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ScanlanKemperBard Bets on Another Problem Property

by Wendy Culverwell
Portland Business Journal

A Portland-based real estate investment firm is taking on yet another troubled project. ScanlanKemperBard Cos. reconnected with its Minnesota equity partner to purchase an economic development project gone awry in Phoenix, Ariz.

SKB and Wayzata Investment Partners of Wayzata, Minn. paid $67 million for High Street, the first phase of CityCenter of CityNorth. The seller was Chicago-based Capmark Finance Inc., the lead lender for the project. Capmark foreclosed on a $290 million loan in 2010.

High Street opened around Dec. 1, 2008 and faltered almost immediately as the recession sank its teeth into the Phoenix market.

It is the second joint venture for SKB and Wayzata. The partners teamed in 2012 on a $39 million deal to acquire Portland’s CH2M Hill Center.

For the Arizona deal, SKB and Wayzata formed City North Associates LLC to own the property. The all cash deal closed Monday.

Bob Scanlan, chairman of SKB, called High Point a can’t miss project and probably the best deal he’s engineered in the firm’s 20-year history. SKB paid about 23 cents on the
dollar for the project, which originally cost about $460 per square foot to construct. That, coupled with rebounding demand in Phoenix for its blend of office, retail and residential space, all but guarantees success. During deal negotiations, Scanlan notes several major Phoenix employers announced plans to add thousands to their payrolls, including Mayo Clinic Hospital, which is blocks away, and USAA Insurance, which is also nearby.

“It’s the first time in my career that I can’t figure out how we could lose money,” Scanlan said.

The deal includes a 628,000-square-foot mixed unit development with 99 condominiums (leased as apartments), 330,000 square feet of office space, 175,000 square feet of retail space, a 1,418-stall parking garage and 458 surface parking spots, along with 4.5 acres of land.

It is about 50 percent leased.

The low acquisition price means SKB and Wayzata can compete for tenants for the office
and retail space by dropping asking rents and offering generous terms for building out office and retail space.

Scanlan said the partners are committed to closing deals and granting tenant improvement allowances. As a foreclosed property, few deals got done. SKB and Wayzata expect to improve the rent rolls and sell the property within four years.

The condominiums alone could generate $20 million to $40 million for the new owners if
residential prices return to even half of the $650 per square foot they commanded prior to the recession. The condominiums will likely be put up for sale in four years.

It is the second time in recent months that SKB has banked on turning around a troubled
project. Here in Portland, it is attempting to find tenants to breath new life into 321 N.W.
Glisan St., a failed office conversion project in Portland’s Old Town/Chinatown district.
The Arizona project originally was developed by The Klutznick Co. and Related Companies. High Point was the first phase of a larger commercial development that was supposed to total 5.5 million square feet of residential, office, retail and entertainment space covering 144 acres.

To encourage the project, Phoenix officials agreed to rebate up to half of all sales taxes collected at the center for 11 years, or about $97 million, once the developer reached certain development milestones.

Scanlan said the recession changed the development, guaranteeing the tax deal will never
take effect.

It was, nevertheless, highly controversial at the time. The Goldwater Institute sued Phoenix, taking the case to the Arizona Supreme Court.