Sears May Keep Its Chicago Office Tower

Sears, Roebuck & Co. is considering refinancing rather than selling its landmark Sears Tower in Chicago, with a deal expected to be reached by year-end, real estate sources said Thursday.

A Boston pension fund adviser, Aldrich, Eastman & Waltch, has emerged as a leading candidate to refinance the property, probably for about $850 million. The firm manages more than $4.3 billion in pension fund assets for large corporate clients, including Sears.

Speculation about the fate of the world’s tallest office building heated up after Sears, Roebuck & Co. Chairman and Chief Executive Edward A. Brennan told New York securities analysts Thursday morning that the company expects to complete a “transaction agreement” that would allow Sears to benefit from the 16-year-old building’s appreciation.

Without offering details, Brennan said the deal “will achieve all of our objectives.” A year ago, Sears announced its intention to sell the 110-story headquarters as part of a massive corporate revamping designed to raise money and enhance the value of Sears’ shares.

Since then, however, Sears has stumbled in efforts to sell the tower for $1 billion or more, the amount it reportedly hoped to get. In September, Olympia & York Developments, a huge Canadian property developer, dropped out of negotiations to buy the building for about $1 billion.

That deal reportedly fell through after Sears and O&Y; realized that a sale would result in a reassessment that would raise property taxes and make it difficult to lease the building at competitive prices. Apparently, Sears and O&Y; deadlocked over who would pay the tax freight.

When O&Y; stepped out, Sears reopened discussions with a number of interested parties. An industry source indicated Thursday that O&Y; has not re-entered the bidding.

Douglas A. Fairweather, a Sears spokesman, said Thursday that a “transaction agreement” could mean anything from an outright sale to a refinancing arrangement.

But real estate industry sources speculated that a sale was looking less likely because of the potential tax liability.

“We’ve had extensive negotiations with a number of people,” Brennan told reporters in New York after the meeting with securities analysts.

Sears executives said the plan has been to use any proceeds from the tower to reduce debt and to repay money Sears borrowed to buy back some of its shares. Sears placed its debt at $2 billion in a July filing with the Securities and Exchange Commission.

The corporate overhaul included a switch to an “everyday low pricing” strategy and to selling more national brands; the transfer of its retailing division headquarters from the tower to a location in suburban Chicago, and the repurchase of about 10% of Sears’ outstanding common stock.

Fairweather indicated that the planned move of 5,500 Merchandise Group employees from Sears Tower to a new office park in suburban Hoffman Estates would stay on track regardless of whether Sears refinances or sells the building.

Michael J. O’Malley, the mayor of Hoffman Estates, said that, in the wake of refinancing rumors, he had earlier asked a top Sears official “point-blank” whether the company was still moving to that community, about 35 miles northwest of downtown.

“They said, ‘Yes, definitely,’ ” he noted Thursday.

Real estate sources have speculated that Sears was unable to get a bid of $1 billion-plus because of the absence of Japanese investors. Early on, the Japanese Ministry of Finance discouraged Japanese buyers from bidding for fear of an emotional backlash.

Indeed, concerns over Japanese ownership of U.S. properties have been freshly raised in light of Mitsubishi Estate Co.’s $846-million deal for a 51% stake in Rockefeller Group, the real estate investment arm of the Rockefeller family trusts.

H. Peter Norstrand, a principal in Aldrich, Eastman & Waltch, said the firm “cannot comment” on speculation about a Sears Tower deal.

But sources say some of the money would come through conventional mortgage financing and the rest from a convertible mortgage. With a convertible mortgage, the investor lends the building owner funds in return for the option to convert the interest into equity.

Other parties that have been mentioned as possible bidders for Sears Tower are LaSalle Partners, a Chicago firm that owns Fox Plaza in Century City, and JMB Realty, the Chicago-based owner of the Century Plaza Hotel.

Industry sources said they understand that no deal has been signed and that other bidders, possibly foreign, could yet emerge.