In late 2016, Macy's (M -2.35%) announced that it would form an alliance with Brookfield Asset Management (BN 2.33%) to help maximize the value of the retailer's enormous trove of high-quality real estate.

For most of 2017, this partnership produced various concepts for redeveloping Macy's real estate, but no firm decisions in that regard. However, Macy's and Brookfield Asset Management now have tentative agreements for development projects on nine Macy's real estate assets. (The projects still require building permits, environmental approvals, etc.) This is allowing investors to get a better sense of how much potential this real estate alliance has for Macy's.

Investors finally get some firm numbers

The likely sale of part of Macy's San Francisco flagship store was the big real estate-related highlight from the company's recent fourth-quarter earnings report. That said, the new details provided about the Brookfield partnership suggest that it could represent an even bigger value-creation opportunity in the long run.

Back in the summer, Macy's CFO Karen Hoguet indicated that Brookfield Asset Management would probably recommend proceeding with development plans for about two-thirds of the 50 Macy's properties it was examining. That number still stands.

In addition, the two companies have agreed to terms for nine properties. Six of those sites would see relatively modest changes, with additional retail space being built in the parking lots of existing Macy's stores. Two stand-alone furniture galleries would be closed and redeveloped, with the furniture collection moving into nearby Macy's full-line stores. Finally, Brookfield has proposed a more ambitious mixed-use development on excess land at one property.

The exterior of a Macy's store

Brookfield Asset Management is planning several development projects on Macy's real estate. Image source: Macy's.

Assuming that Brookfield Asset Management buys the necessary land for all nine projects from Macy's, the proceeds would likely total around $50 million, according to Macy's management, with the potential for additional payments based on the profitability of the three biggest projects.

What's the total opportunity?

The projected "cash value" of $50 million or more for the nine identified projects would suggest that Macy's could reap a windfall of perhaps $200 million if Brookfield ultimately decides to go forward with development projects on two-thirds of the 50 sites it is studying. Yet that estimate dramatically understates the ultimate value-creation potential for Macy's.

First, it seems likely that the amount of time needed to create a pre-development plan would vary based on the complexity of the potential project. As a result, the highest-potential sites probably aren't included in the nine properties for which Macy's and Brookfield have agreed to terms.

(A potential counterargument is that Brookfield Asset Management may have started by looking at the most valuable properties. However, the fact that six of the nine proposed deals are small-scale densification projects isn't really consistent with this explanation.)

Second, Macy's has the opportunity to form a joint venture with Brookfield for each property it contributes. By foregoing an immediate cash payout and sharing some of the risk, it would potentially be able to capture more of the upside from each real estate project.

Third, increasing the density of development near Macy's stores will boost store traffic. This is particularly true for the proposed mixed-use development. Still, just adding a few restaurants near a Macy's store could have a meaningful impact on that location's profitability.

Fourth, Macy's has the option to add more properties to the alliance. It owns or ground-leases hundreds of stores. Thus, Brookfield Asset Management is only examining a small proportion of the potential value-creation opportunities so far.

This will take time

In the long run, it wouldn't be surprising if Macy's generates more than $1 billion in incremental value from its partnership with Brookfield Asset Management (or similar arrangements with other partners). However, investors will have to be very patient.

Macy's management warned that it will take Brookfield at least a year to get the approvals it needs to move forward with the nine development projects it has proposed. That means Macy's won't get any cash proceeds until at least 2019. If it decides to form joint ventures for any of the properties, the payoff wouldn't come for years.

Luckily, sales and earnings trends are improving for Macy's core retail business. Additionally, Macy's dividend carries a generous yield of roughly 5% -- and the company has plenty of free cash flow left for debt reduction. As a result, I intend to keep Macy's as one of the largest holdings in my portfolio.