Becoming a prolific jingle-mailer to dump malls. Holders of CMBS eat the losses.
By Wolf Richter for WOLF STREET.
Deutsche Bank this week foreclosed on a $177.5 million mall mortgage. The mortgage had been securitized and spread over two commercial mortgage-backed securities (CMBS) in 2012. The collateral is 560,000 square feet of retail space at the 1.2 million square-foot Town Center at Cobb, in Kennesaw, Cobb County, Georgia. The regional mall has over 170 stores, including a Macy’s, a JCPenney, and a Belk (just filed for bankruptcy).
The mall was owned by Simon Property Group, the largest mall landlord and mall REIT [SPG] in America, which, in one of its acts of jingle mail, had returned the mall to the lenders.
“Jingle mail” was engraved into the American lexicon during the housing bust, when homeowners voluntarily turned their homes over to lenders, presumably by mailing them the house keys. Most home mortgages are recourse loans, and banks can drag the homeowner to court over any deficiency after the foreclosure sale – except in the 12 “non-recourse” states. But commercial real estate mortgages are non-recourse; all the lender gets is the collateral, and the owner walks away.
At the time of securitization in 2012, the collateral for the loan was valued at $322 million, according to Trepp, a data firm that tracks CMBS. And everything was hunky-dory. In October 2020, the value was slashed by 60% to $130.4 million.
The legal notice by Deutsche Bank of the foreclosure sale, reported by the Marietta Daily Journal on January 27, specified that the mall would be sold on February 2 “at public outcry to the highest bidder for cash before the Courthouse door of Cobb County.” The opening bid would be $130.4 million.
And this is what happened on February 2, according to the Marietta Daily Journal:
[Attorney Matthew Norton of the law firm Polsinelli] “read the legal notice in full on the southern steps of the county’s justice center, a recitation that took over half an hour to complete. The bargain hunters who attended the morning’s residential foreclosure auctions left hours before, leaving Norton to conduct the “public outcry” on the courthouse steps across the street from an empty Flournoy Park.
And there were no bids. So Deutsche Bank and other CMBS holders are now the proud owners of the mall. Simon Property Group has washed its hands off it, letting the CMBS holders eat the losses. And the new owners, Deutsche Bank and holders of CMBS, will now get to manage the mall.
The foreclosed mortgage is spread over two CMBS deals: a $115.4 million portion makes up 12.8% of WFRBS 2012-C7 and a $62.1 million portion makes up 6.8% of WFRBS 2012-C8, according to Trepp.
The brick-and-mortar meltdown, brought on by the switch to ecommerce which hit department stores particularly hard and has been wiping them out one after the other, predated the Pandemic by years. Sales at department stores, which form the critical anchors of malls, peaked in 2000 and have since plunged by 57%, despite 20 years of inflation and population growth.
Even before the Pandemic, Simon attempted to lease out portions of the Town Center at Cobb mall as office space to bring in some cash, according to a source cited by the Marietta Daily Journal.
And even before the Pandemic, Simon has shed malls via jingle mail, letting lenders take the losses, including the 1-million square foot Independence Center in a suburb of Kansas City, MO, in 2019. When the mall was sold in a foreclosure sale, the $200-million CMBS backed by the mall generated a loss of $149.7 million – a loss of 75%! – “the largest loss ever incurred by a retail CMBS loan,” according to Trepp at the time.
Simon Property Group also wants to turn its 426,761-square-foot Springfield Plaza in Springfield, MA, over to lenders and walk away from the $28.3 million mortgage, according to special servicer notes reported by Trepp last August. When the mortgage was securitized in 2013, the property was valued at $39 million.
In addition, according to Kroll Bond Rating Agency, cited by MarketWatch in November, Simon was planning to send jingle mail of four other malls to lenders and walk away from $411 million in mortgage debt backed by those malls: the Mall at Tuttle Crossing in Dublin, Ohio; Southridge Mall in Greendale, Wisconsin; Montgomery Mall in North Wales, Pennsylvania, and Crystal Mall in Waterford, Connecticut.
On its website, Simon has a more or less flashy webpage for each of its malls. But the doomed jingle-mail malls eventually get their webpages on Simon’s website taken down, and the old links, such as this one for the Mall at Tuttle Crossing (https://www.simon.com/mall/the-mall-at-tuttle-crossing/about), are redirected to a generic “oops” page — a form of accidental SPG jingle-mail humor.
Simon together with the second largest mall landlord Brookfield Property Partners have acquired J.C. Penney’s stores out of bankruptcy, along with other stores. J.C. Penney stores are anchor stores. When an anchor store closes, in this environment when no other department store will jump in behind it to fill the space, the mall spirals down quickly, as foot traffic to the other stores dies down further, and those stores close too.
By controlling the J.C. Penney anchor stores, and other key stores, Simon slows down the decline of its malls and gains some time – which makes sense. And if the math doesn’t work out, jingle mail is sent to the lenders.
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