Shopping centers across the country still face significant financial struggles as a consequence of the recent recession, the increasing market share of online retailers, and the relatively high price of gasoline.
The drop in traditional retail shopping in the last few years has caused the bankruptcy and liquidation of many retail stores, including several big-box chains, leaving shopping malls struggling to fill vacancies.
Source: Colliers International
According to a recent report published by Green Street Advisors Inc. and an article titled "Distressing Signs for Maryland Mall," which was published in The Wall Street Journal, six of the largest mall owners in the country have forfeited at least 20 malls to lenders or sold them under pressure since 2009.
If you are a lender foreclosing a mall or shopping center, you will often face unique issues not presented by other types of property. Failure to anticipate these issues could cause problems, either during the foreclosure process or when marketing the center for resale following foreclosure.
To that end, several members of the Distressed Real Estate Solutions Practice Group at the Orlando-based law firm of Lowndes, Drosdick, Doster, Kantor & Reed, P.A. (specializing in such areas as creditor's rights and bankruptcy, commercial foreclosures and workouts, land use and zoning, real estate development and finance, and commercial lending) have compiled these top 6 tips to consider when foreclosing on a mall or shopping center.
1. Rents — Send the borrower a written notice demanding the rents as soon as possible after a default occurs under the loan. Under Florida statutes, for example, this demand triggers the lender's interest in the rents and the lender's right to control the use of the rents.
2. Tenants and rent roll — Review the current rent roll to determine if you wish to foreclose and evict any existing tenants, perhaps because their rent is below market rates, or they are significantly delinquent in paying their rent, or they are otherwise undesirable tenants. This can be accomplished if a tenant's lease was signed after your mortgage was recorded, or was subordinated to the mortgage.
Some tenants' leases include provisions allowing the tenant to terminate if an anchor tenant's store closes. Many anchor tenants' leases preclude competing uses in the shopping center. An analysis of both the rent roll and the tenants' leases will enable you to make informed decisions during the foreclosure process.
If you cannot obtain a current rent roll, leases or other necessary information from the borrower, you can file a discovery request for it when the foreclosure lawsuit commences.
3. Due diligence — Assemble evidence to present to the court for the possible appointment of a receiver. For example, take pictures of the condition of the shopping center and note where it may be in disrepair. Document evidence of any code violations and investigate whether adequate insurance exists or should be obtained.
Longer term, once a receiver is in place, think about what a future purchaser will investigate during its due diligence period, and whether there is anything you can do to limit a future purchaser's concerns and thereby enhance the resale value of the property.
For example, there may be deferred maintenance issues involving the retail building or common areas. These can detract from the center's appearance, cause the loss of desirable tenants and reduce the center's value to a potential purchaser.
Code violations may result in accrual of daily fines. Sometimes such fines are secured by county or municipal liens that are superior to your mortgage, in which case it may be worthwhile for you to cure the violations, advance the funds needed to pay the fines and add the amount of the advance to the debt being foreclosed.
While considering or conducting a foreclosure, investigate the center in a manner similar to a prospective purchaser, with a view toward solving as many problems during the foreclosure as is economically feasible.
4. Entitlements — If the center is not fully developed, or if it is slated for redevelopment, determine what development entitlements exist and whether they "run with the title" to the property (meaning that a new owner will acquire them automatically when they acquire the property), or can be acquired as part of the foreclosure.
Properties within a Development of Regional Impact (DRI) zone, governed by Chapter 360 of the Florida statutes or governed by a Planned Development (PD) zoning ordinance, can present unique challenges.
Sometimes borrowers who develop large tracts of land obtain entitlements such as impact fee credits in the names of an affiliate as master developer. In such instances, entitlements may not be included in the description of the mortgaged property, and they don't necessarily run with the title to the property that is being foreclosed.
In addition, if the property is only a portion of the larger development, the master developer may have retained approval rights over redevelopment. These issues frequently take time to address, so it can be advantageous to do so early on.
If you wait until after the foreclosure is complete and you are the owner of the property, these issues may be more costly to address. You may end up carrying the property for longer, or taking a large price reduction when you resell it.
5. Status of title — In addition to performing the routine title search needed to foreclose junior liens and encumbrances, determine whether the center relies on any privately owned off-site improvements to provide access, drainage, parking or utilities to the mortgaged property. There should be appurtenant easements recorded for these purposes that benefit the center.
It is not uncommon for shopping centers to share such infrastructure with outparcels that are separately owned. In the economic boom that preceded the recession, it is surprising how many mortgage loans were made without lenders verifying that all necessary beneficial easements were in place and insured as part of the title to the mortgaged property.
Review any restrictive covenants, development agreements and similar documents affecting the title to the property to determine if there are any violations or other issues presented that can be cured. You can bet that a prospective purchaser will be doing so after the foreclosure.
Addressing these potential issues at the commencement of a foreclosure provides more time to solve them. A prospective purchaser is sure to pay less for the property if they have to fix these issues.
6.Taxes and Assessments — Unpaid real estate taxes and Community Development District (CDD) assessments can frequently be issues with distressed property. By state law, they constitute a first lien on the property and will survive a mortgage foreclosure (meaning that the purchaser will have to pay them after acquiring the property if they want to keep it).
Generally speaking, property that is subject to real estate taxes past due can be sold after two years following the date that the taxes became delinquent, and such a tax sale will extinguish the lien of any mortgage on the property. It is important, therefore, to keep track of the status of real estate taxes so that you preserve your ability to pay them to avoid the extinguishment of your mortgage.
If a center is subject to high amounts of past due CDD assessments, it may be that the value of the collateral after taking past due and future CDD assessments into account does not justify the lender acquiring that collateral.
In such a case, the lender may be able to negotiate a settlement with the CDD, whereby the CDD's bondholders (who funded the CDD's improvements by purchasing its bonds) accept less than or postpone what they are owed to pay down the bonds.
A current appraisal that takes CDD assessments into account can be important in assessing the lender's options.
Addressing these potential issues early on can maximize the resale value of the shopping center and shorten the time period required to dispose of your interest in the mortgaged property.
This will be beneficial whether you are selling your loan documents or foreclosure judgment, or completing the foreclosure and reselling the property. As the old adage goes, "a stitch in time saves nine."
A lawyer or law firm having expertise in these matters may be able to add significant resale value to a distressed shopping center.
Published in REBusinessOnline
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.