A group of Texas businessmen that launched a $1 billion plan to redevelop the Plano, Texas, headquarters of J.C. Penney Co. say they have been tripped up by the reluctance of lenders to get involved with a project that depends heavily on the health of the struggling retailer.
The group led by Sam Ware and Jeffrey Blakeley bought the 1.8 million-square-foot building and about 45 acres of land from J.C. Penney three years ago in a deal valued at $453 million, including planned upgrades. Its strategy was to improve the sprawling building and add over $500 million of new retail, housing and hotel development. J.C. Penney agreed to continue to occupy and pay rent on two-thirds of the building until 2032.
Now the project, named the Campus at Legacy West, is running into trouble refinancing $384 million of debt because prospective lenders are concerned about J.C. Penney’s future. “The sentiment of the lending community is that they’re just not crazy about bricks-and-mortar retail,” Mr. Ware said in an interview last week.
The venture was supposed to repay the debt it borrowed from Nevada-based Beal Bank USA and its affiliate, CLG Hedge Fund LLC, by Jan. 2. The money wasn’t paid, prompting the lenders’ agent to file a foreclosure action in Collin County District Court two weeks ago, according to court papers.
Mr. Ware predicted that his group would be able to refinance the debt and that the project would be a success. He said that J.C. Penney is current on its rent and faces a bright future now that it has closed unprofitable stores and is focusing on new retail strategies.
“We’ve got a spectacular asset,” he said. “Anybody on this planet would love to own it.”
A spokesman for Beal Bank and CLG declined to comment. The bank was founded and is controlled by billionaire Andy Beal, a friend of President Trump’s and a major contributor to his political campaigns.
The financial headwinds facing the J.C. Penney headquarters development show how the repercussions from upheaval in the retail world are rippling through the financial system. As online sales continue to surge, banks and other lenders have become increasingly skittish about making loans to some bricks-and-mortar retailers as well as owners of the shopping centers and office buildings that house them.
Loans backed by retail properties accounted for only 13% of all private-label commercial mortgage-backed securities issued in 2019, according to data and analytics provider Trepp LLC. That is down from 18.6% in 2018 and 31.5% in 2013, Trepp said.
Lenders have good reason to be cautious. In December, 4.42% of all the commercial mortgage securities backed by retail properties were delinquent, compared with 2.34% for all CMBS debt, Trepp said.
Underwriting an office building with a struggling retailer as a major tenant is tricky because prospective lenders have a hard time evaluating and pricing the risk, said Manus Clancy, Trepp’s senior managing director. Uncertainties include whether or not the retailer will survive through the term of the lease and whether or not they could be replaced if they vacated early.
“You have all this hair,” Mr. Clancy said.
Founded in Wyoming in 1902 by James Cash Penney, J.C. Penney was one of the country’s dominant retailers for decades. But the retailer has suffered years of decline, hit by a series of new competitors, first like Walmart and T.J. Maxx and most recently by internet shopping. J.C. Penney shares, which traded over $80 in 2007, have fallen below $1.
Jill Soltau, who took over as J.C. Penney’s chief executive in late 2018, said on an earnings call in November that the company was making progress in understanding its customers, adding new merchandise and improving its shopping experience. “We will restore J.C. Penney to profit, growth and our rightful place in the retail industry,” she said.
J.C. Penney moved its headquarters to a corporate campus in Plano from New York City in 1992. Since then, the area has boomed, attracting other big-name tenants and adding thousands of units of housing and millions of square feet of retail.
J.C. Penney took advantage of Plano’s growing popularity in 2014 by selling 240 acres of land around its campus which had greatly increased in value. Three years later, it sold its other land and headquarters to Mr. Ware’s group.
Mr. Ware’s group last year ran into opposition at the Plano City Council with its planned sale of two parcels for rental apartment development. Since then, the group has reduced the number of planned units and made other design changes, increasing the chances that the zoning will be approved and the land sales will close, according to Mr. Ware and former opponents of the rezoning.
Mr. Ware said that even if J.C. Penney moves out of the building before its lease expires, his group won’t have trouble leasing the space because the office market is hot and the company has been paying below-market rents. He said the property has been appraised for $200 million to $300 million more than the existing debt.
“There’s nothing but upside here,” he said.
Write to Peter Grant at [email protected]
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