of products and services, trading at remarkably different values when selling the business at virtually the same time. Middle market companies of all sizes can take this lesson to heart and focus on the quality of the management team, understanding its historical performance, and putting together a solid, logical and implementable growth plan, that when all are collectively coordinated will drive long-term value for owners and shareholders.
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A weekly guide of changes in the health care industry. Published Tuesday. MANUFACTURING REPORT: A weekly guide to Northeast Ohio’s manufacturing sector. Published every other Wednesday. SMALL BUSINESS REPORT: A weekly guide to small business news. Published Thursday. SHALE AND ENERGY REPORT: A weekly guide to the energy industry. Published Friday.
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Growth can sometimes come in a neat package By CHUCK SODER csoder@crain.com
Four years ago, when ExactCare Pharmacy moved into its first real office, Dale Wollschleger was a bit concerned. Back then, the company only had maybe four or five employees. So the office seemed huge. “I just remember looking around and saying, ‘How am I going to fill this?’” said Wollschleger, who started the company and is its president. Well, he did it: Today, ExactCare’s 300 employees might catch the attention of the fire marshal if they all tried to squeeze into that 6,000square-foot office in Valley View. The company now uses roughly 10 times that much space, most of it spread across two Valley View offices just off Rockside Road. The popularity of the company’s main product, the ExactPack — a package containing a month’s worth of medication, customized for a particular person — turned the tiny little startup into a much larger middle market business in just a few years. So how did ExactCare get so big, so fast — while navigating the long list of challenges small companies face as they become midsize businesses? Founded in 2009, the company got its start in the back of a traditional pharmacy that Wollschleger used to own in Cleveland. The store served a lot of mental health patients, so Wollschleger started looking for ways to make sure that they took their medications on time. As a result, the store eventually started packaging their medications onto so-called bubble cards that separated their pills based on when they needed to take them. But the real breakthrough came in 2009, when they developed the ExactPack.
Breaking out of the box Inside each box is a long strip of plastic packages containing pills in the order that they are to be taken. Say it’s Saturday night and you need to take three different pills before bed. That evening, you’d grab your ExactPack and rip off the Saturday night package as if you were taking a number at the BMV. Your Sunday morning pills would be waiting for you in the next package. The company started out by marketing the ExactPack to customers in Northeast Ohio. Mostly group homes and long-term care facilities. But it caught on quickly. The company racked up nearly $50 million in sales during 2013, up from $5.5 million in 2010, according to figures the company submitted to Inc. magazine. ExactCare experienced “significant growth” last year, too, Wollschleger said. How do you manage that kind of growth? Wollschleger got a few pointers from other business owners. They told him that he’d need to start making some changes as ExactCare approached 50 employees. Around that time, a human resources department was formed. “Before that I literally did everything. You name it, I did it. HR, IT, janitor. I mean everything. That’s just how you grow when you’re small.” Hiring continues to be a big chal-
lenge for ExactCare, so the company has been forced to adapt. For instance, it opened an employee training center just two weeks ago, and it recently launched a more formalized employee orientation program. And ExactCare isn’t just hiring pharmacy technicians and customer service specialists. Over the past few years, the company has had to expand its senior leadership team as well. For instance, last year ExactCare hired a vice president of regulatory compliance. Like many middle market companies, ExactCare ran into regulatory challenges as it grew. For a few years, it didn’t even sell products outside of Ohio, because each state regulates pharmacies in a different way. Now, however, the company ships medication throughout the Midwest, and it has a distribution and customer service center in New Jersey as well. Wollschleger has learned to rely heavily on his leadership team and outside experts, such as the people at Primus. The Mayfield Heightsbased private equity firm invested in ExactCare about a year ago. Wollschleger wouldn’t provide details about the investment, but he said he did the deal mainly because he wanted to work with people who have experience helping companies make good decisions as they grow. “To be able to admit that you don’t know everything I think is key to success in any business,” he said.
Sure, growing companies can get tripped up if they have trouble hiring a good leadership team, attracting talent and navigating new regulations and costs. But it’s simply not possible for a CEO to build deep personal relationships with every employee when there are hundreds of them. So what can companies do to maintain their culture? Make employees feel appreciated, Farren said. Vitamix, the blender maker in Olmsted Township, does a good job of this, he said. For instance, the company regularly asks for employee input through idea boxes and focus groups. Vitamix, which gives a blender to every new employee, also works with employees to make sure they chose the right health plan and stay healthy. “That just makes people feel really good about the company they work for,” he said.
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Going big time Now that the company has about 300 employees, Wollschleger faces another challenge: Keeping what he described as “the small company feel.” He’s past the point where he can really get to know every single employee, but he makes an effort to meet everyone. And ExactCare regularly hosts events during which employees can get together and have fun. For instance, the company hosted a holiday party at the Corner Alley on East Fourth Street in downtown Cleveland. ExactCare’s revamped orientation program hopefully will help new employees feel like they fit in, he added. “I want them to truly feel like it used to be when I had 20 employees and I would greet them at the door and say, ‘Welcome. This is going to be the best decision you ever made,’” Wollschleger said. Maintaining company culture is a big problem for a lot of fast-growing businesses, according to Doug Farren, associate director of the National Center for the Middle Market at Ohio State University.
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MIDDLE MARKET CHALLENGES Finding/retaining talent Despite the near endless gamut of industries that could fall within the middle market sector, attracting and retaining top talent is an ongoing challenge across the board. According to the National Center for the Middle Market, 37% of all Ohio employees work in middle market companies, which are both growing and adding jobs, largely in operations, manufacturing and marketing/sales. But 87% of Ohio’s middle market leaders said last summer that filling those positions is a concern. “A lot of companies are just having a hard time finding the right employees,” said Zach Abrams, a manager with Capital Advisors Ltd. in Shaker Heights. “This is true from top to bottom, from entry-level positions to skilled ones. This is especially true in manufacturing more than anywhere else. That’s going to change over time, but for now, that’s one of the top issues our clients are facing.” And, it’s a problem seen nationwide, with 77% of middle market companies nationally citing the same concern, according to the center. This challenge persists for middle market companies partly because those firms tend to place fresh, young talent in entry-level jobs. Those people are then lost later to larger corporations with deeper pockets. Brandon Miller, a principal with Howard, Wershbale & Co. in Beachwood, said larger companies increasingly are offering bigger paychecks and additional incentives, like stock options. Many have more cash on hand after operating leanly in a post-recession environment while enjoying growing bottom
lines. Now, they’re ready to invest in human resources — just the same as middle market companies — but they oftentimes can offer more attractive compensation and growth opportunities.
Costs of health care According to the National Center for the Middle Market, the cost of health care is the top overall concern of middle market firms. Many are partnering with organizations like Medical Mutual of Ohio, said Doug Farren, the center’s associate director, to develop best practices for managing health care costs. “There’s not a lot of info on how to best implement health care mandates,” he said. “As those mandates come to fruition, middle market companies are generally concerned about it.” As is generally the case with rising costs, middle market companies feel the brunt of pressure from health care mandates because they’re big enough to be affected, but don’t have the economies of scale of a large corporation to spread out the spike. Abrams said he’s heard of companies reporting health care costs going up as much as 10% year over year. He said more are investing in creative ways to keep health care costs low, such as hiring consultants or implementing in-house wellness programs. “This is really the main thing impacting their margins,” Abrams said. “Costs keep rising, and people just want to know when it’s going to end.”
Maintaining overall margins The cost of doing business is outpacing pricing, meaning costs
often are not passed on to customers. Farren points out that during and in the wake of the economic recession, there was a lot of pressure to keep prices flat, whether on products or services, in order to attract customers with fewer dollars. Prices, generally, are still barely growing or stagnant. Meanwhile, many of the companies that weathered the recession, Miller said, are operating leaner, leaving little room to cut costs further and making new expenses that much more difficult to absorb. Farren said middle market businesses also face other complications. Smaller companies can sometimes operate just under the threshold of some taxes and regulations, while larger ones can more effectively spread out expenses. Larger companies and smaller ones also tend to be more likely to qualify for tax abatements or exemptions. “Most middle market companies say they’re overregulated, and we try to share that with the policymaker community,” Farren said. “There are often hidden and complicit costs of regulations applied at state, federal and local levels or by the industry. This is nothing a business can control — it’s just outside their hands.”
Succession planning Miller and Abrams said they’re increasingly seeing clients — many of whom are of the baby boomer generation and near retirement — with no exit strategy in place. “How long do they want to work for? Are they going to give it to family? Is there a management team in place? Would you sell to a competitor? Is there a third-party buyer? If
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FEBRUARY 9 - 15, 2015
so, how do you prep for that? A lot of times people aren’t ready when it comes to make that transition,” Abrams said. “Maybe they’re not ready to sell. Maybe they’ve never thought about it before. But a lot of people simply don’t know what they’re going to do next.” With M&A activity predicted to continue at a robust pace this year, Abrams said more people are cognizant of the importance of a succession plan, and those without one are scrambling to fix that. In some instances, a lack of available talent has inhibited succession planning, he said, because younger, yet veteran leaders are in high demand and hard to find and retain. An overall robust M&A outlook, plus higher business valuations, is seemingly pushing some aging middle market business leaders to plan exit strategies so they’re ready to entertain a possible sale when the opportunity arises.
Foreign economies, stronger dollar Middle market companies are inherently positioned for growth by
their operating sizes. As those businesses grow, executives must consider new geographic markets. And as foreign countries are vetted among potential new markets, those economies must be top of mind. “If you’re exporting into a weaker economy, and we have a stronger dollar, your goods are going to be more expensive,” Abrams said, calling the combined effects a “double whammy” to bottom lines. “That’s going to make you feel some pressure on revenue.” According to the National Center for the Middle Market, about 42% of middle market leaders say they’re “somewhat” confident in the global economy, compared with 82% and 62% being “somewhat” confident in the state and U.S. economies, respectively. In Europe, Abrams said goods are running about 10% more expensive. “We are seeing some concern with exporters over this,” Miller said. “Because of the devaluing of other currencies, how will that factor into exporting goods? It will be interesting to see.” — Jeremy Nobile
MIDDLE continued from page 15
because of their business experience and potential for exponential organic growth, he said. There are roughly 200,000 middle market businesses in the United States, and 85% of those are privately held. The middle market employs about 2 million people in Ohio — about 500,000 of whom are clustered around Greater Cleveland. Staff size is not a significant characteristic in identifying middle market businesses. “These companies are found in all industries and employ various numbers of people,” said Amanda Lisachenko, CEO of Reed Financial Services in Beachwood, “so revenue is the most congruent statistic.” Revenues also tend to remain more consistent than staff size. Beyond a company’s age and revenue, middle market companies also differ from small businesses because they generally have multiple ownership levels and boards of directors, notes Thomas Scharf, a partner at Walthall CPAs in Independence. Farren said the middle market itself is separated by revenues: $10 million to $50 million; $50 million to $100 million; and $100 million to $1 billion. The bulk of businesses fall in the lower third. The middle group tends to reflect more mature companies. The upper third is where the center has observed the most rapid organic growth. Those companies also tend to have more global strategies, including exporting and expanding overseas. Local governments and chambers of commerce have acknowledged how important the middle market sector is in Ohio and across the country. With manufacturing comprising a significant bulk of that sector locally, Scharf notes that larger companies are dependent on the goods and services that the middle market provides. “Virtually thousands of these businesses exist and provide jobs and economic stimulus for other businesses in the community and the nation,” Scharf said. “These
companies are supported many times by middle market companies supplying parts and products for them. Also, many local charitable community programs are sponsored by middle market companies.”
Ripe for growth Additionally, the National Center for the Middle Market expects that 60% of new jobs in the coming year will be created by middle market companies. The middle market, Farren said, illustrates a “true story” of job creation. Private equity groups are keen to these figures, making middle market businesses a prime target for investment, particularly those in the upper echelons seeing the fastest and most accelerated growth. “With the significant increase in investment dollars getting placed into private equity funds due to low interest rates and volatile publicly traded markets, these private equity groups have pushed the minimum size for which they would consider investing in a privately owned business,” Scharf said. “Some of this is due to the large amount of transaction cost required to purchase many of these businesses.” With a seller’s market tending to prevail in today’s robust M&A sector, companies are seeing higher multiples in their sales. In order to recover those costs, Scharf said private equity firms are eyeing larger businesses where investments are likely to yield higher returns. Lisachenko points to the center’s data showing that since the fourth quarter of 2012, middle market businesses have seen quarterly revenue growth hover around an average of 5% to 7%, compared with the S&P 500, which experienced growth of between 0.5% to 6% in the same period. “These consistent growth factors make them attractive to larger corporations who are looking to expand into a certain niche with an established business and create leverage,” Lisachenko said.
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CARL GRASSI
Goodwill transfer can be part of succession plan Transferring ownership of a business to children who are involved in the business is often the succession plan of choice. If the business has significant value, however, estate and gift tax issues can make moving ownership from one generation to the next problematic. One transfer technique for businesses that are not capital intensive is to have members of the next generation form a new company and direct business of the old company to the new one. Over time, as more and more business is run through the new company, the old company becomes less valuable and the new company becomes more valuable. An issue with this technique is that it may involve a transfer of goodwill of the old business to the new business. The Internal Revenue Service may assert that this is a taxable transaction, be it a gift or some type of taxable distribution, or both. If the goodwill is “personal goodwill,” this technique may be more viable. Personal goodwill is seen most often in the transactional area. The concept is that the goodwill that one might normally associate with a business is not owned by the business but by its owner. If the assets of the business are sold, if the goodwill is personal goodwill instead of corporate goodwill, the tax savings can be substantial. This concept has not seen as much use in the estate planning area until now. In a recent tax court case, the court examined the transfer of a business from a corporation owned by the father to one owned by his sons. It found that the goodwill of the business was owned by the father and did not belong to the corporation. In doing so, the court rejected the IRS argument that the old corporation had goodwill that was transferred from the corporation ultimately to the sons. In this case, the father, let’s call him Mr. T, owned 100% of T Trucking. Mr. T had personally developed the relationships needed to ensure that T Trucking had business, and had never had an employment contract and never signed a noncompete. Investigations from several regulatory authorities led Mr. T to become concerned that T Trucking might be shut down. Because of this concern, Mr. T’s sons formed a new company; approximately half of the new company’s employees were former employees of T Trucking. The new company signed an equipment lease with T Trucking’s old equipment supplier, allowing the new company to use equipment that has previously been leased to T Trucking. Some of this equipment continued to display the T Trucking logo for a period of time, although these were covered over by magnetic signs until the trucks could be repainted. The IRS asserted that the intangible assets of T Trucking had been distributed to Mr. T, followed by a gift of the goodwill from Mr. T to his sons. These assets included what would normally be thought of as components of goodwill (and the assets
were identified as such by the tax court): revenue stream, customer base, established workforce and others. On the distribution of the goodwill from the corporation to Mr. T, the IRS assesses tax and penalties against the corporation of approximately $1 million. The IRS also assessed taxes and penalties of close to $2 million against Mr. T, based on the distribution of the goodwill and the subsequent deemed gift of the goodwill by Mr. T to his sons. The tax court disagreed with the
IRS, finding first that the goodwill of the business had largely diminished due to the increased regulatory scrutiny. This conclusion was supported in part by the fact that the T Trucking logos were replaced, indicating that no “going concern” goodwill was transferred from the company. Importantly, the court found that any remaining goodwill belonged to Mr. T individually, and was not owned by T Trucking. His personal relationships developed the customer base and therefore generated the revenue stream.
He had no employment contract that could have indicated that any resulting goodwill belonged to T Trucking. Therefore, the court found that no distribution of goodwill could have been made from T Trucking to Mr. T. The facts of this case are obviously unusual, and it is unlikely that many family businesses will have a similar fact pattern. This case does suggest however, that personal goodwill can be a part of a succession plan when transferring ownership of a business from one generation to the next.
Grassi is president of McDonald Hopkins LLC.
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going, and we want to make sure NASA Glenn is part of that effort,� he said. Two other factors could help Glenn’s budget grow. First, Glenn has had success attracting contractors from other NASA centers and private companies. Glenn attracted $53 million in additional contracts during fiscal 2014, up from $30 million four years ago, Free said. Plus, Glenn’s budget would jump to $600 million next year if Congress passes the Obama administration’s latest budget proposal. Granted, that may not happen: Republicans control Congress, and they’ve been bashing the president’s budget proposal and the spending increases included in it. Even if that spending increase goes through, however, Glenn still would be required to eliminate the equivalent of 22 federal positions as part of NASA’s plan to cut 200 positions nationwide. Those cuts also have to be approved by Congress. So what would the space agency do with more money if it can’t hire more employees? In some cases, it would hire more private contrac-
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tors, according to a statement from NASA Glenn. Glenn has submitted a plan to NASA headquarters that would allow the center to offer buyouts to “eligible employees throughout the center,� according to the statement. The space agency plans to cut positions related to its so-called human exploration and operations group, because in the future the group will focus less on technology development and more on operations, according to the statement. NASA also plans to reduce the number of federal employees in its space technology group, which would rely more heavily on contractors. The space technology group works on a variety of projects, so it could use “more budgetary flexibility to draw talent from external sources,� the statement said. The plan to cut staff “doesn’t make any sense� to Paul Greenberg, who wrote a letter opposing the cuts on behalf of the Lewis Engineers and Scientists Association, a union at NASA Glenn. “Somehow, despite the boundless challenges facing the Nation’s newest chapter in deep space ex-
ploration, the Administration and NASA-Headquarters maintains we simply don’t have any work for our Country’s best, brightest, and most experienced engineers and scientists,� he wrote in a draft version of the letter. It would make sense to use contractors to erect a building or do something else the center’s core employees aren’t good at, according to Greenberg, who also is a scientist at Glenn. But he argues that having contractors do Glenn’s core research and development work weakens the center’s “long-term intellectual infrastructure� and raises costs: The private company acts as a middle man, taking a cut of taxpayer dollars as profit, and it needs to be supervised. Union president Sheila Bailey wasn’t a fan of the budget for fiscal 2015 or the president’s proposal for fiscal 2016 — because even $600 million isn’t enough, in her view. For now, though, Free says he’s OK with it. “There isn’t going to be this magical switch where all of a sudden we’re a $750 million center again,� he said.
Three Twinsburg office buildings sold to N.Y. investor for $13 million By STAN BULLARD sbullard@crain.com
Developers of Canyon Falls Corporate Center in Twinsburg recently sold three office buildings in the four-building complex, and they’re already looking forward to their next chance to build some more there. The three buildings on the 8920 block of Canyon Falls Boulevard sold to a New York City-based investor for $13 million, according to Luttner Real Estate Investment Services LLC. Luttner sold the properties for Canyon Falls office park developers Peter Snavely of Chagrin Fallsbased Snavely Group and Bob Voelker of Twinsburg-based RSV Hospitality Inc. The three buildings have a total of 94,316 square feet of office space and are 98% leased, said Mark Luttner, a name principal of Luttner Real Estate, in a news release. Peter Snavely Sr., president of Snavely Group, called the sale a natural move. “It was time to harvest,� Snavely said of the buildings constructed 15
years ago. “We have four sites for other buildings in the park and are looking for tenants to do it again.� Voelker said it was an opportune time to sell because the structures are well leased with creditworthy tenants. After 15 years, Voelker said, it is a good time to return cash to investors who partnered in the buildings with them. Voelker, a hotel developer and owner, launched what became Canyon Falls after he acquired a nearly 70-acre parcel in 1998 on the corner of I-480 and State Route 8 in Twinsburg. He developed a Hilton Garden Inn and five restaurants on Wilcox Drive as part of the land development. Luttner said he and fellow broker Dan Lariccia had multiple groups interested in the property. He declined to identify the buyer beyond saying it is a New York investment group. The buyer’s identity could not be located on Friday, Feb. 6, in a search of online computer records of Summit County properties.
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SALES
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in other cities helped shape the 348suite Vue.
Something for everyone Some 60,000 square feet of space goes to amenities — a figure far exceeding typical apartments — which includes a two-level fitness center, a yoga studio with an outdoor yoga garden, three intimate community rooms with distinct designs, a gallery selling artwork by Cleveland artists on a rotating basis, and even a topfloor room that tenants can rent for chef-catered events. The Vue’s business center includes an eight-seat conference room that would be the envy of many an office. Heller said it is designed for tenants who work from home or own a business and want a good place to meet with their team. The Vue also has an indoor children’s play area. “We think grandparents with visiting grandchildren will be the primary users of the play areas,” Heller said, a nod to three demographic groups The Vue targets. That one is empty nesters, people living nearby who want to shed large homes but still want plenty of room. Another is young professionals and millennials, and the third is people starting or finishing a divorce. The four-story building has a fortress-like presence at the southeast corner of Chagrin Boulevard and Green Road. Oodles of balconies provide views of miles of surroundings from Shaker Country Club to Lake Erie. The building surrounds four separate outdoor courtyards, including one designed for people who want to use a heated pool and outdoor barbecue with a big-screen TV. Another major courtyard is NRP’s take on a botanical garden for those seeking serenity. The contemporary suites are striking, particularly penthouses that feature either 10- or 13-foot ceilings and banks of tall windows. The two-bed-
Contact: Phone: Fax: E-mail:
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The lobby of The Vue in Beachwood. room, two and ½-bath units include walk-in closets, full-sized washers and dryers in a walk-in laundry room and other features. The complex offers one-, two- and threebedroom suites divided between 43 different layouts. Rents are similarly head-turning. The penthouse model suite goes for $3,480 a month. If you wonder if there is such a market for stratospheric rents, they exist. At the newest phase of competitor Goldberg Cos.’ Five Seasons Apartments, at 26600 George Zeiger Drive in Beachwood, two penthouses were combined to form a suite that was taken for $4,000 a month. The Vue’s lowest rent is for a onebedroom suite costing $1,550 a month, nearly double the region’s average monthly rent of $832. For his part, Heller said demand is strongest so far for the penthouses. Heller won’t say how many suites are taken so far as the first tenants just moved in Jan. 23. Additional phases of the building will add more suites later this year. The Vue and 143 suites at Four Seasons account for 68% of the 880 units
Denise Donaldson (216) 522-1383 (216) 694-4264 DDonaldson@crain.com
that the Marcus & Millichap realty brokerage estimates will be completed here this year.
‘Starving’ for luxury However, there is no worry about filling the suites. “Between us and Four Seasons, it’s not really a lot of units given that they were the first projects built in 19 years when they started,” Heller said. “It is a lot less competition than we are used to in Atlanta, Charlotte and Dallas.” Heller expects The Vue to fill up in about 10 months. The first 78suite phase of the Four Seasons addition opened last summer is half leased and Goldberg expects that when the remaining units in the 148-suite phase are done they’ll be leased by this summer. Even with apartments going in at a pace greater than in generations, Marcus & Millichap estimates vacancy will hit just 3.8% this year in the Cleveland-Elyria-Mentor Metropolitan Statistical Area. Moreover, Ralph McGreevy, executive vice president of the Northern Ohio Apartment Association
trade group, said The Vue has its own market as not everyone wants to live downtown. “Beachwood is starving for topshelf apartments,” McGreevy said. “Many studies show that people want to stay in their community as they age. For years the well-heeled have been heading to condos in Three Village and a few apartments. But there are only so many units in those dwellings.” The apartment group’s market surveys show Beachwood and surrounding suburbs have a vacancy rate of just 2%, Something that McGreevy joins Heller in describing as unique in Northeast Ohio at The Vue is a set of 59 private garages; behind each individual garage door is a private space the size of a 1½-car garage. Rick Bailey, the other principal of NRP, already wishes The Vue had more. “If you worry about who is parking next to your Porsche, this is for you,” Bailey said, gesturing at the vast 500space basement garage. That privilege will cost $150 monthly.
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apartments or mixed-use office and apartment properties. The Halle, Leader, Standard and 75 Public Square office buildings all traded in 2014. However, only the $20 million purchase of the massive Halle Office Building by K&D Group of Willoughby in December was a striking figure; none of the other old office building sales exceeded $6 million. That drags down the overall figure for sales volumes. Such prices reflect the weakness of the office market and high vacancy of older downtown buildings. Developers are price-conscious in such situations. They know it takes multimillion-dollar investments to convert them, with the help of oodles of subsidy, to get in on the booming market for downtown apartments. Retail properties were by far the most active category in 2014, accounting for 33% of sales volume. Office and industrial properties each accounted for 20% of sales, while apartments accounted for 16%. The remaining 10% were sales to investors of single-tenant net-leased properties, which may be office, industrial or retail properties devoted to a single tenant with a long-term lease. As for the coming year, Pacella estimates property sales may shake out in the same range as in 2014. “For this region, it will be another healthy year,” Pacella said, estimating sales will be in the $700 million to $800 million range. He said rising rents and values for rental industrial properties may attract additional interest by publicly traded real estate investment trusts in the region, and owners of top-tier office buildings that have steadily filled since the downturn ebbed may make for continued action in that sector. Apartment sales also will remain steady.
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REAL ESTATE LAND Vermilion 4acres 150 ft. frontage zoned comm. $275,000.00, 8 acres 280 ft. frontage zoned comm. $345,000.00, 125 acres 900ft. frontage with 1500 ft. frontage exposure to Rt. 2. $3,300,000.00, PUD zoning available. Possible owner financing all parcels. Location Vermilion Twp. Rt2 & Rt 60 interchange area. All parcels have sewer, water, gas and electric. Broker owner of 4 acre parcel. Winterstein Realty 440-225-8553 Wintersteinreal@Hotmail.com
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PUBLIC NOTICE Request for Qualifications Sediment Processing Center Operator Port of Cleveland is seeking Statement of Qualifications from firms seeking to function as the Port’s concessionaire for managing the onsite hydraulic delivery of dredged sediments, harvesting, and marketing the material. Interested firms should visit the Port’s website www.PortofCleveland.com for requirements and submission instructions. Submissions are due no later than 2:00 PM on 12 February 2015.
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THE WEEK FEBRUARY 2 - 8 The big story: Less than three years after it began producing seamless steel pipe in fall 2012, Youngstown’s $1 billion steel mill is shutting down for at least three weeks, citing lack of demand for the oil and gas products it makes. The owner of the mill, France’s Vallourec Star, announced the closure Feb. 4, after the prior week saying it might make “adjustments” to its work there. The shutdown will start in “mid-February.” See related story, Page One
By the numbers:
Gov. John Kasich’s $72.3 billion, two-year general revenue budget includes a personal income tax cut that averages 23% over the two years. But it manages significant increases in spending with a variety of tax hikes, including an increase of 0.5 percentage points in the sales tax. The 2016-2017 budget released Feb. 2, is $12 billion higher than the last biennial budget, despite what’s estimated to be a $500 million tax cut. The budget, called “A Blueprint for Ohio,” raises spending by 12.5% for fiscal year 2016 that begins July 1, 2015, and 4.8% for fiscal 2017. See editorial, Page 10
Iconix adds iconic character: American Greetings can prepare a farewell card to Strawberry Shortcake. New Yorkbased Iconix Brand Group Inc. signed a definitive agreement to buy the Strawberry Shortcake character brand and related intangible assets from American Greetings for $105 million in cash. The transaction is expected to close in 30 to 45 days. Strawberry Shortcake debuted 35 years ago and has become a global brand with more than 350 licensees.
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HealthSpan flocks to city’s ‘health care desert’ Residents may be flocking to downtown Cleveland, but their health care isn’t following suit. At least that’s how HealthSpan sees it, so it has partnered with the YMCA of Greater Cleveland to provide medical services at the Galleria at Erieview on East Ninth Street in early 2016. The 1,800-square-foot space will boast four exam rooms shared by a HealthSpan provider and an independent integrative medicine physician. At present, HealthSpan plans to accept most insurance plans at the downtown facility. In a news release, Dr. Nabil Chehade, president of HealthSpan Physicians, said downtown Cleveland is a “health care desert.” “Downtown Cleveland has experienced significant growth in residential and commercial building, yet there is very limited access to medical professionals within the downtown area today,” Chehade said. HealthSpan Physicians is the insurer’s provider group that boasts more than 250 clinicians in the region. HealthSpan, meanwhile, is the insurance arm of Mercy Health, the state’s largest health system. It acquired Kaiser Permanente Ohio in fall of 2013. — Timothy Magaw
If you have to ask how much it costs … Art in Cleveland has been drawing some attention — and high prices — lately.
2014, during which Gray’s broke the global auction record for Andy Warhol’s Moonwalk at $120,000. It sold to a local buyer in the audience at Gray’s auction showrooms. A boutique company, Gray’s Auctioneers and Appraisers holds live auctions every month, accepting consignments daily and offering complimentary valuations. It was founded in 2007 by Harragin and Deba Gray, president, a licensed auctioneer and senior appraiser. — Amy Ann Stoessel
An advance look at our manufacturing future CONTRIBUTED PHOTO
Palestinian-born Samia Halaby’s oil on canvas painting, “Rainbow Spirals,” sold for $102,000 during a recent auction held by Clevelandbased Gray’s Auctioneers. Gray’s Auctioneers recently achieved some impressive results at its modern and contemporary auction, according to information from CEO Serena Harragin. Bidders participated from all over the world in the auction, which featured a diverse collection of paintings and prints from Cleveland collector Stanley Yulish. The highlight of the sale, according to Harragin, was Palestinian-born Samia Halaby’s oil on canvas titled, #270 (Rainbow Spirals) from 1973, which sold for $102,000 to an international telephone bidder. This auction follows Gray’s first post-war and contemporary art auction in November
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Job well done: Daniel E. Berry is retiring as the president and CEO of Magnet, the Cleveland nonprofit dedicated to helping local manufacturers stay competitive and grow. Berry has been the organization’s president and CEO since May 2010, after a few months as interim CEO. Berry will stay with Magnet until a replacement is found. The organization’s board of directors has begun the search for its next president and CEO. Stan Hywet Hall & Gardens kicked off its 100th anniversary with the public phase of a $6 million fundraising effort to support a major restoration and sustainability project at the historic Akron estate, which was the home of Goodyear Tire & Rubber Co. co-founder F.A. Seiberling. Stan Hywet said it already has raised roughly 70% of its $6 million goal. The effort was anchored in 2013 by a $1 million gift — the organization’s largest ever — by an anonymous donor.
COMPANY: OurPet’s Co., Fairport Harbor PRODUCTS: Four new Pet Zone cat toys The company has added four new products to its Pet Zone line of cat toys — the Romp-ARound Floor Toy, Kitty Kicker, Pounce House Cat Tunnel and Catnip Crinkle Disks — to help your feline friends fight boredom. OurPet’s says the Romp-A-Round Floor Toy “provides a multi-sensory play experience with many stimulating options.” Among them: Cats can chase jingling balls around the track and swat a 360-degree spinning feather toy. The Kitty Kicker “keeps cats entertained and energized with soft fur, dangling ‘arms’ to bat and swat, and a body filled with fragrant NorthAmerican-grown catnip,” according to the company. The Pounce House is portable and collapsible. It’s 60 inches long, so the tunnel “provides ample space for hiding,” OurPet’s says. It also features a peep-hole for quick getaways. Catnip Crinkle Disks “were designed to indulge natural instincts and keep cats positively engaged with the world around them,” according to OurPet’s. The disks have “vibrant colors and irresistible textures,” and they encourage cats to “jump, pounce and chase.” For information, visit www.ourpets.com and www.petzonebrand.com.
Akron and Cleveland are both among America’s top 100 cities in terms of advanced manufacturing jobs in industries such as computers, aerospace, engineering and other high-tech fields. That’s according to data put out Feb. 2 by the Washington, D.C.-based Brookings Institution, where folks sit in a tank and think about such things. The Cleveland metro area ranked 27th in the nation, with 94,370 jobs in advanced manufacturing and a total industry output of $15.7 billion. Akron ranked 77th, with 24,020 jobs and $4 billion in output. The data used was from 2013. As a nation, the U.S. had more than 11.3 million people working in advanced manufacturing, Brookings found, with New York City in the top spot with more than 786,000 advanced manufacturing jobs. — Dan Shingler
BEST OF THE BLOGS Excerpts from recent blog entries on CrainsCleveland.com.
think your travel plans through the heart of downtown Cleveland. It’s all because of the rebuilding of Public Square. The plan will go into effect when construction on the square begins — possibly as soon as Feb. 23. The Group Plan Commission presented to the board of the Greater Cleveland Regional Transit Authority a construction traffic plan that will keep as much auto traffic as possible away from the construction zone, reroute buses and move bus stops. The plan was created by Group Plan traffic consultants and RTA planners.
Big bet on pets: J.M. Smucker Co. of Orrville agreed to buy San Francisco-based Big Heart Pet Brands for $5.8 billion, including $2.6 billion in debt, in a deal that marks Smucker’s entry into the pet food business. Big Heart’s brands include Mile-Bone, Kibble ‘n Bits and Meow Mix. The deal gives Smucker, maker of Pillsbury baked goods, Folgers coffee as well as its namesake fruit spreads, a presence in the pet food market that totaled $21 billion in the United States in 2013.
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REPORTERS’ NOTEBOOK
About that commute …: Get ready to re-
Thinking big:
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Congratulations, Northeast Ohioans. As workers, you are quite productive, particularly in comparison with other Midwestern metros. CityObservatory.org broke down Bureau of Economic Analysis estimates of “Gross Metropolitan Product” — the total value of goods and services produced in a metropolitan area. “If we divide metropolitan GDP by population, we get a rough idea of which metropolitan economies are the most productive on a per person basis,” the website noted. Nationally, GMP averages about $55,000 per person in the nation’s largest metropolitan areas. Cleveland is just above that, at $55,430. What’s striking about the number, though, is that it’s higher than all of our nearby peer cities: Columbus, $54,493; Cincinnati, $52,063; Pittsburgh, $52,053; Detroit, $49,653; Louisville, $48,048; Rochester, $45,202; Grand Rapids, $44,482; and Buffalo, $42,550. Cleveland also beat out places like Atlanta ($52,178), Austin ($52,110) and Raleigh ($51,673) — all hotbeds of the new economy that might be expected to be more productive than Northeast Ohio. The strongest performers, not surprisingly, are on the coasts, but Cleveland also lost out to a few upper Midwestern cities — Minneapolis ($61,711) and Milwaukee ($56,734) — as well as Indianapolis ($60,038) and Chicago ($57,752).
Plowing ahead Cleveland has been a hotbed for a new business app called Plowz and Mowz, according to MarketWatch.com. As the name suggests, the app “allows you to plow and mow your property with just the tap of a button,” according to the website, which compares its functionality to “Uber for hailing a snowplow.”
From the story: As co-founder Wills Mahoney explains, it used to be that you would have to call a company and then pay price-gouging rates if you wanted snow removed during a blizzard, and that was if the company answered your call. Plowz and Mowz does the dirty work for you, setting you up with an accredited company and getting the job done fast. This simple concept is starting to pay off for the company entering its third year. “We’re in this great environment where everyone wants to tap a button and just get things done,” Mahoney said. MarketWatch.com reported that Mahoney’s company currently includes 30 cities, from Miami to Anchorage, and partners with more than 1,300 local companies. The most profitable markets have been Minneapolis, Cleveland and Boston. Plowz and Mowz hopes to be in 60 markets by the end of this year.
Give it a shot Ohio is lacking in a hot-button area of public policy. The Washington Post compiled federal data on the percentages of toddlers in each state who have received the full complement of Centers for Disease Control and Prevention recommended vaccinations, and the Buckeye State fared very poorly. Just 61.7% of Ohio toddlers have received all the CDC-recommended vaccinations, putting it at No. 48 among the states and well below the national average of 70.4%. (For the curious, The Post noted, the full vaccine regimen consists of >4 doses of DTaP, >3 doses of poliovirus vaccine, >1 dose of measles-containing vaccine, full series of Hib vaccine (>3 or >4 doses, depending on product type), >3 doses of HepB, >1 dose of varicella vaccine, and >4 doses of PCV). Ohio is one of only nine states with rates below 66%. Only Arkansas (57.1%) and Nevada (60.6%) have lower rates than Ohio.
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