Amid tenant departures, ownership shifts, unpaid bills and litigation, the University Square shopping center in University Heights, Ohio, has been in limbo for more than three years.
But the next few months might bring some clarity about the future of the financially distressed, vacancy-plagued property, at Cedar and Warrensville Center roads in the East Side suburb of University Heights.
Bond investors who control much of the multi-story complex -- everything but the Target and Macy's stores -- are working on a debt-restructuring deal to make the property appealing to developers.
After selective demolition, the site could accommodate 289 apartments or 376,000 square feet of new offices flanking Macy's and Target, cleaned-up structured parking and a smattering of smaller stores and restaurants, according to conceptual plans posted on the city's website.
"Everyone loves the corner. That's pretty universal," said Kjerstin Hatch, founder and managing principal of Lapis Advisers, the majority bondholder on University Square. "Nobody likes the current configuration. That's pretty universal."
But before any redevelopment occurs, whether it's residential, commercial or both, the bondholders and other parties with a say over the project have to fix a daunting debt dilemma. Between vacancies and expenses, the project is in the red. There's still $33.8 million in principal outstanding on $40.5 million in bonds issued for the original development in 2001 — along with interest, fees and overdue property taxes on the land underneath the buildings.
Lapis and other bondholders, represented by UMB Bank as their trustee, took over the core of the complex in late 2015 to settle a foreclosure lawsuit they filed early that year. The ownership change got rid of a Detroit-area real estate speculator who swooped in and bought the property for virtually nothing two years before, with no apparent plans to improve it.
Now the people with the most money at stake are in charge of the property's future.
University Heights Mayor Susan Infeld said she's encouraged that UMB has spent money on repairs to the center's five-level parking garage, other maintenance and design work by RDL Architects, the firm that put together the early redevelopment concepts posted online.
Hatch said the bonds could be reworked by summer, making it financially possible for developers to move beyond those design suggestions and toward a tangible project.
"What we want to do is develop a bond structure that's not going to default again and that encourages development. That's our goal," said Hatch, a San Francisco-based portfolio manager and acquisitions specialist who focuses on distressed debt and problem properties. "It's messy. It's difficult. It is a number of constituents that need to be pulled together."
Those constituents include Target and Macy's, which own their stores and contribute to the debt payments; the Cleveland-Cuyahoga County Port Authority, which issued the bonds to support construction of the 2,260-car garage; and the city and the local school board, which agreed to an arrangement that reallocated new property-tax revenues from the project to debt repayment.
To ensure that the debt was covered, the University Square deal required the property owners to pay special assessments if the shopping center's value plunged and the real estate taxes fell below the annual debt payments.
When the property was full, and flush, that structure worked.
But grocery store Tops Markets left in 2006, and smaller tenants followed. Repair needs at the garage became an expensive headache for Inland Western Retail Real Estate Trust, which bought much of the complex from original developer Starwood Wasserman in 2005. A recession that drove retailers to curtail expansion plans and shutter stores nationwide didn't help.
Vacancy rose, rent collections dwindled and University Square lost value. But the bond-payment requirements didn't go away. The costs gradually shifted from the real estate to the landlord, making the shopping center a sinking ship.
In late 2013, Inland got out. The company sold its portion of the property, including almost 300,000 square feet of retail space, through an online auction where no bid was considered too low. The winner, a company tied to Romel and Nicholas Casab of Michigan, paid $175,000, property records show.
The debt payments stopped. The Casab group collected rent but put no discernible money toward maintenance. Instead, the investors tried to break up the shopping center and sell off pieces of it.
Since wresting the property away from the Casabs through a foreclosure settlement, UMB Bank and the bondholders have been cleaning up the mess.
They haven't tried to keep existing retail tenants or attract new stores, though.
T.J. Maxx recently closed its hybrid clothing-and-housewares location at University Square and opened a new store in neighboring South Euclid, at Oakwood Commons. An Applebee's restaurant is the sole remaining tenant in the main building.
"We have made zero efforts to re-tenant," Hatch said. "We just don't think that's the right path for anybody. If we wanted to go the short and quick and cheap route, we could have tried to fill that space at low rental rates just to get money flowing. But that's not the path we're trying to take here."
Instead, Lapis and UMB are pursuing a more ambitious, longer-term vision, a plan that could give both the investors and the community a shot at benefiting if the value of University Square rises through reinvestment.
"I think the bondholders are pretty serious about the need to redevelop the site," Infeld said. "They've mentioned to me that they realize that there's a lot of retail in the area and that there isn't this type of [market-rate apartment] housing...I know they have been talking to developers. I think that this is a very active process."
Several unidentified developers have expressed interest in working alone or jointly on a project, Hatch said, but they're not willing to take on both the redevelopment risk and the special-assessment burden that's part of the existing bond deal.
She wouldn't go into detail about the potential bond-restructuring plan, but possible changes include adjustments to the debt-repayment timeline, guaranteed payment amounts or the interest rate — or a combination of those factors.
"We're very committed, as is the trustee, to getting this redone in a way that's going to encourage the development that's going to be done here," Hatch said of reworking the debt. "It may seem like it's taking forever...but there's not a day that goes by when we're not working on this project."
