There is more pain to go around. In October, 14% of US malls were in arrears on their mortgages, nearly double the highest level after the financial crisis, according to an analysis of mortgage bonds by research firm Trepp.
Some of CBL’s peers, such as Taubman Centers Inc. and Washington Prime Group Inc., have already worked to get lenders to ease the terms of their credit agreements. They asked bond investors to relax requirements such as the minimum amount of income they need from their borrowings, according to regulatory documents.
Shopping centers are financed by a dizzying array of bonds, loans and equity, including debt obtained through the commercial mortgage-backed securities market. Many properties are at least partly owned by one or more of the department stores that anchor them. The types of debt incurred by malls have only become more complex over the past decade.
Jeffrey O’Neale, a partner in the real estate practice at the Chicago law firm Mayer Brown, likened the drama of most malls to a family.
“It was easier to make decisions in my house when it was just me,” O’Neale said. “When I’m with my wife, and my brother and sister-in-law are in town, it’s a different story,” he says. “It’s the mix of a lot of interested parties that makes it so much more complex.”
Some malls are simply trying to reduce their debt levels or ease restrictions on their borrowing, when they may need to make more drastic changes that can only happen in the event of bankruptcy, O said. ‘Neale.
“Traffic is down and revenue is down. Some of these malls will not succeed with the current business model,” he said. “No amount of restructuring can change that.”
Properties with lower sales or more remote locations, often referred to as Class B or C malls, could be more at risk. There are more than 350 malls in the United States that are classified as Category B malls, according to real estate research firm Green Street Advisors, and more than 325 that are Class C.
Companies that only own a handful of poorly performing malls can often simply sell the properties to lenders. Individual CMBS shopping centers are generally financed without recourse, which means that creditors cannot ask the parent company to repay the loans.
But the problem for mall owners is that the pain is so widespread across the country. Malls aren’t just hurting in Houston or Los Angeles, they’re struggling all over the place. This can put the whole company at risk.
Among commercial properties with delinquent mortgages, the appraised value of space had fallen an average of 34% since the time the loan was made, according to an analysis of commercial mortgage bond data through October from Wells. Fargo & Co.
For example, Park Plaza, a CBL mall in Little Rock, Arkansas, was valued at $33.1 million in August, down more than 75% from its 2011 valuation of $142 million. CBL defaulted on the debt and “intends to return the collateral to the lender,” according to a Sept. 17 note from DBRS Morningstar ratings analysts. One potentially complicating factor for mall options: Dillard’s Inc., the department store mainstay, owns about half of the property’s retail space. Dillard declined to comment.
With these steep declines in value, owners would take a huge hit if they sold assets. The declines also complicate efforts to secure new financing or change debt terms, said Rhona Kisch, who leads the real estate practice group at law firm Seward & Kissel. Kisch is co-leading a task force the law firm has established on commercial leases and loan restructuring in response to the pandemic.
“It’s hard to restructure in an environment where you don’t know the value of your assets,” Kisch said. “We are in a moment of absolute transition and we do not necessarily know where things are going.”
This does not mean that it is impossible to negotiate with lenders and restructure the debt out of court. Parties are encouraged to avoid the costs of the bankruptcy process. Washington Prime told investors in August that it had enough flexibility to avoid breaching the terms of its credit lines and bonds.
Even with the right incentives for all parties, mall owners’ balance sheets have become more complicated as owners have used an increasing amount of direct loans and unsecured debt over the past decade. While CMBS once made up the majority of retail commercial real estate debt financing, securities now account for roughly half of borrowing.
Direct lenders often provide three-year loans with the possibility of an extension at the end, while CMBSs usually mature in almost 10 years. This difference allows lenders to make faster and more aggressive demands on borrowers.
Between deadbeat tenants, falling asset values and complicated balance sheets, it will be difficult to avoid bankruptcy court, the lawyers said.
“Commercial real estate issues are looming very close on the horizon,” said John Sparacino, bankruptcy attorney at McKool Smith. “I really don’t think I would want to be a landlord right now – and I certainly wouldn’t want to be a lender.”