EXCLUSIVE: Sand Hill Property Completes Purchase of Entire Vallco Mall for Total of $320MM

Vallco Mall, Sand Hill Property, Menlo Park, Cupertino, Vallco Property Owner, Intero Real Estate Services, Efi Luzon, San Jose

Vallco Shopping Mall Cupertino real estate The Registry

By Nancy Amdur

In a complicated deal nearly two years in the making, an affiliate of Menlo Park-based developer Sand Hill Property Co. has purchased the long-struggling 1.3-million-square-foot Vallco Shopping Mall in Cupertino with plans to replace it with a mixed-use development.

The Sand Hill affiliate, Vallco Property Owner LLC, bought the mall’s interior shopping space and anchors Sears, J.C. Penney and Macy’s for approximately $320 million, according to a source with direct knowledge of the transaction.

The retail anchors were purchased in October for about $200 million, and the interior mall was acquired this week from Vietnam-based investor Vallco Shopping Mall LLC for approximately $120 million, the source said. Vallco Shopping Mall purchased it in 2009 for $64 million, the source added.

At a standing-room-only special meeting of the Cupertino City Council on Monday, which lasted until Tuesday morning, council members in a straw vote recommended allowing 2 million square feet of office space, 582 residential units and 750,000 square feet of retail at the Vallco site, which is roughly what Sand Hill requested for its proposed redevelopment project. Sand Hill also requested a height increase to 160 feet east of Wolfe Road and up to 85 feet west of Wolfe Road. The council is expected to vote on the recommendation Nov. 18.

Luzon
Luzon

The mall’s sale was complex as each anchor and the interior mall were separately owned, so each piece had to be negotiated on its own. Efi Luzon, a senior vice president at Intero Real Estate Services, Inc. and managing director of real estate brokerage The Luzon Team in Los Altos, represented the buyer in the transactions.

“Single ownership will remove the key barrier to redevelopment that has hampered the site for decades,” wrote Sand Hill Principal and Founder Peter Pau in a letter he sent last month to the City of Cupertino Planning Commission. “The development team and funding is in place to move forward now,” he wrote.

“It’s like I flew an elephant through a nut hole,” Luzon said when asked about assembling the intricate deal. He added that “This sale is a great opportunity to reinvent this area into the thriving Silicon Valley community it should be. It is my job to keep these transactions moving forward no matter how long it takes, and I’m glad we were able to close this deal in a win-win situation for the buyer and seller.” He would not comment further for this article.

J.C. Penney and Sears sold both their buildings and the land underneath, while Sand Hill acquired the 40-year ground lease for the Macy’s property. It is unclear whether or how long the Bay Club fitness center and AMC movie theaters, which lease space at the mall, will remain. Macy’s, J.C. Penney and Sears will operate under a one-year lease-back agreement. Sand Hill is backed by equity partner the Abu Dhabi Investment Authority, the sovereign wealth fund for the government of the Emirate of Abu Dhabi, in Vallco and the Main Street Cupertino projects, according to a source with knowledge of the transactions.

The once-thriving iconic Vallco Shopping Mall, built in the 1970s, sits on prime property across the street from the 2.8-million-square-foot Apple headquarters and kitty-corner from Sand Hill’s 17-acre Main Street Cupertino mixed-use development, both of which are slated to open by 2016.

Despite its seemingly strong location on 50 acres at North Wolfe Road and Stevens Creek Boulevard, Vallco has floundered. The mall’s ownership changed six times over the past 16 years, said Mike Rohde, who has been Vallco’s general manager since 1998, and various developers have tried to revitalize the property to no avail. Vallco went into bankruptcy followed by foreclosure in 2008.

Competition and the economy hindered the mall’s performance, industry experts said.

Occupancy at the mall stands at 60 percent, a drop of about 5 percent from one year ago, with tenants including Claire’s Boutique, Victoria’s Secret, Gymboree, Famous Footwear and TGI Fridays, Rohde said. A bowling alley and ice rink also are within in the mall.

With the close proximity of retail outlets such as Westfield Valley Fair mall in Santa Clara, Stanford Shopping Center in Palo Alto and the Sunnyvale Town Center mall “it’s been hard for that location to be a regional pull on its own,” said Tom Nelson, a vice president of retail properties at real estate brokerage Colliers International in San Jose. “The layout of the mall is a bit dated. It needed a lot of TLC and financial strength to give it a new life.”

“A number of things were proposed over the years but no one has had the secret sauce to get it all to move forward,” Nelson said, adding that the property would be “perfect” for a mixed-use project. Sand Hill’s experience in the area will be helpful, he added. “[Sand Hill] has demonstrated they’re not afraid to do something that’s challenging.”

“Competition is tough around this area,” Rohde said, adding that the rise in consumers Internet shopping also has been a challenge for Vallco and other malls and likely will “continue to plague shopping centers.”

“The days of department stores anchoring shopping centers are really over,” Rohde said. “It will be important for shopping centers to continue to offer unique entertainment opportunities and other related types of things to keep shoppers active [and] coming to the property.”

Most Cupertino residents agree the mall needs to be changed, though what should replace it is debated, said Gary Chao, the city’s assistant director of community development.

“Everyone has a different idea about what that means,” he said, adding that some residents would like top-tier retail but developers have said that housing and office space make the project more economically viable.

Residential units are a sticking point among residents due to concerns about the impact on local schools, Nelson and Chao said.

Pau told council members that Sand Hill’s Vallco project could take five to seven years to complete. “It’s time to turn [Vallco] into something we can be proud of,” he said.