Inside Starwood and Lender Losses on Chicagoland Mall Defaults

After Barry Sternlicht’s Starwood Capital and its lenders were hit with tough losses on four distressed Chicagoland shopping malls in the past two years, new owners are betting on a turnaround, with the latest wager placed earlier this month.

But they’re coming in at a shaky time for malls, despite a general retail rebound following the pandemic. Financial struggles of anchor tenants like Carson’s, Bon-Ton Stores and Sears are forcing some locations to close and creating vacancies throughout the U.S. in large, hard-to-fill retail spaces.

Four of Sternlicht’s firm’s former Chicagoland malls were in varying states of distress when sold off, driving losses for not only the landlord but its lenders as well. Representatives of Starwood did not respond to requests for comment.

Starwood failed to pay off an $80 million loan tied to the Chicago Ridge Mall — the latest to find a new owner when sold out of distress this month — by its July 2023 maturity date. The firm had already pushed back the original maturity date in July 2022 after negotiating a loan modification with Atlanta-based lender Trimont Real Estate Advisors.

Florida-based Second Horizon Capital came in and bought the property for $64.3 million, driving a $15 million loss for the lender, records show.

This month, Second Horizon secured a 41,000-square-foot lease with Burlington Coat Factory in what the firm hopes will be the first step in the right direction for the struggling mall.

“We anticipate making substantial investments in upgrading our infrastructure, enhancing center operations and supporting new leasing activity,” said Camilo Varela, managing partner and co-founder of Second Horizon Capital.

Starwood also defaulted on a $67 million loan for the Arboretum of South Barrington and faced foreclosure before local real estate investor Rick Heidner stepped in. Heidner’s venture, Heidner Properties, seized the property by buying the debt from UnionBank, the lender that filed the foreclosure suit, in early 2022.

While the sum Heidner paid for the loan note wasn’t disclosed, he took out a $29.5 million mortgage at the time the mall traded hands, and he refinanced it last year with a $30 million loan from Busey Bank, public records show.

The 480,000-square-foot shopping center ran into trouble during the pandemic when multiple tenants, including Sur La Table, Loft and Gymboree, filed for bankruptcy protection.

Heidner has plans to further develop the asset and said in a statement that he sees it as a “flagship property.”

Although some of the Starwood’s malls sold for an undisclosed price, making it difficult to calculate the firm’s total Chicagoland losses, at least one sold for half the value of its loan. A person familiar with the sale of Starwood’s Promenade at Bollingbrook said a joint venture of M&J Wilkow and Bixby Bridge Capital bought the mall’s $60 million debt for $30 million, according to Crain’s.

The 779,000-square-foot Promenade mall is 89 percent leased, and has Macy’s, Bass Pro Shops and Ulta as anchor tenants.

Over in Joliet, Starwood lost the Louis Joliet Mall to foreclosure in July 2023. That’s when distressed retail assets specialist Namdar Realty Group swooped in.

Namdar bought the Louis Joliet Mall for $31.4 million from the lender that took back the property from Starwood.

Starwood surrendered the 940,000-square-foot property after missing payments on an $85 million CMBS loan in 2020. The property was appraised at $131.8 million in 2012 when the firm borrowed the ultimately doomed loan.

Troubles started to mount for the 46-year-old mall in 2018 when anchor tenant Carson’s went out of business. That was followed by Sears closing in 2019. When Namdar bought the property, Macy’s and JCPenney were the remaining two anchors, while the Sears and Carson’s spaces sat vacant.

Igal Nassim, director of leasing for Namdar affiliate Mason Asset Management, said he knows Macy’s is a key feature of the mall and that the firm will need to work to secure a new tenant should the chain close that location. Nassim said he does not know if Macy’s plans to close the Louis Joliet location but added that the store owns its block at the mall.

“We’ve done this successfully in a number of our properties, filling vacant anchor tenant spaces with healthcare providers, call centers and entertainment venues, for example — whether we own the box or not. In some cases, we’ve even explored making way for multifamily housing,” Nassim said.

Starwood’s distress woes are not exclusive to its Chicagoland mall portfolio. The Miami-based firm has hit roadblocks all over the U.S.

Five years ago, Starwood paid nearly $500 million for three office buildings in downtown Oakland, California. This month, it lost them to its lender after defaulting on a $364.5 million loan.

Also in California, a joint venture between Starwood and Artisan Ventures defaulted in February on an $84.8 million loan from MetLife Investment Management tied to a 257,000-square-foot El Segundo office building.