Financial troubles for CityPlace, the popular retail destination in West Palm Beach, have finally caught up with the sprawling shopping center.
Last summer, David Manero was on the verge of launching the first franchised location of BurgerFi, his new burger restaurant chain.
But after seven months of negotiations over the former Mayor’s Jewelers space near the fountain at CityPlace, the deal-making inexplicably slowed.
In September, Manero and the franchisee learned why. CityPlace had been sued for foreclosure by its lender.
The lawsuit put a freeze on lease negotiations, delaying the franchisee’s ability to open, despite his having spent $37,500 on franchise fees.
The uncertainty isn’t good for CityPlace tenants or businesses wishing to take space at the center, Manero said.
“It’s taking a major commercial property with a lot of tenants and casting a big shadow of doubt. Nobody knows what it means,” Manero said of the foreclosure. “It could be better or it could be worse or it could be the same. It’s an unknown.”
The foreclosure also has prompted business leaders to confront the fact that one of the most ambitious urban redevelopment projects in Florida, led by one of the nation’s top dealmakers, could not surmount the lingering effects of the recession. CityPlace also has had to change its focus from being a high-end shopping destination to one more focused on dining and entertainment.
Visitors may be surprised the lively center isn’t meeting its mortgage payments. CityPlace says the number of visitors is up 7 percent during the past two years.
But on Sept. 1, CSMC 2007-C1 South Rosemary LLC, an entity serviced by LNR Partners LLC, sued CityPlace Retail LLC in Palm Beach County Circuit Court. The lawsuit alleges CityPlace has fallen behind on a $150 million loan. The property is appraised for $143 million, less than the loan amount and far less than the center’s boom-time value of $233 million. At the same time, CityPlace’s net operating income fell to $5.2 million in 2009, from $9.3 million in 2006, according to an analysis by Trepp LLC, a New York firm that tracks commercial real estate.
CityPlace Retail is an affiliate of New York-based Related Cos., which is led by Miami Dolphins owner Stephen Ross.
CityPlace officials declined to discuss specific reasons for the foreclosure. They offered this statement: “Unfortunately, high traffic volume cannot meet the assumptions of loan documents negotiated in the very peak of a major economic boom in 2006. While CityPlace held its own and continued to be a destination during the downturn, it is not immune to the same issues that continue to affect a large portion of the securitized commercial loans made during this period.”
The statement added: “We continue to work hard with our lenders to ensure the long-term success of this important property.”
Real estate sources last week said LNR and CityPlace are close to resolving the foreclosure lawsuit. The news does not surprise industry professionals. “Related knows the project better than anybody. They will figure it out,” said Anthony Librizzi, vice president of CB Richard Ellis in Palm Beach Gardens.
But even if a deal were struck tomorrow, it is unlikely the foreclosure action would be dismissed right away. Experts say it takes months to finalize workouts.
In addition, business experts say the fact that negotiations between LNR and CityPlace failed to avert a foreclosure lawsuit indicate the intransigence of both sides. “The filing of a foreclosure is acrimonious,” said Neil Merin, chairman of NAI/Merin Hunter Codman brokerage in West Palm Beach. “You keep the pressure on by filing the lawsuit,” added Amy Rubin, a West Palm Beach litigation attorney.
Many shopping centers are in the midst of loan workouts now, but not every shopping center is operated by a negotiator as savvy as Related’s Ross, who once led a loan servicing company known as Centerline Capital Group.
It was Ross’ mastery of complex commercial projects, and his vision for a grand shopping, dining and housing complex, that in 1996 prompted West Palm Beach to pluck Related from a field of competing developers.
The 77-acre CityPlace opened with great fanfare in October 2000. Large tenants include Restoration Hardware, Muvico Theaters, Barnes & Noble Booksellers and Macy’s department store. The center became an economic engine for the city, spurring a number of condominium developments and the construction of a modern office building. CityPlace also injected fresh life into a downtrodden section of West Palm Beach.
But CityPlace has struggled to achieve its own financial success. The recession and competition from other shopping venues are among the reasons for the mixed results.
CityPlace Partners thought the center would lure shoppers from all over South Florida, but the center quickly proved to be an attraction for mostly local residents and visitors, in part due to the rise in popularity of suburban shopping malls throughout the county, such as The Gardens Mall in Palm Beach Gardens and the Mall at Wellington Green in Wellington.
CityPlace officials shifted the center’s focus from an upscale shopping center when it opened to a home furnishings cluster during the real estate boom and now to a dining and entertainment destination. Today, CityPlace says it is more than 94 percent occupied, and the center is often bustling on weekends.
But real estate brokers say a number of tenants pay very little rent to occupy space.
CityPlace, like many shopping centers, has to offer aggressive deals to lure tenants, even though the move hurts the center’s bottom line and its ability to pay the mortgage. Shopping centers need to stay full to avoid triggering rent concessions in tenant leases when a property falls below a certain occupancy level, Palm Beach Gardens broker Richard Lackey said.
Among the deals struck during the past couple of years: Months of free rent to lure BB King’s Blues Club in 2009; and generous allowances to build out space for new restaurants, such as Taco Vida and Sweet Ginger Asian Bistro.
The uneven economic recovery has made it hard to attract national tenants who are best able to afford CityPlace’s pricey overhead costs. Charges such as taxes and insurance can hover in the $27 per square foot range, not including base rent, real estate brokers say.
During the past year, CityPlace’s business also has been affected by the rebirth of another troubled mall, the Downtown at the Gardens shopping center in Palm Beach Gardens.
The Palm Beach Gardens property, which in 2007 changed hands for a rumored $200 million, fell into trouble during the recession. It was purchased in 2009 for a reported $38 million by Berman Enterprises. Because the purchase price was so low, Berman has been able to offer tenants great deals on rent – and still make money.
Now Downtown is 87 percent occupied, up from the low-60s when Berman bought it, and it is filled with a variety of restaurants and entertainment venues.
“Downtown at the Gardens has become a community gathering place for entertainment in north county, and it’s stopping people in the north end of the county from going to CityPlace,” said Al Ferris, leasing manager of The Gardens Mall in Palm Beach Gardens.
Another challenge for CityPlace is the center’s paid parking. In July 2005, CityPlace started charging parkers to discourage freeloaders who used CityPlace’s garages but didn’t shop there. Although parking started at $1 an hour, after the first free hour, it now is up to $2 per hour after the first free hour, and $1 for every half hour. The charge is a deterrent to some cost-conscious consumers.
Despite fickle consumer spending, and paid parking, most CityPlace retailers agree on one thing: Business would be better if the long-promised hotel at the convention center went up. “A convention center hotel would be tremendous for everybody,” said BB King’s President Tommy Peters.
Unfortunately, the sight of a hotel rising across Okeechobee Boulevard remains years away.
Last week, Related and the county held a meeting to discuss the hotel, the first such meeting since April, when the county agreed to provide $27 million in taxpayer money to help finance Related’s construction of the hotel.
Shannon LaRocque, assistant county administrator, said Related last week presented the county with a new study of the West Palm Beach hotel market. The July study anticipates a 400-room Hilton hotel opening on Jan. 1, 2014, with occupancy slated to be 61 percent that first year, rising to 74 percent by 2017, according to the report by HVS Consulting and Valuation of Miami.
LaRocque said Related and the county haven’t talked about the hotel since April because getting everyone together during the summer months “was challenging,” due to vacations. Plans are to get together again in October to hammer out a hotel contract between Related and the county, before the Christmas holidays make meeting difficult again, LaRocque said.
LaRocque said she doesn’t think the CityPlace foreclosure has anything to do with the difficulty in scheduling hotel meetings. “I tend to believe they’re working hard to make CityPlace work,” LaRocque said. “I believe they’re committed, and the signs they are showing me say they are.”
Still, at least one CityPlace tenant was surprised, and disappointed, the hotel isn’t moving along faster.
Skip Stoltz, owner of Brewzzi restaurant at CityPlace, said his business is up 20 percent to 25 percent every time there’s a convention center event.
“We need the convention center hotel desperately,” Stoltz said. “I wish somebody was pushing the ball down the court a little faster. In the private sector, this wouldn’t be excusable.”
Related may be plodding along on the CityPlace foreclosure and the convention center hotel, but it’s clear the firm still is in deal mode – in other parts of the country.
Last month, the Wall Street Journal reported that a Related fund has agreed to buy an ownership stake in a troubled Anaheim, California shopping center near Disneyland.
The article said Related intends to invest between $40 million to $50 million in GardenWalk, with plans to retool the center into a property that echoes the strategy at CityPlace. GardenWalk will move from a retail project to one with a greater focus on restaurants and entertainment.
Source: The Palm Beach Post