2B — November 23 - December 13, 2018 — New York Deal Making — Shopping Centers — M id A tlantic

Real Estate Journal


N ew Y ork D eal M aking

HILADELPHIA, PA —Shopping center own- ers and developers who A leading financial restructuring and investment banking firm Algon Group finds solutions for retail real estate owners facing over-leveraged capital structure P retail projects may need sub- stantial repositioning, rede- velopment or increased capital investment.

have not been factored into the calculation. The issues surrounding an aggressively- leveraged capital structure can multiply rapidly if an adequate cash cushion is not provided in the initial capitalization. Compounding this situation, some projects have outstand- ing infrastructure debt to be assumed at purchase. These fixed payments create an an- nual cash obligation often reflected on the real estate tax bill. This magnifies the impact on NOI of a reduction in rents or increase in unexpected va- cancies. Additionally, many

estate restructuring/sale as- signment that highlights the issues involved in overcoming obstacles that may be associ- ated with an over-leveraged capital structure, and finding successful solutions. Commercial real estate proj- ects are frequently capital- ized based on projections and models. Rents, escalations, occupancy and expenses are all educated guesses based on past trends. Minor changes in these variables can often cause major changes in the cash flow. Macro changes in market dynamics historically

Algon recently encountered this situation at the 8,000+ acre “Tradition” mixed-use development, which has five miles of prime I-95 frontage and three interchanges in the City of Port St. Lucie, FL. Tra- dition was initially designed in the early 2000s to have a 300-acre regional mall site, a power center and substantial local retail uses, plus more than 11,000 homes and a com- mercial corridor. To support the anticipated commercial and residential development, $165 million in municipal bonds was raised in 2007 for infrastructure expenditures in Tradition. The new off-ramp, roads, and utilities in Tradition came with substantial annual bond payments. Then came the residential real estate “bust” of 2008-12, followed by macro changes in the retail market. The result of this impact was that a significant portion of this project, including the mall site, was never developed. Al- though activity in the residen- tial portion of the property is recently energized, retail and commercial activity has not yet caught up. Realizing that the changing market conditions presented a challenge, the owner of Tradi- tion, a major financial insti- tution, turned to a national real estate broker. The broker was unsuccessful in finding a buyer for the retail and com- mercial land because of the infrastructure debt. Because this debt was incurred well in advance of the build-out, the retail and commercial portion of the project carries a heavy annual debt burden. Algon founder and president Troy Taylor said, “The level of the infrastructure debt, com- bined with the changing dy- namics in the retail and com- mercial real estate markets, made what should otherwise be tremendously valuable land virtually unsaleable.” Tradition then retained Al- gon to structure a solution, addressing the infrastructure debt that was the major stum- bling block to a transaction. In June 2018, Algon structured and negotiated a series of com- plex transactions that included the sale of 3,028 acres to Mat- tamy Homes and the transfer of 1,222 acres to an entity as- sociated with. The City of Port St. Lucie. continued on page 14B

f ind them- selves strug- gling with a project that is over-bur- dened with debt are in- c r e a s i ng l y c on f r ont ed by challenges

The changing retail environ- ment over the last decade was captured in a comment made by a retail investor attend- ing an Algon presentation, who said, “The retail world is upside-down. My best tenants 10 years ago (Best Buys, Toy R Us, Sports Authority) are my biggest problems today, and the ‘Mom and Pop’ retailers that I used to be most wary of are now my most stable tenants.”

Troy Taylor

that may seem insurmount- able. Algon Group , a leading financial restructuring and investment banking firm, re- cently completed a major real

June 2018

Tradition Land Company, LLC has divested its remaining assets in Port St. Lucie, Florida via a restructuring and related sale

has acquired via a transfer 1,222 acres Government Finance Corp.

has acquired via a purchase 3,028 acres

The undersigned served as:

Financial Advisor to Tradition Land Company, LLC

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