CHICAGO - General Growth Properties Inc. signed a definitive agreement last week to acquire the retail properties of Homart Development Co. from Sears, Roebuck & Co. for $1.85 billion.
Now the only question remaining is what institutional investor will co-invest with the public real estate investment trust to close the transaction.
The $79 billion California Public Employees' Retirement System, Sacramento, has been mentioned as a potential investor, probably through the issuance of convertible debt, real estate professionals said.
A spokesman for California Employees' said: "We've been named as part of the group that's part of the negotiations. Negotiations are under way right now."
General Growth President Robert Michaels said meetings with potential co-investors were under way. He declined to identify any of the participants, except to say there was a lot of interest in the portfolio and that it was from "institutional-type investors."
The Homart portfolio consists of 26 regional shopping malls, two others under construction, five community centers, five other community centers under construction and a number of other retail properties in various stages of development.
Des Moines-based General Growth is interested in the regional malls, and it is expected to sell the small shopping centers in the portfolio to help pay for the larger properties.
Sources said a consortium of investors consisting of Developers Diversified Realty Corp., a Moreland Hills, Ohio, public REIT, and a joint venture between Dallas-based venture capitalist Hicks, Muse, Tate & Furst and the Homart management is buying the community centers for about $500 million.
Telephone calls to Developers Diversified were not returned. John Muse, a partner with Hicks, Muse, Tate & Furst, was vacationing and unavailable to comment.
General Growth's fund-raising effort is being led by New York-based investment bank The Beacon Group. Telephone calls to Senior Partner Geoffrey Boisi and Harold Pote, another partner working directly with General Growth, were not returned.
Goldman Sachs represented Sears and awarded the deal to General Growth because it was the highest bidder, but other suitors were considered to have greater security of capital, said sources familiar with the deal.
Other potential suitors were New York-based Jones Lang Wootton Realty Advisors, representing the $60 billion New York State & Local Retirement Systems; a venture between Heitman/JMB Advisory Corp., Chicago, and Atlanta-based Equitable Real Estate Investment Management; and the Yarmouth Group, New York, with its parent, Lend Lease Corp. of Australia.
Jonathan Miller, a spokesman for Equitable Real Estate, said his company would not comment on its continued involvement.
Real estate professionals surmise General Growth won the deal despite doubts about its ability to raise the money because it has a long and lucrative relationship with Goldman Sachs. Thus, the investment bank stood the chance to profit from both sides of the transaction if General Growth won the deal, real estate professionals said.
A Goldman Sachs spokesman denied the accusation that General Growth was shown favoritism. "Our client (Sears) has publicly gone on the record as stating this auction was run fairly," said Goldman Sachs spokesman Ed Novotny, in a published statement.
"Not surprisingly, the group that won saw the most value in the property and therefore were prepared to pay the most - and the losing bidders absolutely know this," Mr. Novotny said in his statement.
Goldman's investment banking unit took General Growth public in 1993; its Whitehall Fund L.P. invested in General Growth's 1994 purchase of CenterMark Properties from Prudential Life Insurance Co., Newark, N.J.
Several real estate professionals said that during the bidding, other investors were encouraged by Goldman to form a partnership with General Growth. In fact, it was rumored the Bucksbaums - the family that controls the majority of the General Growth's shares - dropped out of the bidding but Goldman asked them to come back.
Real estate professionals said they wouldn't be surprised if some of the initial suitors ultimately ended up as co-investors with General Growth.