Wednesday, April 22, 2009

Hillwood cedes stake in Victory Park to German investors

Ross Perot Jr.'s Hillwood development company has agreed to give up its stake in the high-profile Victory project surrounding American Airlines Center.

Hillwood will lose about $100 million in a new agreement with German investors who provided equity for the signature Dallas retail and office project.

While the company will continue to operate and manage Victory, it has committed to surrender its ownership position in most of its buildings.

The deal represents a huge concession by the Perots – one of Dallas' most prominent business families – who staked their reputation and investment dollars on the success of the Victory project.

Last month, investors in the German real estate fund US Treuhand were warned that Hillwood could default on its obligations because of the deteriorating U.S. economy and real estate market.

The German investor began providing equity for large portions of the Victory development in 2006. The Hamburg-based investment group has sunk more than $185 million in Victory.

After making initial payments to the Germans, Hillwood was unable to continue providing anticipated returns on the project.

Hillwood is close to finalizing new terms with the Germans and the bank lenders that will keep Victory out of bankruptcy, officials with the Dallas real estate firm said.

"Hillwood Victory is in negotiation with its equity partner, US Treuhand XVI LP, regarding the future of the existing vertical development at Victory Park," the company said Tuesday in a brief statement. "We are working together to bring a fresh infusion of capital to the district to enable Victory Park to move forward with new restaurant and retail development.

"Our highest priority has been and will continue to be the success of Victory Park."


Restructuring


Investors in the German real estate funds still have to sign off on the deal.

And as part of the restructuring, Hillwood may also have to give additional cash to the investors, according to German press reports.

Hillwood has put $68 million in equity in the venture.

The restructuring will give Victory's operators time to make the project profitable.

"We have arranged stable, legal and economic relationships for the next three years," US Treuhand chief executive Lothar Estein told The Financial Times of Germany.

The ownership of Victory's buildings is complicated, with multiple owners for each one, but almost every building in the development is partially owned by Hillwood.

Hillwood declined to give details, but the restructuring involves ownership stakes in most of Victory's buildings with the exception of American Airlines Center, which is a public building. The restructuring does not include the raw land.


The project

Hailed as one of the boldest redevelopments in Dallas history, the 75-acre Victory project was planned as a catalyst for center city renewal.

Hillwood and its partners built a series of residential, office, retail and hotel buildings on the northwest edge of downtown starting in the late 1990s.

After initial success, Victory ran into problems last year because of falling retail occupancy and weaker-than-expected demand for high-end housing.

Hillwood has been working since late 2008 to broaden Victory's appeal with a wider range of restaurants and shops.

Getting the problems at Victory solved and avoiding a drawn-out foreclosure and bankruptcy process is important, Dallas real estate executives said.

"Where there are problems, the quicker they are identified and worked out, the better it is for the project," said Joel Pustmueller, a partner with Dallas-based Peloton Real Estate Partners. "I'm glad Hillwood is staying involved because they had the vision for the project."

John Crawford, who heads the central city economic development agency DowntownDallas, agrees that a quick solution to the Victory dispute is preferable.

"It's a good thing when an amicable solution can be reached quickly and all parties keep working for the benefit of the project," he said. "It's also better for the downtown area – it lessens the impact."

Crawford also doubts that Victory will be the last high-profile project to wind up in restructuring.

"We are in interesting times, to say the least," he said. "This could be a leading indicator for other changes that occur not only in downtown but throughout Dallas."

Staff writer Elizabeth Souder contributed to this report.

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By STEVE BROWN / The Dallas Morning News