The COVID-19 pandemic pummeled shopping malls, as retailers closed stores and stopped paying rent and more consumers migrated online. Many malls are still struggling to recover, even as the economy shakes off the health crisis and shoppers return to malls.

Starwood, the big real estate firm founded and led by Barry Sternlicht, has taken an especially brutal beating in the Chicago mall market over the past couple years. After missing loan payments on an $85 million mortgage on the Louis Joliet Mall, a Starwood joint venture waved the white flag, handing the Joliet property over to its lender last year.

Starwood ran into more trouble in South Barrington. In 2020, a lender filed to foreclose on the Arboretum of South Barrington, a 480,000-square-foot shopping center in the northwest suburb. A venture led by local video-gambling and real estate investor Rick Heidner recently bought the $66.3 million loan on the property, according to Cook County records, a move that could eventually allow him to seize it. But the foreclosure case is still pending.

Now Starwood faces loan trouble at its only other Chicago-area mall. A Starwood venture acquired the sprawling Chicago Ridge Mall along Ridgeland Avenue between 95th and 99th streets as part of a bigger $1 billion mall portfolio deal in 2012 with an Australian shopping center owner known at the time as Westfield Group.

The venture financed the acquisition with an $80 million loan that was packaged with other property debt and sold off to investors in a commercial mortgage-backed securities, or CMBS, offering. The mall was appraised at $129.7 million at the time.

A spokesman for Miami Beach-based Starwood declined to comment.

The mall’s performance was going downhill even before the pandemic. Carson’s closed its department store there in 2018, and Sears shut its store at the mall last year. The mortgage doesn’t include the Sears property, which is owned separately, but mall landlords rely heavily on department stores to draw shopper to other stores.

The mall’s occupancy rate fell from 100% in 2015 to 70% in 2020, but rose to 80% last year when Dick’s Sporting Goods leased part of the Carson’s space, according to a recent report from Fitch Ratings. Other tenants include Bed Bath & Beyond, AMC, H&M, Michaels and Aldi.

The good news: The property is still generating more than enough revenue to covert its debt payments, and Starwood hasn’t missed any mortgage payments yet.

The bad news: The mall’s net cash flow before debt service totaled $6.69 million in 2020, down from $12.48 million in 2016, Bloomberg data shows. Full-year 2021 data for the mall is unavailable.

More bad news: The mortgage matures on July 6, and it’s doubtful that Starwood can secure a new $80 million loan to pay off the retiring debt. That’s why the loan has been placed with a special servicer, a firm hired to oversee problem CMBS loans.

A special servicer is often the canary in the CMBS coal mine, stepping in even before a landlord misses a mortgage payment. The Chicago Ridge Mall loan is at risk of an “imminent maturity default,” according to Bloomberg.

Special servicers can sometimes restructure loans to give borrowers more breathing room, but they often just manage the process of taking over a property through foreclosure or an amicable out-of-court agreement. A representative of the special servicer on the Chicago Ridge Mall loan, Atlanta-based Trimont Real Estate Advisors, declined to comment.

The mall isn’t in dire straits, said Tom Fink, senior vice president and managing director at Trepp, a New York-based research firm. Fink isn’t convinced that Starwood won’t be able to find a way to refinance the property, noting that its cash flow, though down, is still high enough to cover its mortgage payments. Starwood could negotiate an extension of the loan’s maturity date, giving it more time to turn around the property and find new financing.

“There’s any number of things that could be going on,” Fink said. “It’s not necessarily a slam dunk, but this is clearly not a mall that’s on its last legs.”

Fitch is more pessimistic. The firm projects a major loss for the investors that own the CMBS bonds backed by the loan. Because mall incomes and values have fallen so much—an index of mall values compiled by real estate research firm Green Street has declined 34% since 2016—investors can’t borrow as much against them as they could have several years ago. The value of some malls has fallen so much that they’re underwater, or worth less than the debt owed on the property.

Fitch estimates Chicago Ridge Mall may only be worth $46 million today. That means investors would receive just 58% of the $80 million in principal owed on the loan if the property is repossessed and sold.

The fate of the Arboretum of South Barrington also is up in the air. By acquiring the loan on the property, Heidner is in a position to take it over through the foreclosure process.

“That is a solution,” said Heidner, owner of Heidner Properties and Gold Rush Gaming, both based in Hoffman Estates. “I would be fine with that solution.”

But Heidner and Starwood representatives are discussing various alternatives, he said. It’s still possible they could reach an agreement that would allow Starwood to retain ownership of the property.

“We’re not exactly sure how it’s going to end, but we’re hopeful it ends in an agreeable solution for the both of us,” Heidner said.

Tenants at the Arboretum include Arhaus, Sephora, L.L. Bean, Xsport Fitness and Pinstripes. Heidner, who declined to disclose how much he paid for the loan, said he knows the property well. As a resident of Barrington Hills, about five miles away, he visits the mall often.

“That’s home for me,” he said. Buying the debt “made all the sense in the world for me.”



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