What retailers are in the area in terms of everyday nessessaties Walgreens, Whole Foods, Trader Joe’s, Jewl, Dominics…

This pool of downtown residents might find Block 37- with a more practical mix of stores than Michigan Avenue- very attractive.

When the economy recovers, Block 37 may very well prove to be a popular retail spot on State Street.

I’m sure it’s nothing like this rendering…

http://www.dpcaltd.com/firm/images/block37_interior_practice.jpg

Here’s my take on Block 37: Early on, the City and the developers wanted a very upscale retail development- something like the stores and “vertical” malls on North Michigan Avenue. Nothing but the best for this prime space on State Street opposite the Marshall Field flagship store. For a time, Mayor Daley was even talking about a Harrods of London branch opening at Block 37.

Several developers and financiers later, they finally figured out that Michigan Avenue-style retail at Block 37 really was not going to work and, instead, a more down-to-earth retail mall would make more sense. Unfortunately, by the time this was figured out, the economy sank into recession. And, here we are, with the half empty mall sitting in receivership.

Block 37, the infamous lot in downtown Chicago, has drawn controversy for the past two decades as a series of developers have struggled to turn it into a mixed-use project. The latest drama surrounding the 285,000 sq. ft. retail development took place in late November when Cook County Circuit Court Judge Margaret Brennan appointed CB Richard Ellis (CBRE) as receiver for the property.

The story has been far from straightforward. The developer, Joseph Freed and Associates, remains in control is in the midst of an effort to contest the appointment while CBRE, the Los Angeles-based brokerage giant, has been in limbo pending the resolution of a key insurance transfer, delaying handover of Block 37.

Brennan’s ruling was the result of tensions that have been brewing for the last two years between Freed and primary lender Bank of America. So far, Freed has received $135 million of the $205 million construction loan from the bank in addition to putting about $20 million of its own equity into the project. Both sides agree that the project will require about $72 million to complete, but the bank is loath to continue funding it with Freed in control.

The parties have had disputes over leasing decisions, most prominently in late October when the bank refused to approve a revised lease that Freed had signed with movie theater operator Muvico. More troubling, the bank said that Freed had been in default on its construction loan since March 2008 and that the project was about $42 million over budget.

In part, the project seems to be a victim of timing. Tenant demand for new retail real estate space has dried up and in cases where retailers are moving, they are asking for cheaper rents. A project coming on line in these conditions faces stiff challenges.

For the rest of the story, please go to NREI.

Another new downtown Chicago mall just opened this week, with much less hoopla. It is located on the ground level of the old Chicago & Northwestern railroad station (now called Oglevie Center), in the block bounded by Clinton, Canal, Randolph and Washington. It is essentially the “back door” entrance to the station, heavily used by train commuters (including me) who walk north from the station to their jobs. So far, there is the “French Market” and a CVS Pharmacy, but more is scheduled to open. I think this mall (or, more accurately, mini-mall) will work. Tons of commuters never use the “front” entrance to Oglevie- the atrium area bounded by Clinton, Canal, Washington & Madison- but pass through the “back door” at least twice daily. Plus, there is a lot of nearby residential development to the west of the station.

Bank’s Action Rattles a New Mall in Chicago
By TERRY PRISTIN
CHICAGO — It took nearly two decades to get to this day, but on Nov. 20, Block 37, a five-level mall in the heart of this city’s downtown, got the green light to open its public areas. However, the developer, Joseph Freed & Associates, was not celebrating.

That afternoon — in what real estate specialists say was an extraordinary event for a mall on the verge of welcoming its first shoppers — a judge named a receiver from CB Richard Ellis, the real estate services giant, to take control of this 285,000-square-foot project away from Freed, which is based here.

The request for a receiver came from Bank of America, the lead lender in the $205 million construction loan. In October, the bank sued to foreclose, saying the developer lacked the funds to complete the mall. Situated on State Street, between Randolph and Washington Streets, the glassy new mall stands opposite the former Marshall Field flagship store, now a Macy’s.

Developing Block 37, named for the site’s designation as one of Chicago’s original blocks, has long been a priority for Mayor Richard M. Daley, whose office faces the site.

Beginning in 1989, several older buildings were demolished to make room for a mixed-use development with an underground walkway linking two subway lines. Successive developers failed to make their projects work, however.

In 2006, the owner at the time, the struggling Mills Corporation, sold the retail portion of the site to Freed and the office portion to Golub & Company, a local firm, and its financial partner, BlackRock, an investment firm in New York. Last year, Golub completed a 16-story office building overlooking Daley Plaza. It is anchored by CBS and Morningstar, the financial services company.

Like other developers trying to complete projects in the worst recession in decades, Freed has experienced defections by retailers. Yet by the time the foreclosure lawsuit was filed, more than 70 percent of the space was spoken for — either through signed leases or commitments, said Laurance H. Freed, the president of the family-owned business. A Steve Madden shoe store opened the Saturday before Thanksgiving. A few other stores, including the athletic apparel retailer Puma, followed on the Friday after Thanksgiving.

Mr. Freed said he had been working with the bank to modify the loan when he was surprised with the suit. “To us it seems suspicious that a month before you’re opening for the bank to do this,” Mr. Freed said in an interview in the former Carson Pirie Scott department store on State Street, which he is redeveloping. “We felt very good about what we were doing, but they lost confidence in us.” The company said it had invested $20 million in the project and assigned 20 professionals to work on it full time.

But Shirley Norton, a bank spokeswoman, said Freed had been in default since “at least” March 2008. “We have been in negotiations with the developer since March 2009, but cost overruns have continued to rise,” she said in an e-mail message. “The banks believe that the appointment of a receiver is the right step to ensure that construction and management continue uninterrupted.”

The bank’s foreclosure suit also caught city officials off guard, said Steven J. Holler, a deputy corporation counsel. Based on “competence and capacity,” Mr. Holler told Judge Margaret Ann Brennan of Cook County Circuit Court, “Freed is better positioned to finish this project than CBRE.” CB Richard Ellis said it could not comment.

In a telephone interview, Mr. Holler said: “Our view is that Freed has done about as good a job as you can do in this economy, but that ultimately the project is dependent on funding from Bank of America, so we took a neutral position on the receivership.” Mr. Holler said $71.9 million was needed to complete the project.

In court papers, Freed said that it had not actually missed any loan payments. The developer did acknowledge two defaults but characterized them as insignificant.

One default took place when Freed failed to invest more equity to correct what the bank says is now a $41.6 million loan imbalance, resulting from cost overruns. A second default occurred when Freed did not maintain the required $5 million in unencumbered funds. Before filing its suit, Bank of America unsuccessfully tried to persuade Freed to repay the $135 million it has received so far.

Mr. Freed attributed the cost overruns and delays to the state of the economy; enhancements to Mills’s design, including expanded elevators and a larger sky-lighted atrium; and inconsistent actions by the bank. Muvico, a movie theater chain, had agreed to open a theater on the fourth floor, but when it ran into financial trouble and sought to modify the terms, the bank did not go along, according to court papers.

Though the city has imposed a number of conditions, including a requirement for a mix of local and national tenants, Mr. Freed said these had no bearing on the delays.

At the Nov. 20 hearing, John H. Anderson, a lawyer for the bank, told the judge that the settlement talks had failed. Freed “simply doesn’t have the cash to make this project a go,” he said.

Daniel Lynch, one of Freed’s lawyers, said his client was seeking additional sources of equity. “He’s been a couple of hundreds of thousand dollars short at various times,” Mr. Lynch acknowledged.

For technical reasons, the receiver is not yet in charge of the mall but is expected to take over soon.

The change will inevitably cause more delays, said David Stone, president of Stone Real Estate, a Chicago company that specializes in urban retail real estate. “It’s going to take any leasing agent time to get up to speed,” he said. “If there’s something retailers like, it’s consistency and predictability.”

More than money is at stake in this dispute, said Mr. Freed, who plans to appeal the receivership order. “We’ve had a group dedicated to this project, with a lot of rightful pride,” he said. “It’s been 20 years in the making. There’s a lot of emotion invested in this site.”