Mall of America: Hurdles to mall growth rise

Even if the owners of the Mall of America succeed this year in securing public financing to help fund a $2 billion expansion, they face other considerable hurdles in completing the project as proposed.

The nationwide credit squeeze has raised borrowing costs for developers and increased the amount of equity they're required to put into projects. As a result, some developments are being scaled back, postponed or canceled.

Twin Cities developer Steve Minn has firsthand experience with the sea change in credit markets. His firm, Lupe Development Partners, recently canceled a $100 million retail, office and hotel project planned for Minneapolis' Warehouse District. Minn said three New York lending syndicates initially competed to finance the project until late last year, when the subprime lending debacle triggered the credit crunch.

"It was pretty much like a switch got flipped, and people said they were no longer underwriting projects of this type," he said.

A recent report by McGraw-Hill Construction noted a continuing drop this year in commercial building, including hotels and stores. Both segments are part of the Bloomington mall's expansion plans. Tighter credit markets are part of the reason, as well as the sluggish economy, which is prompting several national retailers to close stores or curtail expansion.

Mall officials point out that conditions could be better by the time the expansion is complete. The project is estimated to take almost four years to build.

Ed Padilla, CEO of Bloomington-based NorthMarq Capital, said the mall expansion could get financed, but that a lending arrangement would likely be more complicated than in the past. A consortium of lenders rather than a single financial institution probably would divide up the loan amount, he said.

Padilla also said the mall could attract significant interest from foreign banks and financial institutions, which have become increasingly active in the U.S. commercial real estate market. Part of the reason is the strength of their currencies against the dollar, making investments in this country a bargain.

Triple Five Group, the Canadian company headed by the Ghermezian brothers that owns the mall, has said it won't proceed unless it gets about $350 million in public financing for a parking ramp and infrastucture improvements that are part of the project.

The remaining $1.65 billion cost of the expansion would be privately financed. About $650 million of that would be handled by co-developers of some anchor tenants, including a Bass Pro sporting goods store, a Marriott Renaissance Hotel and a Great Wolf Lodge with an indoor water park.

The other $1 billion would be handled by Triple Five through a combination of equity and debt. Mall officials say that in today's credit markets, lenders will probably require an equity investment of about $300 million, compared with just $50 million a year ago. The increased equity contribution is slightly more than the $200 million in public financing Triple Five is seeking for the new parking ramp.

Prospects for partners?

Bill Griffith, an attorney who represents the mall, said that despite the higher equity requirements, it's unlikely Triple Five will take on equity partners. "But I wouldn't rule anything out," he added.

Twenty years ago, Triple Five did take on partners for the mall's first phase because it was unable to line up about $600 million in permanent financing on its own. It didn't become the mall's sole owner until 2006, when it paid about $1 billion to buy out the interests of Simon Property Group and Teachers Insurance and Annuity (TIAA-CREF).

The buyout settled a long-standing legal dispute that contributed to the Ghermezians' reputation as sometimes difficult partners -- something that could pose problems if Triple Five needed to find equity investors for Phase II, according to one local real estate investment manager.

In addition to Bass Pro, Marriott and Great Wolf, the expansion would house more than 250 tenants in more than 1.4 million square feet of space. Griffith said there has been considerable interest from prospective tenants, but said the mall probably wouldn't pursue firm lease agreements until the public financing is secured.

Lenders would likely require a significant amount of preleased space in addition to a substantial equity contribution before agreeing to finance this type of project, according to Whitney Peyton, senior managing director for the Twin Cities office of CB Richard Ellis.

The number and types of tenants also could have a significant effect on lenders' terms, Padilla said. "Some [financing] sources will do retail but don't want anything in the hospitality industry. It can make things complicated for a multifaceted project," he said.

Finding new tenants for the expansion could be a challenge, according to Richard Grones, head of Cambridge Commercial Realty in Edina. John Johansson, senior vice president of retail at Bloomington-based Welsh Companies, agreed, saying there's a finite number of retail concepts that would be new and unique to the local market. "It can't be just another Macy's," he said.

The existing mall can boast an occupancy rate of around 95 percent but over the years has struggled to fill space on its third level. Earlier this year it announced nine new tenants, including a Best Buy that'll occupy the former Sports Authority store space on the third floor.

Even so, the mall's pitch for an expansion is coming at time when leases for 10.5 percent of existing retail space that account for nearly 11 percent of its total base rent are expiring, according to Securities and Exchange Commission (SEC) documents filed last year in connection with a loan from GE Commercial Corp. The documents said Triple Five used the $104 million loan to help it buy out the interests of former partners Simon and Teachers.

The SEC filing also provided some financial information about the mall typically not made available by privately held Triple Five. Its net operating income as of Aug. 31, 2006 was $59.4 million, about 1.4 percent less than a year earlier. Griffith declined to provide updated figures, but earlier this year mall officials said sales in 2007 rose about 7 percent.

Waiting to build roads

Bills now making their way through the Legislature don't require the mall to guarantee it will build the expansion exactly as it now is proposed. Griffith said Triple Five has no plans to change the project unless it doesn't succeed in securing public financing. The closings for the public and private financing would occur at the same time, he said.

He also said the mall's owners went through due diligence with the Bloomington Port Authority in the first phase and are doing that again in connection with the expansion. The process is designed to assure public officials that the mall's owners can deliver the project as promised.

Jill Hutmacher, acting director of the Port Authority, said no work on publicly financed infrastructure would go ahead without proof of Triple Five's financial wherewithal and evidence of private financing.

"You won't see anyone building roads without that," she said.

Susan Feyder • 612-673-1723