Arlington Heights development falls into foreclosure
(Crain's) — A foreclosure suit seeking nearly $20 million has hit Arlington Town Square, a publicly subsidized mixed-use project that sparked a revival of the northwest suburb's downtown.
The project's nearly 137,300-square-foot commercial space is owned by a group of 30 individual investors put together in 2007 by DBSI Inc., a Boise, Idaho-based real estate investment firm that is liquidating after last year being accused of investor fraud.
The group failed to make monthly mortgage payments beginning in September, according to a complaint filed Feb. 3 by an affiliate of Florida-based real estate firm LNR Partners Inc., which is representing bondholders in the project.
The suit, filed in Cook County Circuit Court, does not include the project's 13-story condominium tower, whose 94 units are separately owned.
A Newport Beach, Calif., lawyer for the project owners didn't return calls.
Arlington Town Square was built in 1999 at Northwest Highway and Arlington Heights Road, about a block and a half from a Metra station. The project, which reportedly received $13.9 million in tax-increment financing, was a key step in the village's plan to revitalize its downtown, where retailers had suffered from competition from newer, larger shopping centers nearby.
Tenants in the complex include apparel retailers Ann Taylor Loft and Jos. A. Bank Clothiers Inc., fast-casual restaurant California Pizza Kitchen and a six-screen movie theater. The project is about 87% leased, according to village officials.
About $10 million of the public subsidy went toward construction of an underground parking garage, which is owned and operated by the village.
The project was part of a wave of similar developments fostered by other suburbs, such as Mt. Prospect and Palatine, that looked to capitalize on the daily waves of commuters boarding Metra trains. But tight municipal budgets, limited construction financing and the weakness of the retail sector have probably put similar projects on hold.
"It's an example of a project that would be impossible to finance today, especially with what's happened to retail," says Joseph P. Schwieterman, the director of the Chaddick Institute for Metropolitan Development at DePaul University. "We've had to ratchet down our expectations of transit-oriented retail in a big way."
But Charles Witherington-Perkins, director of planning and community development for Arlington Heights, says the village is confident its investment paid off.
Before the redevelopment, the site generated $65,000 annually in property taxes. Arlington Heights now receives property tax revenue of $1.7 million to $1.8 million a year, according to Mr. Perkins.
"It's all positive impact," he says. "The growth in restaurant and retail sales has been very significant."
The village has confirmed that the property is "functioning fine" and that the foreclosure suit will not affect tenants or customers, Mr. Perkins says.
"After the inquiries we've made, I think we're a lot more comfortable about how this thing may pan out," he says.
LNR is acting as the trustee for investors who bought securities backed by a pool of commercial mortgages (CMBS), including the Arlington Town Square loan. David Lynch, a partner in Chicago with law firm DLA Piper, which represents LNR, declines to comment.
DBSI filed for protection from creditors in 2008 and is now liquidating. The firm cited the credit crisis and the downturn in commercial real estate as the reasons for its filing.
But last year, the state of Idaho filed a civil suit accusing the company and its president, Douglas L. Swenson, of fraud. And in October, a Bankruptcy Court-appointed investigator looking into DBSI's affairs found evidence of impropriety, according to published reports.
Mr. Swenson has denied any wrongdoing.
A lawyer representing DBSI in the bankruptcy case did not return calls requesting comment.
The DBSI investment group bought the project from Chicago-based developer Joseph Freed & Associates LLC for $36.6 million.
Related story: Freed sells remaining interest in Arlington Heights project
Greenville, S.C.-based TIC Properties Management LLC took over management of Arlington Town Square and other DBSI properties in January 2009. An executive with TIC did not return a call requesting comment.
