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Power 100 2020: John Kane

 In Power 100 2020

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John Kane from the Power 100 2020

By Christer Berg

JOHN KANE

King of the hills

By Michael MacMillan

Outside the window of Raleigh-based Kane Realty’s second-floor office in North Hills, a 12-piece band called Sleeping Booty is setting up in an open pavilion adjacent to a Starbucks, a Ben & Jerry’s and other retailers. It’s Thursday, time for the weekly fix of beach music. Beyond the musicians stands the 17-story Captrust Tower, 18-story Bank of America Tower and a construction crane that’s assembling Advance Auto Parts’ 18-story headquarters.

In the boardroom, the third of three architectural and design firms is making its presentation on Kane’s proposed soccer stadium and mixed-use project, which would transform Raleigh’s Downtown South neighborhood. The talk is of population density, traffic flow and creating an “urban edge.”

John Kane, CEO of his namesake real estate development company, sits near the head of the table watching intently and saying little, his right leg bouncing throughout the presentation. Next to him is his project partner, Steve Malik, owner and chairman of the N.C. Football Club, which has men’s and women’s professional soccer teams and oversees a massive youth soccer organization. Kane, 67, is casually but crisply dressed. He’s not particularly chatty beyond polite small talk, but he’s clear when it comes to what he wants.

As the formal presentation concludes, everyone crowds around the models on the conference table. Kane jumps up, gesturing at the models, having determined which buildings need to be moved and where to maximize traffic flow and improve the street-level environment. Heads nod in agreement. Towers are reshuffled. It’s a microcosm of the last few decades of Kane’s life, reshaping his hometown.

His company owns about 1.5 million square feet of retail space, 1.6 million square feet of office space and 1,700 apartments, with another 1,230 under construction. As part of his downtown Peace Street project, he has zoning rights to build a 40-story tower, which would be the city’s tallest structure.
“Look at what’s happened to Raleigh because of what he’s done,” says Tom Darden, a veteran Raleigh investor who played a key role in Kane’s emergence as one of the state’s most influential business leaders.

Kane’s grandfather, George W. Kane, moved to North Carolina from Maine in 1920 to supervise the construction of a Roxboro cotton mill. Shortly thereafter, the elder Kane struck out on his own. Starting with houses, he expanded into commercial construction and became one of the state’s largest contractors. Among the company’s projects was the relocation of Wake Forest University from Wake County to Winston-Salem, where it subsequently built much of the new campus.

In 1956, George Kane bought a construction company in Henderson, prompting his son’s family to move. When the elder Kane died in 1966, John’s father, George W. Kane Jr., took over the company, continuing its focus on commercial projects, including the Four Seasons mall in Greensboro and Duke University buildings in Durham. In his teenage years, John Kane did manual labor for the company.

The youngest Kane attended Wake Forest, graduating in 1974 with a business degree. He was on the golf team that won an NCAA championship during his senior year, though he didn’t play much on the squad that featured future PGA stars Curtis Strange and Jay Haas. Following graduation, he joined the family business, arriving just in time for the harsh 1974-75 recession.

“The Four Seasons mall defaulted,” he recalls. “The developer of a condo project we were working on in Myrtle Beach defaulted. It was a difficult period.” Going into the recession, Kane Construction ranked among the state’s three largest contractors, he says. But developer defaults destroyed cash flow, prompting George W. Kane Inc. to file for bankruptcy protection in September 1974, three months after Kane joined it.

For the next four years, he pitched in as the company sought to reorganize and pay off debts. One project involved a small Greenville shopping center whose developer had defaulted. “No one wanted to run it, so I got the job. And I liked it.”

In 1978, he left the family enterprise and started his own company to buy the Greenville project, converting it from an open-air strip to an enclosed mall. Three years later, he added his first development, a Greenville fitness club that opened on Nov. 4, 1981, the same day his first child, Bryan, was born. “Willa, my wife, had to drive herself to the hospital,” he says. “But I made it back in time to be there when my son was born.”

Kane spent the next two decades mostly buying and repositioning small properties in eastern North Carolina, ultimately moving into the Raleigh market with the 1985 purchase of what’s now Celebration at Six Forks shopping center. He financed the business without his father’s participation.

Kane Realty acquired significant holdings and assembled a staff of 75 to 80 people. Kane then decided to bundle the properties into a real estate investment trust, an investment vehicle then gaining popularity. It enabled individual investors to own a piece of commercial property portfolios.

Unfortunately, his timing was less than perfect. The economy was slowing, and demand for real estate was slumping. “The market went away from us, and we weren’t able to do the deal.” Shut out of the equity market and with substantial debt, he instead sold to a REIT, Konover Property Trust, in 1995. The transaction netted him about $5 million. “It was kind of a disaster,” he says.

With his operation shriveled to a handful of loyalists, Kane kept plugging on a few small retail projects in eastern North Carolina. His big break in the Raleigh market came with what looked like, at the time, the dubious opportunity to buy North Hills Mall and a nearby convenience center.

Opened in 1960 and converted to an indoor, two-story mall in 1967, North Hills was owned for many years by the pension fund of Royal Dutch Airlines’ parent company, KLM NV. The once-stellar center, anchored by J.C. Penney and Dillard’s department stores, suffered from neglect in the 1990s and was no longer competitive with shopping elsewhere in north Raleigh.

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A steady stream of music festivals, after-work concerts and a weekly farmers market have made North Hills a Triangle entertainment destination. Photo courtesy of North Hills

Turning around a shopping mall is a tough slog. “Retail leases are complicated, and everyone has different terms,” Kane says. “That makes shopping centers hard to reposition. I told the sellers that we would be willing to buy it if they could deliver it where I could tear everything down, and they terminated most of the leases.”

KLM eventually agreed to those sale terms, but then inspectors discovered the water table beneath the land had about a foot of gasoline floating on it. The fuel came from a neighboring gas station, whose underground storage tank was leaking. With lenders unwilling to take a risk on the project, even though the property was 90% occupied, Kane reached out to Darden’s Raleigh-based Cherokee Investment Partners, a pioneer in environmental-remediation projects.

“Tom was just getting going at the time,” Kane says. “People didn’t know what to do with environmentally troubled real estate. We did a deal with Cherokee and bought the property in late 2000 for $15.5 million. They came in and cleaned everything up [at a cost of $3 million], and I eventually bought them out.” No tax credits were involved, though money from a state fund was used to replace the damaged storage tank.

Kane envisioned tearing down most of the existing structure and replacing it with an open-air mall, adding offices, shops and restaurants. It was an audacious concept at the time in North Carolina, Darden says. But Kane had visited similar, thriving properties such as Tyson’s Corner in Virginia and Buckhead in Atlanta. North Hills is deemed a “new urbanist” approach, an adaption of the “old urbanism” of cities with walkable blocks that incorporate housing, retail and offices in close proximity, says Emil Malizia, a UNC Chapel Hill professor who specializes in economic development.

“Usually when a mall goes wrong, the neighborhood goes with it,” Kane says. “But in the case of North Hills, the neighboring demographics were off the chart.” Other developers followed a similar path elsewhere in the state, including Chapel Hill’s Meadowmont Village or Huntersville’s Birkdale Village.

Kane eventually surrounded the mall with 2,400 high-end apartment rental units, 1 million square feet of retail, 1.4 million square feet of office space and three hotels, creating a “micro-community where people can live, work, shop and eat,” as he puts it. Nearly two decades later, the North Hills neighborhood has about 4,000 residents.

Kane’s success didn’t go unnoticed. The properties were among the first in Raleigh to attract money from global sovereign funds. Aida, Abu Dhabi’s sovereign fund, owns two hotels at North Hills, the Renaissance and Hyatt House, and Kuwaiti funds have partnered with Kane through KBS, a Los Angeles-based real estate investment firm. “These [investments] say something very powerful about what he’s done there,” Malizia says.

Kane rolls up to the Peace Street construction site in a 2019 Tesla Model S, cheaper than the Maserati he used to drive but quicker off the line. It’s appropriate for a man who seems to vibrate with nervous energy. While North Hills is his signature development, he’s increasingly focused on downtown Raleigh as the center city’s popularity for businesses and residences soars.

According to Downtown Raleigh Business Alliance, projects totaling at least $2.1 billion have been delivered, are under construction, or were announced for downtown from 2015 through 2019. Since 2015, 2,415 units have opened, and 1,018 units are under construction downtown, the group says. That includes the Dillon, an 18-story office building with two six-story apartment buildings, a Kane development that helps anchor downtown’s thriving Warehouse District, which opened in 2018.

DRBA says in December, there were projects totaling more than $701 million in the pipeline, with $474 million in construction underway. The pending development includes Kane Realty’s Peace Street/Smoky Hollow projects with 650 apartments. A tour of one of the buildings shows about 350 luxury apartments under construction, including a three-bedroom, 1,900-square-foot unit that will rent for about $3,000 a month.

The development’s renters could afford to buy a house in the suburbs, Kane says, but “many of them come from cities where they’re accustomed to walking to restaurants and other amenities.” He says that “20 years ago, downtown Raleigh was not a vibrant place. North Hills was a dump, and there was no reason to be in downtown Durham. All three are now great urban communities to live, work and play. There’s [Durham Performing Arts Center], the Red Hat [Amphitheater], and 480 events a year at North Hills.”

Real estate is notoriously cyclical. Builders are optimistic by nature, and everything is usually great until it isn’t. Overleveraged developers are caught short, and the work sites fall silent, with the cranes standing sentinel to the latest round of excess.

For the moment, however, the sun is shining on Raleigh. A 2019 report from Washington, D.C.-based Urban Land Institute and London’s PricewaterhouseCoopers rated the Triangle’s real estate prospects as second-best in the country for 2020, trailing only Austin, Texas.

For his part, Kane professes little worry about overbuilding. His company is involved in projects building 580 new apartments at North Hills. “There are 70 people being born or moving into Wake County every day, and they have to live somewhere,” he says. Further, this cycle has not seen the kind of heavy leverage that tends to precipitate a downturn. “The banks usually get over-aggressive late in the cycle, but that hasn’t happened this time. They’re being prudent about the percent of leverage, the market and the sponsor.”

Kane’s earlier brushes with financial difficulties have left a mark, and he has been conservative with leverage. The Peace Street project, for example, with a construction cost of about $150 million, carries around $95 million in debt. The site has space and zoning rights to eventually house the city’s tallest office building. “We could have more leverage, but we’d rather be conservative and take less of a deal. If we have a downturn we’ll just ride it out.”

Next up is a potentially transformative project on the southern edge of downtown Raleigh: a $1.9 billion development that includes a 20,000-seat soccer stadium. It’s a partnership with Steve Malik, who, in addition to putting soccer teams on the pitch, founded and owns Cary-based Medfusion, a health care software developer and provider. The 55-acre site is marked for industrial use and sits in an opportunity zone that offers tax advantages.
Over the next decade, Kane and Malik anticipate adding 1.7 million square feet of office and creative space, up to 125,000 square feet of shopping and dining, 1,750 rental units, including affordable housing, and as many as 1,200 hotel rooms.

In late 2019, Malik and Kane closed on the land and plan to seek a rezoning. They are looking at several public and private sources for funding. A report that they commissioned identified several possibilities, including $239 million in tax incremental funds backed by revenues expected to be generated through additional taxes resulting from property improvements, $41.9 million in tax credits, $371 million in development equity, $1.257 billion in developer debt, and $45 million over 10 years from local occupancy and prepared food taxes. The latter taxes helped support construction of the PNC Arena and downtown convention center.

This mix will almost certainly be subject to change given all the new faces at Raleigh City Hall after the November elections. Those include incoming Mayor Mary-Ann Baldwin, a center city resident who supports the Downtown South proposal, noting that baby boomers and younger residents favor walkable communities.

Persistence is one of Kane’s strengths, says Michael Landguth, CEO of Raleigh-Durham International Airport, where Kane is chairman of the airport authority board. “What John brings to the [board] is long-term strategic thinking and the ability to execute.” Landguth points to the airport’s plans for reaching the growing China market with an 11,500-foot runway capable of handling the larger planes needed for longer international flights. Finding the $350 million to build it has been a challenge. “John asked, ‘Is it our aspiration to get to China? Then let’s set the target where we need it to be, and we’ll figure out how to generate the income to pay for it.’ He has a vision for what the community needs.”

For the proposed Downtown South project, Malik and Kane are projecting a handsome return on the city’s investment. In a 2019 study commissioned by Kane’s company and Malik’s club, Raleigh-based Economic Leadership concluded that the stadium and associated development would create about $3.3 billion in economic activity over a 15-year period and create or support 1,710 jobs. They anticipate the project also will generate $20.3 million in property taxes and nearly $80 million in sales and other local taxes.

Kane has no intention of slowing down at his company, which now employs 180 people. His four children don’t work for Kane Realty — he doesn’t like nepotism — though they do some business on a third-party basis.

“I love what I’m doing … I have no plans to stop.”

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