Twelve years ago, it looked like a stroke of genius. Leaders of northwest suburban Hoffman Estates struck a deal to lure Sears, Roebuck and Co. from its swank corporate headquarters in downtown Chicago to a sprawling, 786-acre tract of undeveloped land off the Northwest Tollway.
The upfront cost to Hoffman Estates was substantial: Sears received $181.3 million in financial incentives to acquire the land and build its new office complex. The deal was considered worth it because the village hoped to reap big benefits down the road as other businesses joined Sears, boosting property tax receipts.
But the Prairie Stone development hasn’t filled up as planned. Some 270 acres remain vacant, almost half the 565 acres available for development. No other major corporation has joined Sears, and midsize businesses have been reluctant to move in despite the park’s attractive rents and natural landscaping.
The upshot: Sears must fork over an estimated $5.1 million in May to cover the shortfall in property tax payments that are needed to service bonds issued by the village.
As part of a guarantee it provided in 1989, the nation’s third-largest retailer has paid $4.1 million during the past two years to cover the mounting principal and interest requirements of the bond offering.
Sears faces seven more years of escalating payments if it can’t find new tenants for the space. The principal and interest payment that is due annually on May 15 will rise from $6.9 million this year to $9.4 million next year and $11.4 million in 2003. Sears is responsible for making up the difference only if property tax receipts fall short of those amounts, but the lead times involved in real estate development almost ensure that it will be forced to come up with more money in the next several years.
The extra expense comes at an awkward time. Sears is fighting to turn around its struggling department store business in a softening economy that hurt holiday sales.
Sears’ frustration with the situation became evident last summer, when it switched developers on the project from John Buck Co. to Jones Lang LaSalle.
“Of course we are concerned about the slower-than-expected development at Prairie Stone, but we also feel very fortunate that Jones Lang LaSalle is aggressively working on bringing business to the site,” said Sears spokeswoman Peggy Palter. “I would definitely say there is some pressure to get Prairie Stone developed.”
Real estate experts say growth at Prairie Stone has been slow for one simple, cliched reason: location, location, location.
Hoffman Estates is a good half-hour drive beyond O’Hare International Airport for commuters coming from the city. It also can be a 45-minute drive from other northern suburbs such as Lake Forest.
“Although the demographics are promising, there aren’t as many companies that want to venture out there,” said Greg Van Schaack, vice president with Hines Interests, the largest office-building developer in the country. “The absorption of office space has been greatest in suburban core areas where there is access to a deep amenity base of hotels, shopping and restaurants.”
With the tight job market, few companies want to inconvenience their employees by adding even 15 minutes to their commute, adds Alain LeCoque, co-manager of the Chicago office of Equis, a brokerage firm that represents tenants.
“When Sears moved, it was in the era of big corporate cutbacks. Today it’s an employee’s world instead of an employer’s world,” LeCoque said. “All the businesses I meet with are very concerned about anything that would cause them to lose people.”
Yet another reason some cost-conscious businesses haven’t moved to Prairie Stone is real estate taxes, said John Pikarski, a real estate broker and president of J.D. Partners of Des Plaines. The Northwest Tollway exit to Prairie Stone is little more than a mile from the Kane County line, where tenants seeking Class A office space can cut their taxes by more than half.
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“Prairie Stone is its own little island out there, and it’s perceived as a wonderful complex,” Pikarski said. “But it’s the taxes, and it’s a little out of the way.”
Competition from nearby Schaumburg also has played a role, developers say. Although the suburb that is home to Motorola Inc.’s world headquarters is filling up, there is still another 1 million feet of office space that could be built, according to Steven Fifield, president and chief executive of Fifield Cos. in Chicago.
Despite growing traffic headaches, Schaumburg remains popular because of its accessibility to the highway and assortment of restaurants and shopping at Woodfield mall. Fifield’s Windy Point office development in Schaumburg has only 28,000 feet of vacant space left out of 487,000 square feet.
“We have competed head-on with the office buildings out there and generally have won,” Fifield said.
Real estate experts agree that it could take more than 10 years for Prairie Stone to fill up. Nevertheless, there are a few promising things happening.
Last year, a fitness club and day-care center opened in Prairie Stone, making the development more attractive from an employee point of view. Later this month, the Hoffman Estates Village Board will vote on preliminary approval of a long-awaited full-service Marriott hotel. And under construction is a new headquarters for Leopardo Construction of Glendale Heights.
Although Hoffman Estates has a lot riding on the development’s ultimate success, the village and other taxing entities already have reaped some benefits. School District 300, for example, received $759,662 from the development last year.
And the percentage of taxes the school district and the other agencies will receive from Prairie Stone will increase over the life of the agreement, leaving an increasingly smaller share of the levy for Sears to apply toward bond payments.
Sears wouldn’t comment on whether it would ever attempt to reopen the agreement to reduce its financial burden. But Hoffman Estates acting Mayor William McLeod said such as a move would be “a public relations disaster of epic proportions. They would be showcasing a problem, and they really don’t want to do that,” he said.
McLeod said although development has been slow, he is optimistic about Prairie Stone’s future.
“Probably, we all had unrealistic expectations when the project was approved initially,” he said.