Thursday, July 24, 2008

Magellan's Lakeshore East: Halfway Home

First of Three Parts

In the summer of 1996, Joel Carlins took time off from his job as a top-flight attorney to play golf on an unusual course in downtown Chicago.

The nine-hole, par-three course occupied a 28-acre parcel near the confluence of Lake Michigan and the Chicago River, three blocks east of Michigan Avenue. It was bounded on the east by Lake Shore Drive, on the south by Randolph, on the west by Columbus, and on the north by East Wacker.

What made the site all the more unusual was that, because it had served as a freight yard for the Illinois Central Railroad, it sat 52 feet below the elevated streets surrounding it.

As he looked up at the nearby high-rises, Joel, age 60, asked himself what many players on that course also wondered, “Why is this a golf course?”

As he soon discovered, the land remained undeveloped because it was still owned by Illinois Central, in partnership with Pepsico and Met Life, and was part of a Planned Development Community called Illinois Center.

By opening it to the public as a golf course, the land owners saved millions of dollars in taxes each year.

A transshipment port in the mid-19th century, the site was believed to be the largest parcel of undeveloped downtown land in any major U.S. city. It had been considered as a location for a casino or a stadium for the Bears, but no one had been able to surmount the difficulties to get a deal done.

Months after his golf outing, Joel decided to buy the land and create a mixed-use development with condos, apartments, hotels and offices. He did so with longtime partner and fellow developer, Jim Loewenberg, owner of NNP Residential & Development. (In 2006, the two companies would merge to become Magellan Development Group LLC.)

Before persuading the owners to sell, Magellan needed to create a master plan to develop the site. The plan would need to be not only feasible, but acceptable to the neighborhood, the city and the sellers.

The initial plan included building an infrastructure that would raise the land 52 feet. That alone would cost an estimated $80 to $100 million.

Fortunately, a city employee asked Joel and Jim if they had ever talked to Adrian Smith, an architect at Skidmore Owings and Merrill. They said, no, and asked why. The man said that, as a hobby, Adrian had been working for years on a master plan for the site, which dealt with the height and various other problems.

Joel and Jim called Adrian and asked if they could see the plan. When he saw it, a light bulb went on in Joel’s head. Adrian’s plan didn’t require that the land be raised, saving perhaps $100 million and making the project feasible.

Magellan hired Skidmore and, in six months, Adrian and his colleagues completed the plan. Over the next few years, Magellan got it approved by the neighborhood, the city and the owners.

Originally, the Planned Development Community encompassed 14 million square feet, all the way to Michigan Avenue. To limit density, the city negotiated with Magellan to remove five million square feet and to build on only nine million.

In 1998, with help from a Detroit financial group, Magellan bought the 28-acre property at public auction for $70 million, or $2.5 million per acre.

Before it could close on the deal, however, Magellan ran into problems. Delays caused by the first Gulf War and environmental “hiccups” caused the Detroit group to walk away and Magellan lost is financing after 9/11/01.

In early 2001, Magellan recruited another group of lenders. This time, the lead lender was LaSalle (now part of Bank of America). Other lenders included National City and a Korean bank.

The master plan was completed in early 2002, and has not changed significantly. It outlines a village in the heart of downtown. The village incorporates all the elements of a traditional city neighborhood—housing, stores, offices, a park, even a public school. Total projected cost: $4 billion. Total time to complete: 15 years.

Called Lakeshore East, the community is designed to be a model urban village, the largest development in any city in America.

Plans call for construction of up to 4,950 residences (market demand will determine the mix of condos and apartments) in a dozen high-rises, 2.2 million gross square feet of commercial/office space, 1,500 hotel rooms, 400,000 square feet of retail space and a six-acre park.

In the park would be an elementary school, a gated playground and dog park, a meadow, water fountains, ornamental gardens, extensive seating and free wi-fi Internet access. (Magellan and the city are considering locating the school elsewhere.)

In June 2002, after five years of negotiation, with financing finally in place, an important meeting was held by Magellan’s three principals: Joel Carlins, his partner Jim Loewenberg, and David Carlins, his 40-year-old son and vice president. The three had gathered to vote on whether or not to proceed. Two voted yes; one voted no.

To his credit, David, a lawyer, freely admits that he, the young tiger, voted against it. “I just couldn’t imagine enough people would buy a unit in a building that would overlook a construction zone for years,” he recalls.

David credits his father’s tenacity for making the deal happen. Joel sat in many meetings with Pepsico officials as they were being distracted by consolidation. The triumph, David believes, is a tribute to his dad’s tenacity.

In June 2002, it was David, the doubter, who signed the papers to borrow the $70 million to buy and improve the property.

What David recalls most vividly about the closing is that Bernie Levitt, the representative for one of the sellers (Met Life), insisted that the legal documents be signed on a golf course. Why? Because, Bernie explained, at his advanced age, getting in another round of golf on a beautiful day was far more important than selling another piece of property!

Ironically, a land purchase conceived on a golf course closed on a golf course. Now that it possessed a prized parcel in the heart of downtown Chicago, could Magellan, developer of only eight condos, execute its bold, award-winning plan well enough to recover its investment? Or would the company, like so many developers, find itself facing bankruptcy?

Part 2
Part 3

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