Passco Buys Puente Hills Mall

Puente Hills Mall in the City of Industry, one of the largest shopping centers in California, was sold Tuesday for $148 million to a group of investors in a complex, tax-deferred real estate exchange.

Passco Real Estate Enterprises Inc., along with 32 other investors, bought the 65-acre property from Krausz Cos., a South San Francisco real estate investor. Santa Ana-based Passco and its partners took title to 750,000 square feet of retail space at the Puente Hills Mall. The rest of the 1.2-million-square-foot retail space is owned by anchor stores Robinson-May and Sears.

Passco and its group will spend an additional $7.5 million on capital improvements, said William Winn, Passco’s chief operating officer.

The mall was completed in 1975 and received an upgrade in 1998 that included the construction of a 20-screen AMC theater complex. Among the improvements planned by Passco is a new electronic sign that will display messages to drivers on the adjacent 60 Freeway.

Passco specializes in real estate trades that are covered by Section 1031 of the federal tax code, under which the owner of an investment property who swaps it for a similar property does not have to report a capital gain immediately.

Most regional malls are purchased by large companies or pension funds, but Passco joined 32 comparatively small investors to assemble $56 million in equity and qualify for a $92-million loan from Greenwich Capital, a U.S. subsidiary of Royal Bank of Scotland.

Buyers in 1031 exchanges are considered tenants in common and not limited partners. By transferring the proceeds of one real estate sale directly into undivided interests in another property, they are able to defer taxes on capital gains. When the new property is sold, owners can cash out and pay taxes or complete another exchange.

“As far as we know and the lender knows, this is the largest tenant-in-common acquisition,” Winn said.

The investors who bought Puente Hills Mall sold various kinds of properties to take a 3% to 5% interest in the shopping center, Winn said. A common 1031 investor is an owner of an apartment complex or other commercial property that requires constant supervision who wants to be relieved of management responsibilities.

The acquisition of Puente Hills Mall marks Passco’s first purchase of a regional mall. The company’s 5.4-million-square-foot property portfolio is composed mainly of grocery-anchored neighborhood shopping centers, including Lancaster Commerce Center in Lancaster and Rolling Ridge Plaza in Chino Hills.

Passco intends to invest $500 million in real estate this year, Winn said, and the Puente Hills Mall purchase brings the investment so far this year to about $225 million.

Passco will manage Puente Hills Mall, which will be 94% occupied when a new Circuit City opens its doors in November, Winn said.