Behringer REIT Rescues $500M Frisco Square

FRISCO, TX-In an off-market transaction, Fairways Group Ltd. has recapitalized the $500-million-plus Frisco Square by selling 70% controlling interest to Behringer Harvard Opportunity REIT I Inc. The recapitalization rescue totals $72.1 million of upfront capital and loan assumptions, with additional funds earmarked for future development.

Fairways Group took over the 147-acre project, abutting the $65-million Pizza Hut Park, in mid-July 2005, from Five Star Development Co. of Flower Mound, TX after it had three years invested in the project. The recapitalization has cleared just as Fairways is ready to break ground on additional residential, retail and office space.

Jim Leslie, one of four Fairways' partners, tells GlobeSt.com that the recapitalization was driven, in part, by the project's original lenders "wanting to see everything done" and the need to add a partner for future construction. Fairways had inherited some debt when it took over the development.

Leslie says they were going to market the buy-in opportunity last fall, but first approached Behringer Harvard about buying the existing space and 48 developable acres entitled for 1.6 million sf of office, 560,000 sf of retail, 300 high-end multifamily units and 800 hotel rooms. Early in the talks, Leslie says it became evident that Fairways needed to buy out the original developer, which had retained minority interest in the project. That leg of the process was completed earlier this year.

After seven years of working the land, Frisco Square has 43,500 sf office space, of which just 800 sf is vacant; 57,000 sf of retail and restaurant space, resting at 50% occupancy; and 114 lofts that are 95% leased. Behringer isn't saying how much capital it's prepared to funnel into the project.

"We expect within the next year that we'll have new starts of all product type of about 400,000 sf," Leslie says. This month, ground will break on a nine-screen Studio Movie Grill and an additional 8,000 sf of retail space. In six weeks, a 15,000-sf retail building, preleased to FedEx/Kinko's, will get under way. And in January, another 285 apartments in a four-story design will begin to rise. Presently under construction is a 48,000-sf office building and 16,000 sf of retail. Dallas-based Retail Connection leases the shop space; Jones Lang LaSalle handles office leasing; and Lincoln Property Co. oversees the residential component.

Behringer Harvard got the lion's share of the project, except for one multifamily tract. "They bought into the preponderance of it," Leslie says. "We got really lucky that it fit in with Behringer Harvard's Opportunity REIT." Under the agreement, Fairways Group continues as developer.

Leslie says had the buy-in been marketed that Holliday Fenoglio Fowler LP was going to show it to national and international investment circles. He says "it just made sense" to have a Dallas-based partner who understood the market at their side.

Frisco Square has battled with retail competition six miles to the south for anchors and tenants and suffered through road construction, which ends in September when the Dallas North Tollway opens on its doorstep. "The primary demographics and location" were the dealmakers, says Jason Mattox, executive vice president for Behringer Harvard. "This development already attracts a huge amount of residents' interest," he says. "And, it's very well positioned to be a center of activity and so will all of the development that we've mapped out. For each type of development we're planning, we think this area is well positioned to meet those needs and rival all other development in the area." Mattox says a three- to six-year hold is planned.

In an SEC filing Aug. 3, Behringer Harvard's initial capital obligation was $15.5 million with Frisco Square affiliates, representing the 30% ownership, kicking in about $6.6 million by transferring fee simple interests. All partners have agreed to pony up additional funds for future development.

Behringer Harvard Opportunity REIT I assumed a $21.1-million loan, which matures Dec. 3 with Dallas' newest headquarters tenant, Comerica; an $8.8-million loan that matures in November with First National Bank of Omaha; and $1,000 from an $8.8-million line that matures March 8, 2009 with Compass Bank. Behringer Harvard also took out a $20.1-million bridge loan at a 10% interest rate to retire debt from Citibank. In the filing, the REIT says it will seek third-party financing no later than Feb. 3, 2008 to repay the bridge loan.