(From THE WALL STREET JOURNAL)
By Maura Webber Sadovi
With the commercial real-estate market at a virtual standstill, there is much
to be learned from the sale of one of the Cincinnati area's largest malls by
retail giant Simon Property Group Inc.
But be warned: It isn't a pretty picture. Not only was the price abysmally
low, but the buyer, North Star Realty of suburban Atlanta, also had to agree to
onerous personal-recourse provisions to obtain financing.
North Star paid about $9.2 million and assumed debt on $18 million in bonds
for Cincinnati Mills, a 1.4 million-square-foot mall whose anchor tenants
include a Kohl's department store and a Bass Pro Shop, according to people
familiar with the matter. That values the property at less than $20 a square
foot. The price is a fraction of the average national rate of $134 a square
foot paid for the few malls that traded hands last year, according to Marcus &
Millichap Real Estate Investment Services.
To be sure, the property is in sad shape. Some 40% of its non-anchor retail
space is empty and it has suffered a bruised image marked by several failed
redevelopment efforts since L.J. Hooker Development Corp. opened it in 1989,
when it was known as the Forest Fair Mall. It now faces headwinds as the
economy sours. The Cincinnati region posted third-quarter estimated retail
vacancies of 20%, the eighth highest of the 54 markets surveyed by Property &
Portfolio Research Inc., a Boston-based real-estate research firm.
From its earliest days, Cincinnati Mills has had difficulty competing with
two other larger malls nearby, says Jeffrey Johnston, senior sales vice
president with commercial real-estate advisory firm Grubb & Ellis/West Shell
Commercial in Cincinnati. It also got off on the wrong foot with an early
failed concept that tried to bring higher-end retailers into a largely
blue-collar area, Mr. Johnston says.
But financing the deal was brutal even for such a challenged property. Tom
Robinson, the 52-year-old principal of North Star Realty, says he financed the
deal by obtaining mostly recourse loans, which require personal guarantees,
from a number of wealthy individuals in Georgia and elsewhere. Mr. Robinson
acknowledges the deal's risks. "It's sort of like walking a tight rope without
a net," Mr. Robinson says.
So-called hard money that includes recourse debt is increasingly behind the
smaller commercial-property sales that are getting done. Indeed, thanks to this
financing, it is often easier to put together smaller deals than larger ones.
The volume of retail-property sales valued at $1 million to $20 million fell
just 53% to $17.4 billion last year nationally from 2007, compared with deals
valued at $40 million or more, which fell 77% over the same period, according
to Marcus & Millichap and CoStar Group Inc.
Mr. Robinson says he doesn't yet have a firm plan for redeveloping the
property. Still, he sees opportunity in the property located in Fairfield and
Forest Park, Ohio, roughly 20 miles north of downtown Cincinnati along
Interstate 275, a major highway. He is planning a name change and would like to
bring in more traditional retailers as well as some non-traditional mall
tenants to fill empty spaces, such as entrepreneurs, as well as doctors that
bring needed foot traffic or dialysis centers. "We have to be very innovative
because we've tackled a big old white elephant and it takes a lot to keep it
going," Mr. Robinson said.
Simon, along with hedge fund Farallon Capital Management LLC, acquired
Cincinnati Mills in 2007 as part of its acquisition of Mills Corp. The mall was
a "failed redevelopment that was never true to the unique, value-orientation of
the Mills format," Simon said in a statement. "Upon our acquisition, it was
always our intention to sell the asset and we are pleased with the result." The
Indianapolis-based company is the country's largest mall owner by number of
properties.
Just five malls valued at $5 million or more sold in the second half of last
year in the U.S., down from 68 in the second half of 2007, according to Real
Capital Analytics, a New York-based real-estate-research firm.
"The market for malls is dead," says Dan Fasulo, RCA's managing director of
research. "These properties are very capital intensive and without the debt
markets it's impossible to make them work."
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Kris Hudson contributed to this article.
(END) Dow Jones Newswires
01-27-09 1734ET
Copyright (c) 2009 Dow Jones & Company, Inc.
17:34 012709
