Creditors rule out another Simon Property Group mall, face massive loss
As the largest mall owner in the United States sheds its malls, CMBS holders, such as bond funds and pension funds, are taking the losses.
By Wolf Richter for WOLF STREET.
After Simon Property Group, the largest mall owner in the United States [SPG], stopped making monthly interest payments in June 2020 on a $ 100 million loan guaranteed by the 1.1 million square foot Montgomery Shopping Center in North Wales, Pennsylvania, the slow the seizure has started. On August 31, a formal notice was issued, followed by a notice of acceleration of the loan a month later. Now it’s over.
Creditors seized the mall and obtained a judgment of $ 119 million, including principal, unpaid interest and expenses, against the Simon entity that owns the mall, Mall at Montgomery LP, according to court documents, reported by Philadelphia Business Journal.
Simon Property Group got rid of the mall at the expense of CMBS investors – one of the many malls Simon has taken down in recent years to deal with the brick and mortar collapse that preceded the multi-year pandemic. Every mall Simon had abandoned produced big haircuts for creditors – namely investors in commercial mortgage backed securities (CMBS).
The initial loan of $ 100 million over 10 years was issued in April 2014 by the Royal Bank of Scotland which split the loan into two parts of $ 54 million and $ 46 million which were securitized in May 2014 in CMBS , with Wells Fargo as the master maintenance worker.
At the time, CMBS investors were happy with their deal. The mall, which had five mainstays and was built in 1977, had been renovated in 2008 and 2014. Just before the securitization, it was valued at $ 195 million. With a $ 195 million guarantee backed by a $ 100 million loan, what could go wrong? Nothing, of course.
Last year, the special department that then ran CMBS had the mall re-evaluated, and it came in at $ 61 million, down 69% from the original valuation.
At that point, it became clear that Simon would be moving away from the mall. Why pay interest on a $ 100 million loan for a property that was worth – perhaps at best – $ 61 million?
The process of extortion of creditors has become quite routine. These CMBS are in some pension funds or bond funds, whatever.
In November 2020, the Kroll Bond rating agency put Montgomery Mall on a list of four malls Simon would likely return to lenders, totaling $ 411 million in mortgage debt. The other three malls were the Tuttle Crossing Mall in Dublin, Ohio; Southridge Mall in Greendale, Wisconsin; and the Crystal Mall in Waterford, Connecticut.
In February 2021, Simon got rid of another mall this way, when Deutsche Bank foreclosed on a $ 178 million mortgage, spread over two CMBSs, backed by 560,000 square feet of retail space at the 1.2 million square foot downtown retail in Cobb, Kennesaw. , Cobb County, Georgia. At the time of securitization in 2012, the collateral was valued at $ 322 million. In October 2020, after Simon’s default, the value was reduced by 60% to $ 130 million. When Deutsche Bank held a foreclosure sale on February 2, with an opening offer of $ 130 million, it received no offers.
Simon’s $ 28 million mortgage, which backs onto the 426,761 square foot Springfield Plaza in Springfield, MA, is also among the potential foreclosures, according to special memos reported in August 2020. When the mortgage was Securitized in 2013, the property was valued at $ 39 million.
It started long before the pandemic: In 2019, as part of the steady brick and mortar collapse that has been going on for years, Simon abandoned the 1 million square foot Independence Center in a suburb of Kansas City, Missouri via foreclosure. When the mall was sold in a foreclosure sale in April 2019, the $ 200 million CMBS backed by the mall generated a 75% loss for CMBS investors.
In addition to the process of returning shopping centers to creditors, three shopping center REITs have filed for bankruptcy since November 2020: last month it was the spin-off of Simon Property, Washington Prime Group, following in the footsteps of two Shopping Center REITs last November, CBL & Associates Properties. and Pennsylvania Real Estate Investment Trust.
Among the shopping malls that are not returned to creditors are those in expensive housing markets, where the land itself has a lot of value and where the vast parking lots, parking garages and some or all of the mall structures can be razed and refurbished. in apartment and condo buildings, with maybe a pinch of office buildings. It’s now underway in many cities, including San Francisco, and it’s often a welcome change.
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