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Case Study: Puente Hills Mall, City of Industry, Calif.

When the Krausz Cos. of south San Francisco bought Puente Hills Mall in 1996, the property was in deep trouble. Originally developed by the Hahn Co., the property had gone into default while Hahn was in bankruptcy. According to Matt Lituchy, director of Cleveland-based KeyBank's San Francisco office, the mall was outdated and in poor repair. Two anchors - JCPenney and the Broadway - were gone, leaving only Robinson's, and the shop space was beginning to empty.

The property, however, had a good location and history. It had once been the region's dominant shopping center and was even prominently featured in the film "Back to the Future." The demographics were strong but significantly different from what they had been when the mall opened. Asians and Hispanics had replaced whites as the predominant population, but income levels were strong and the population density had increased.

"Hahn made no effort to market to these groups," Lituchy says. "The shops didn't stock what they wanted, and there were few signs in Spanish and Asian languages."

Lehman Brothers provided Krausz with funds for acquisition and some initial rehab, and the developer set to turning the mall around. The new owner replaced the Broadway with a multi-screen AMC Theatre, put Linens 'N Things, Burlington Coat Factory and other large tenants in the Penney's space, added Sega Gameworks, Borders and other entertainment retailers, and brought in Hollytron, a Korean-owned, high-end electronics dealer.

The effort succeeded, and Lituchy reports the property shows strong sales and is now 85% committed. "The cinema is among the top 5% in the country in terms of gross," he says.

When the Lehman note came due, Key stepped in with an $80 million bridge loan to see the property through the remainder of construction and retenanting. The 30-month facility has an interest rate in the mid 7s (%).

"Krausz is doing a great job in turning it around, and we see it as a very strong property," Lituchy says. Though there's no permanent loan lined up, Key is not worried. In fact, Key will likely compete for the permanent mortgage. "Whether we end up doing the takeout or not, it's definitely the kind of property we would like to have."

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