The $68 billion New York State and Local Retirement Systems, Albany, is expected to invest more than $200 million to help General Growth Properties Inc., Des Moines, Iowa, purchase 26 regional malls.
General Growth, a public real estate investment trust, outbid numerous investors in July for the Homart Development Co. retail portfolio owned by Sears, Roebuck & Co. General Growth bid $1.85 billion for the 26 regional malls, 10 power shopping centers, five community centers and numerous properties in various stages of development.
It already has sold the 10 power shopping centers. (A power shopping center ranges between 250,000- and 600,000-square feet and has as its anchor tenant a retailer that sells commodities and/or discount merchandise.)
General Growth President Robert Michaels said his investors have been lined up, and he expects the deal to close at the end of November. He declined to identify the investors, but said they are a pension fund and endowment.
Pensions & Investments learned New York State & Local is one of General Growth's partners.
"We are in negotiations," said Steven Greenberg, a spokesman for New York State Comptroller H. Carl McCall. "Our real estate advisory committee gave its OK, subject to final negotiations and the comptroller's approval."
Mr. McCall is the sole trustee of the New York State and Local Retirement Systems.
New York State and Local is being advised by Jones Lang Wootton Realty Advisors, New York. The pension fund made an independent bid for the whole Homart portfolio earlier this year.
Stephen Furnary, a managing director with Jones Lang Wootton Realty Advisors, was unavailable.
Several real estate investment professionals predicted this summer that some of the initial bidders that lost the deal to General Growth would end up in partnership with the real estate company to finance the deal.
During the bidding, other investors were encouraged by Goldman Sachs & Co. to form a partnership with General Growth, real estate professionals said. Goldman represented Sears in the deal, but also has worked with General Growth. The investment bank took the real estate company public in 1993 and one of its investment partnerships helped finance a property purchase by General Growth.
Two weeks ago, General Growth sold the power shopping centers to Developers Diversified Realty Corp., a Moreland, Ohio, public REIT, for $501.5 million. New York-based DRA Advisors Inc.'s Opportunities Fund helped finance that deal, bringing in five tax-exempt institutional investors, including the $22 billion pension fund of E.I. du Pont de Nemours & Co. Inc., Wilmington, Del.
DuPont and another DRA investor also are taking larger stakes directly in the deal.
Each side will invest about $85 million of equity into the deal, said Paul McEvoy Jr., senior managing director with DRA. The balance will be raised in a commercial mortgage-backed securitization of the 10 shopping centers.
Developers Diversified was advised by Chadwick, Saylor & Co. Inc.
"What we were engaged to do was to find an institutional co-investor or investors," said Paul Saylor, a Chadwick Saylor partner. "DRA stepped up right away and proved to us that they had discretionary capital available in an amount which would not only take this deal, but that if the deal increased, would be able to take more if it," said Mr. Saylor.
Developers Diversified actually reached an agreement with General Growth to buy the power centers. But Developers Diversified is expected to close with Sears on the acquisition before General Growth closes its deal, said Scott Wolstein, president of Developers.
Developers Diversified's deal is a 50-50 joint venture between the REIT and DRA and its investors.
According to Mr. Wolstein, Developers Diversified is buying the company in a stock transaction. Sears is putting the shopping centers into a limited liability company, and Developers Diversified is buying the stock of the company.
"Then we are entering into an operating agreement, which is the joint venture between ourselves and the clients of DRA Advisors," said Mr. Wolstein. "We will own these assets 50-50, we will be the managing partner, and we will be paid a management fee of 31/2% of gross revenues of rents and reimbursements, which is roughly equivalent to 5% of base rents, for managing the portfolios."
The commercial mortgage-backed securitizations will be offered in two tranches, said Mr. Wolstein. The first - expected in the first quarter of 1996 - will involve seven of the malls and will seek to raise $190 million, he said.
The second will raise $140 million from three malls, and is expected to be completed by the end of the second quarter.
The 10 shopping centers are located in Denver; Fairfax, Va.; Naples, Fla.; Chicago; Durham-Chapel Hill, N.C.; San Diego; Kansas City, Mo.; Boston; and Atlanta. The centers are the dominant or No. 2 player in their market, he said.