Monday, June 01, 2020

MALL OF AMERICA FAILS TO PAY ITS MORTGAGE - IS THIS A SIGN OF THINGS TO COME FOR OTHER MALLS AND SHOPPING CENTERS?

By Bill Siegel

 
People talk about retail tenants being in financial disarray and filing bankruptcy, but what about our malls and shopping centers?  They are hurting, too.  If their tenants are not paying  rent, taxes, insurance, and utilities, this impacts landlords, who are also struggling to meet their financial obligations, including their mortgages.
 
 
Tenant Decline and Vacant Space
 
The percentage of the retail loans that are delinquent continues to grow and will only get worse.  It is estimated that 50% of department stores in malls will close by 2021.  Department stores represent about 60% of the anchor space currently in malls today.  Already J.C Penny and Neiman Marcus have filed bankruptcy.  Nordstrom and Macy’s are facing financial issues as well.  And, though Covid-19 can be blamed for the store closures this Spring, the problems run deeper because many of these department stores and retail outlets are over leveraged and have been slow to adjust to the changing times. 
 
Though bankruptcy will be used to sell assets, reject under-performing leases, and/or readjust over leveraged balances sheets, with debt being converted to equity, the old ways of doing business are gone and major adjustments need to be made -- including reduction of square footage of current retail space and reduction of inventory with improved distribution centers.  Some retail tenants have co-tenancy clauses that give them the right to rent relief or the right to break leases early if the anchor space remains vacant.  Thus, vacant space and/or reduced or delinquent rent translates into delinquent mall and shopping center loans.
 
 
Mall of America
 
One has to look no further than the Mall of America in Minneapolis, which has failed to pay its mortgage the last two months.  The Mall of America is the largest shopping center in the country with a $1.4 billion mortgage and 5.6 million sq. ft. which includes more than 500 shops, 50 restaurants, an aquarium, a movie theater, and an indoor theme park.  The mall has been closed since mid-March and though it notified lenders of its financial hardships, it has not yet sought a forbearance. 
 
 
Broader Contagion?
 
Chances are, without federal financial assistance, mall and shopping center owners will be unable to pay their mortgages resulting in  mortgage forbearance, foreclosure, or bankruptcy.  The domino effect of foreclosures and/or bankruptcies extends to the decline of properties values for the mall and shopping center and also for the surrounding area, which will then adversely affect the amount of property taxes collected by local and state governments, which then adversely affects our schools and services provided by local governments including police and fire, etc.
 
At the end of the day, the message is bigger than the relationship between a retail tenant and a mall/shopping center.  There are short term and long-term consequences that will play out over time.  For there to be a win-win situation, lenders, landlords, tenants, and local governments will need to work together to avoid a local retail/public apocalypse.   
 

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