Cushman & Wakefield is taking bids for the sale or long-term ground lease on Hawthorne Mall, a one million-square-foot vacant shopping mall in Hawthorne, California. In addition to the potential for a large-scale redevelopment of the 25-acre property, the planned sale includes an unusual but increasingly common factor – the potential for seller financing.
Mike Condon Jr, who is heading the sales effort at the Chicago-based advisory, told Real Estate Capital USA that seller financing is emerging as a key way for buyers and sellers to navigate today’s difficult capital markets environment.
“If and when a seller is selling right now, the best way to mitigate the current market conditions is through seller financing,” Condon said. “We are seeing many deals with carry from the seller that are in the market today. If the seller does have the ability to provide seller financing, which is attractive to the buyer because of the cost savings on third-party debt, the seller can recognize additional profits and proceeds by becoming the lender.”
Additionally, seller financing becomes another revenue stream. “It enhances the sale proceeds and takes out the wild card out of the market by trying to find debt, which is extremely challenging, especially for development deals today.”
By the numbers
A report released earlier this month by New York-based data provider MSCI found the availability of seller financing has increased as the debt markets have remained illiquid. The firm tracked a significant increase in these deals over the past 12 months, with MSCI finding that seller-financed transactions made up 0.5 percent of all deals in the first half of 2022. During the same period in 2023, this level jumped to 1.9 percent of all commercial real estate lending.
“The capital markets are obviously very challenging right now and land acquisition financing or construction debt is at some of the most unfavorable terms we have seen in quite some time,” Condon said. “But the very good news about the sale is that our seller recognizes that and so is willing to do a lot of different things to engineer a transaction that helps to mitigate some of the market factors right now.”
Tourmaline Capital Partners, a Philadelphia-based investment management company that opened its doors two years ago to acquire a portfolio of class A office buildings, has been taking advantage of seller financing on some of its deals, said chief executive of the firm Brandon Huffman.
“It’s not just that rates are high, it is just that there is a lot less debt available, which makes it doubly expensive,” Huffman said. “There are only a handful of people who are playing for large offices and need loans of $200 million or larger, and there are virtually no banks or life companies in the market to provide that financing.
“The debt funds can’t get their underlying leverage today and they’re also pricing these loans at historically wide spreads, based off of what is already a very high index. Seller financing is what is facilitating some of the deals we are doing.”
Cushman & Wakefield is marketing the site on behalf of The Charles Company, a development company based in West Hollywood, California. The property, located on Hawthorne Boulevard between 120th and 128th Streets, was constructed in the 1970s and closed its doors in the 1990s. Despite the dislocated transaction markets, Condon and his team and Cushman have been fielding a significant number of inquiries.
“The good is that the property is huge and there is tons of flexibility in the zoning,” Condon said. “It has existing entitlements and there is a substantial amount of goodwill from the city of Hawthorne, which wants the site developed. But the hard thing is, because there is so much optionality with the business plan – you could build retail, office, hotel, mixed-use residential, studio sound stages or data centers – that it is hard to figure out who the eventual buyer will be.”
Condon believes there are other intrinsic benefits to the site. “As a former mall, there are nearly 4,500 stalls of structured parking that exist on site. That alone is more than $150 million of value. I think that, while the capital markets headwinds are against us, we will structure the deal and there is some intrinsic value to the improvements.”
Two years ago, Condon and his team would have expected the highest and best use for the asset would have been an adaptive reuse completed for a tenant or owner in the high-tech or aerospace industry. “But there is less of a need for traditional or even newly renovated creative office today. We are looking at more opportunistic developers.”
The Los Angeles area has been hit with many different factors that are causing the market to be soft, but Cushman is hoping the sale will close by the end of the first quarter of 2024.
Part of Condon’s optimism stems from the support a redevelopment would see from the city of Hawthorne. “When we kicked off the sale, we had a meeting with city officials and the seller that was a very positive and good meeting where we were working together with a common goal of seeing this project redeveloped. The city’s number one goal is to see this project redeveloped and they made a commitment to assist developers in their evaluation of the property. It is such a significant piece of land in the city of Hawthorne.”