Randhurst's $95 million price leaves the mezzanine underwriting the lease-up

Aquarian Real Estate Partners and 3650 Capital have split $72.3 million of acquisition debt on Randhurst Village, funding Rhino Investments Group's $95 million purchase of the 929,899-square-foot open-air shopping center in Mount Prospect, Illinois, and the split is where the underwriting actually happens: AREP's $45.6 million senior loan is 48 percent of the price, while 3650's $26.7 million mezzanine takes total debt to 76 percent. Commercial Observer first reported the financing; The Real Deal first reported the Sept. 23 sale.

The coverage discloses no other capital source, which leaves a $22.7 million gap between price and loans — about $24 a square foot of sponsor equity under a center that traded at $102 a foot. For a value-add retail deal that is unremarkable leverage, and it is also exactly how the risk is split: Rhino's return clears on a modest occupancy gain with so little of its own money in, while the mezzanine, more than a third of the debt stack, gets repaid only if the leasing and outparcel programs both produce.

Randhurst has been rewritten before: it opened in 1962 as the Randhurst Corporation's answer to postwar shopping, a joint venture of Carson Pirie Scott, Wieboldt's and Montgomery Ward that the coverage calls the Chicago region's first enclosed mall and, at the time, the largest enclosed air-conditioned retail space in the country. None of the three retailers that built it still exists. DLC Management Corp. bought Randhurst in 2015 for roughly $100 million, then its largest single-property purchase, and spent several years converting the enclosed mall into the open-air center Rhino now owns at 1 Randhurst Village Drive, twenty miles west of downtown Chicago and four miles from O'Hare.

The exit at $95 million lands about $5 million below DLC's 2015 cost, before a redevelopment spend the coverage does not quantify. A decade of repositioning produced traffic and credit but no nominal price growth, and the strongest numbers sit inside that flat price: 9.3 million visits a year, according to Placer.ai, and a roster running from Jewel-Osco, Costco and Home Depot through T.J. Maxx, HomeGoods, Macy's, an AMC theater, PetSmart, DSW, Old Navy and Planet Fitness. Retail's scarcity premium, as this publication has argued, has split in two, with grocery anchors and drive-through boxes holding pricing power while urban storefronts reprice tenant by tenant; Randhurst sits on the favored side of that line and still sold below its 2015 number. The grocery-anchored format is doing what it is supposed to do for occupancy and traffic, and none of that insulation reaches the seller's basis.

Rhino's plan, per a release, is to lease the vacant space and sell outparcels, and the second half of that plan is where the credit risk actually lives: pad sales convert land into proceeds at whatever the retail bid pays, and that bid is set in the same market that just marked the center itself. A basis low enough to undercut the market is what makes value-add leasing financeable in the first place, the logic behind the $21.75 million Insignia purchase on Sept. 15. Randhurst's $102 a foot is where that wager gets tested. The $26.7 million mezzanine here is a bet on how fast the leases get signed and what the pads fetch, which is a different credit than the one the senior loan is making.

Jonathan Roth, 3650 Capital's co-founder and managing partner, called Randhurst "a dominant retail asset with a strong national tenant base" and pointed to the affluence of its suburban market for the "value-add upside," adding that the firm's "tremendous confidence" in Rhino comes out of an existing relationship. Kevin Holmes, the AREP partner who heads the firm, called it "an ideally located property in a strong Chicago submarket," while Rhino's chief executive, Sanjiv Chopra, put the thesis plainly: "a generational retail asset that we believe is significantly undervalued relative to its market position, traffic profile and income potential."

Alpha Capital CRE's Anthony Longo arranged the financing, and Newmark's Conor Lalor, Keely Polczynski and Brian Schneiderman represented DLC on the sale. Whether the two lenders are right about the upside is a live question, and the stack prices their answers differently: AREP's $45.6 million comes to about $49 a square foot, a basis that holds up across most retail scenarios, while the mezzanine adds about $29 a foot and is the piece that needs the leasing and the pad sales to arrive. The same arithmetic applied to 200 Madison Avenue's $386 million financing this month: where a lease and a clock do the sizing rather than a market mark, the basis the senior lender takes is the real price. Randhurst applies that arithmetic to a value-add plan, with debt at 76 percent of the price and sponsor equity under $25 a foot, and the number to watch is the first pad trade. Outparcels clearing above the $102 a foot the center itself fetched put the mezzanine's exit a land sale away; if the pads come in below that, the lease-up carries more of the plan than the debt was sized for.