Overdue loan for sale on big suburban shopping center
(Crain's) — The Arboretum of South Barrington, the biggest shopping center to open in the Chicago area in recent years, is on the block.
The overdue $91-million construction loan on the outdoor mall at state routes 59 and 72 in the northwest suburb was recently put up for sale. The move is likely to bring in new ownership for the 600,000-square-foot center, which opened in September 2008 — the weekend after the financial crisis toppled the investment bank Lehman Bros.
Real estate sources say the loan may fetch upward of $60 million or as little as $40 million, given today's depressed retail rents and the struggles the center has had in landing and retaining tenants.
“It's an incredible victim of market timing,” says James Schutter, a senior managing director in the Chicago office of Newmark Knight Frank who heads a team that leases shopping centers and isn't involved with the Arboretum. “It's a beautiful center when you go through it. It's unique and special, but unique and special centers don't work well in difficult economic times.”
The three-year loan from EuroHypo A.G. came due recently, and no deal could be struck to refinance or extend it, says the Arboretum's developer, Michael Jaffe, president of Northbrook-based Jaffe Cos. EuroHypo has hired Eastdil Secured LLC to market the note.
Mr. Jaffe wouldn't provide financial details, but sources say his firm along with equity partners RREEF and the California public pension giant CalPERS probably will see their $25-million to $30-million stake mostly wiped out by the loan sale. Given the collapse of the values of real estate developments over the past couple years, many retail developers and investors are unable — or unwilling — to refinance maturing loans, as that would require putting in more equity.
“A giant reset button was hit the day that Lehman went under, affecting rents and real estate values,” Mr. Jaffe says. “We all wish it had gone differently.”
But Mr. Jaffe says he's in talks with several prospective bidders and hopes his firm will partner with a buyer and remain in an ownership position. He says the bank is allowing for an amicable handover — rather than a foreclosure — and that Jaffe is able and willing to put in new equity.
“There will be a recapitalization,” he says. “We are working toward and intend to be part of the mix in the future.”
A spokesman for Sacramento, Calif.-based CalPERS referred a call to RREEF, its investment adviser in this deal. A spokeswoman for RREEF, a unit of Germany's Deutsche Bank, and an Eastdil executive both decline to comment.
A U.S. executive with Eschborn, Germany-based EuroHypo, which specializes in commercial real estate lending, didn't return calls Tuesday seeking comment.
Mr. Jaffe says he expects a wide range of prices given the fluidity of the center's leasing picture and how different buyers might value the unbuilt land, where another 114,000 square feet of retail space could be developed.
Sources say the center's size and the project's complexity will limit the pool of buyers, particularly as most are focused on either top-performing, well-leased centers or distressed, bargain-basement opportunities.
“There's going to be a lot of interest from people that want to get it on the cheap,” says Newmark's Mr. Schutter.
One of the Arboretum's biggest tenants, a Circuit City electronics store, closed when the chain shut down just months after the Arboretum opened. By March 2009 Jaffe had a new tenant, Midwest Elite Gymnastics Academy, in the space. Other major tenants include Gold Class Cinemas, L.L. Bean and Pinstripes, a restaurant that features a bowling alley and bocce ball court.
The center is currently more than 86% leased.
“Ironically, we are the most occupied that we've ever been,” Mr. Jaffe says. “There's a ton of work still to go, but we've certainly gotten it on a positive path.”
