CLEVELAND — A lender is foreclosing on Downtown Cleveland’s largest apartment complex, after soaring vacancy and a debt-repayment deadline tipped Reserve Square into a hole.
Fannie Mae filed a foreclosure lawsuit on July 21 in federal court against an affiliate of the K&D Group, a major Northeast Ohio landlord. The government-sponsored financing giant says K&D is in default – unable to pay off or refinance the debt on the property, which spans a city block off East 12th Street between Chester and Superior avenues.
K&D is cooperating with the foreclosure and Fannie Mae’s request to have a receiver, an outside expert, take over the property. The lawsuit says K&D owes more than $78 million in principal, interest and other costs associated with a mortgage that matured on Jan. 1.
“We’re out of ideas to fix the problem,” Doug Price, K&D’s CEO, said during a phone interview on Thursday afternoon.
The apartments at Reserve Square are more than half-empty, Price said. The nearly 1,000-unit complex was 93% full about a year ago. But hundreds of international students who were scheduled to move in late last year never showed up, Price said. Other international students left as their leases came up for renewal.
“A lot of it was the new administration’s stance on immigration,” Price said, referring to President Donald Trump, who took office in January.
Price said Reserve Square, an early-1970s behemoth where rents start around $1,100 a month, has become increasingly reliant on international students. Many of those students attend nearby Cleveland State University.
Cleveland State saw international-student enrollment drop last year and is bracing for more declines, amid visa crackdowns and federal policy shifts.
When that pipeline of renters dried up, it was impossible to fill the void at Reserve Square fast enough. Price said K&D had a new loan lined up late last year but ultimately couldn’t move forward.
“We were ready to go into closing and then all the vacancy happened, and both of us knew … we would be in default immediately,” he said of discussions with the lender.
The foreclosure won’t impact existing tenants at the apartments or in the storefronts and offices downstairs, which are about 50% occupied. K&D is still marketing units and signing leases.
“We’re running it just as we would, up to the day we’re not there,” Price said. “We’re gonna turn over a well-run operation to the receiver, whoever gets appointed.”
Fannie Mae is asking a federal court judge to put Andrew Hayman of the Michigan-based Hayman Company in charge of Reserve Square. The foreclosure complaint says the goal is to sell the property, “with the proceeds of sale after payment of the costs ... and real estate taxes being applied to satisfy Fannie Mae’s claims.”
Price said K&D has never been in this situation before, during its four decades in business. The company owns and manages dozens of Northeast Ohio properties, ranging from high-end apartments Downtown to senior housing and low-income properties.
“If I knew a path forward, I would have took it,” Price said of Reserve Square. “The only way I know to do it is to do what we’re doing now.”
K&D bought Reserve Square in 2005. At the time, one of the apartment towers was partially occupied by an Embassy Suites hotel. In 2012, K&D closed the hotel, which was in financial trouble and needed significant renovations, and transformed the space back into apartments.
In an emailed statement, the company said it has spent more than $25 million over the last decade to fix up the property, from the apartments to the large parking garage. But Reserve Square still “has faced prolonged financial losses and occupancy challenges.”
Across the street, the former Luckman apartment building – a property of a similar vintage to Reserve Square – has been grappling with similar problems. A New York-based lender moved to foreclose on that property last year and has since taken over the complex, changing its name to LIV Cleveland.
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Price said K&D’s other Downtown properties are doing “really well.” Those projects are newer and much smaller, and they don’t depend on students.
“It’s a shame for us,” he said of the foreclosure. “It’s a shame for the city. But it’s just one of those things.”
