GT Mall: Bankruptcy won't affect shoppers

Garfield Township

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Jan-Michael Stump

April 17, 2009

FROM STAFF AND WIRE REPORTS The Record Eagle Fri Apr 17, 2009, 07:10 AM EDT

In its drive to become the second-largest owner of shopping malls in the nation, General Growth Properties Inc. racked up $27 billion in debt. At around 2 a.m. in Chicago on Thursday morning, the retail giant buckled under the weight.

After months of tense negotiations with tightfisted lenders, General Growth filed for Chapter 11 bankruptcy.

General Growth, which owns more than 200 malls including the Grand Traverse Mall in Garfield Township, said shoppers at its malls will not be affected by its bankruptcy filing. The real estate investment trust owns or manages a dozen mall properties in Michigan, including shopping malls in Bay City, Grand Rapids, Jackson and Lansing.

The Chicago-based company is paying the price for its aggressive expansion at the height of the real estate boom. General Growth, like many homeowners during the frenzy, bought several properties at top dollar and now is finding lenders unwilling to refinance.

Plans for the Grand Traverse Mall were unveiled in 1989 and General Growth broke ground on the development a year later. It was built on a 70-acre hayfield in Garfield Township and spanned around 660,000 square feet, with an original construction cost of around $60 million.

But construction was temporarily halted because of a lawsuit filed against the project by the Northern Michigan Environmental Action Council in June of 1990. Circuit Judge Philip Rodgers dismissed some of the lawsuit in June of 1991, and the remaining counts were settled out of court. The mall finally opened in March of 1992, 19 months after the groundbreaking.

Rolling over financing for commercial properties is common in the industry, but when lenders all but stopped making loans last fall, it left General Growth without recourse to make its debt payments.

"While we have worked tirelessly in the past several months to address our maturing debts, the collapse of the credit markets has made it impossible for us to refinance maturing debt outside of Chapter 11," Chief Executive Adam Metz said in a statement.

By placing its fate in the hands of a bankruptcy judge, General Growth hopes to cast off its debt and emerge with its portfolio of landmark retail centers intact, although there are no guarantees the company will be able to do so.

"We will not have to sell substantial amounts of our iconic assets," Tom Nolan, president and chief operating officer, said during a conference call with reporters. "We believe we can maintain those."

But should General Growth have to sell-off even 10 percent of its shopping centers, that could depress overall mall property prices, said Chris Stanley, a research associate covering commercial real estate for Reis Inc.

"Mall owners are scared and don't really want this to happen, so I think (General Growth) will try to avoid that route as much as possible," he said.

Nolan acknowledged that the company took on significant amounts of debt to finance its expansion efforts, but stressed that the company didn't run into trouble trying to refinance until last fall.

Hessam Nadji, managing director at Marcus & Millichap Real Estate Investment Services, said he doesn't see much fallout from the General Growth bankruptcy because its debt problems were well known.

"I don't think it will have an immediate ripple effect," he said.

But tight credit markets could force other major commercial real estate owners into bankruptcy, he said.

"We could see other examples of that," Nadji said.

Chapter 11 protection typically allows a company to hold off creditors and operate as normal while it develops a financial reorganization plan.

The company had about $29.6 billion in assets at the end of last year, according to documents filed with the U.S. Bankruptcy Court in the Southern District of New York.

The company noted that some subsidiaries, including its third party management business and joint ventures, were not part of the bankruptcy petition.

The move by General Growth had been widely anticipated since the fall, when the company warned it might have to seek bankruptcy protection if it didn't get lenders to rework its debt terms. Efforts to negotiate with its creditors ultimately fell short late last month.

"While we got a majority of the bondholders to agree, we didn't get the levels we were looking for," Nolan said.

General Growth said it intends to reorganize with the aim of cutting its corporate debt and extending the terms of its mortgage maturities. The company has a financing commitment from Pershing Square Capital Management of about $375 million to use to operate during the bankruptcy process.

Nolan said the bankruptcy process wouldn't lead to large cuts in the company's work force of more than 3,500 employees.

Last month, General Growth said it got lenders to waive default on a $2.58 billion credit agreement until the end of the year.

In February, the company reported lower-than-expected fourth-quarter funds from operations and a dip in revenue amid weaker retail rents.

The company has suspended its dividend, halted or slowed nearly all development projects and cut its work force by more than 20 percent. It also has sold some of its non-mall assets.

GT Mall

What: Grand Traverse Mall
Owner: General Growth Properties
Where: 3200 South Airport Road West, Garfield Township
Anchor stores: Macy's, Target, J.C. Penney
Number of retail stores: 100-plus
Size: 590,000 square feet of leasable space, plus 2,800 parking spaces
Year opened: 1992