COVER STORY, JUNE 2009

CHAPTER 11 REVITALIZATION
Frozen credit markets, economy force firms to restructure.
Jon Ross

On April 16, Chicago-based General Growth Properties (GGP) filed for Chapter 11 bankruptcy protection. While not every asset in the retailer’s portfolio of more than 200 malls is part of the restructuring plan, more than 40 malls in the Southeast were affected by the decision. Six days later, the developer Opus South, which has offices in Tampa, Florida, and Atlanta, followed suit, shouldering a burden of maturing construction loans totaling $324 million.

An underwhelming economic outlook and an increasingly insurmountable amount of maturing loans have forced the companies to seek help. These two casualties of the recession highlight a growing concern that more developers and owners will face similar issues in the coming months. Obtaining financing for GGP’s portfolio had become a nearly impossible task. Bernie Haddigan, director of Marcus & Millichap’s national retail group, predicts that more trouble is on the horizon for large real estate investment trusts. “Looking forward 6 to 12 months, there may be other REITs out there that are also potentially at risk for bankruptcies,” he says.

Dealing exclusively in the retail industry is no longer for the faint of heart. With consumer spending on the decline, it’s easily the most unstable of the commercial property types. Starting last summer, major players in the retail sector started whispering about coming problems for GGP. “As we went through the year, [the Chapter 11 filing] became a virtual certainty,” Haddigan says. “Most people in the industry assumed that it wasn’t a question of if they were going to go into bankruptcy, but when.”

A variety of factors led to GGP’s need to sell off assets. The company used credit facilities in order to spread its influence throughout the Southeast, but when banks stopped lending, this plan fell apart. “A landlord like GGP, they’re getting hit on both sides from weakening store sales and weakening tenants,” Haddigan says. “They’ve got a very high quality portfolio, they’ve been pretty effective in continually growing that firm over the past 50 years, but they hit a huge economic pothole with the disappearance of liquidity in the marketplace.”

In 2004, the firm acquired Columbia, Maryland-based Rouse Company, adding 37 regional malls to the growing General Growth portfolio. This purchase, says Tom Maddux of NAI/KLNB in Baltimore, ultimately aggravated GGP’s problems. The 1.2 million-square-foot White Marsh Mall in Baltimore and the 530,00-square-foot Gateway Overlook in Columbia are just two former Rouse malls targeted for reorganization. “It was inevitable for GGP to get rid of those properties,” Maddux says. “I don’t think they were suited to owning those for the long term.”

Regency Square Mall in Jacksonville, Florida.

Notable Southeast malls subject to restructuring include the 1.39 million-square-foot Regency Center Mall in Jacksonville, Florida; the 1.17 million-square-foot Lynnhaven Mall in Virginia Beach, Virginia; and the 1.14 million-square-foot Four Seasons Town Centre in Greensboro, North Carolina. While the 1.37 million-square-foot North Point Mall in Alpharetta, Georgia, was included in the decision, two of the GGP’s biggest Atlanta-area malls — Cumberland Mall and Perimeter Mall — were spared. Eighteen additional assets in the Southeast were not included in the bankruptcy, a message to the industry that GGP is still in the game. “Their intention is to sell as little as possible,” Haddigan says. “I don’t know how practical that’s going to be. It really is going to be a question of how they restructure their debt and equity pieces.” The company’s smaller malls may generate interest from other retail outlets. Maddux says the majority of Rouse’s former holdings in Maryland will be sold. “Most of these properties will sell to smaller local and regional developers who understand them,” he says.

Retailers, brokers and owners aren’t really expecting GGP to leave the industry, but it’s obvious the company is in a perilous situation. “People might say that if GGP can go bankrupt, a lot of other people can go bankrupt,” Haddigan says. “Most people think they’re going to come back. They might come back slightly pared down, but in the long run, GGP is not going to go away.”

Instead of reorganizing in the hope of starting fresh, Opus South, an independent operating company affiliated with Opus Corporation, is shutting down its operations. In March 2008, the company moved its headquarters from Tampa to Atlanta. Within 1 year, it had laid off the heads of both offices and the majority of its employees. Now, only 25 workers spread across the two offices remain in their jobs to help with the dissolution of the company. This chain of events seemed ominous, but Opus South’s decision to leave the market still came as a surprise. “It was a shock. Our perception of Opus South was of a very highly successful operation,” says Randy Smith of GVA Advantis in Tampa. “You knew something was in the works, just from an outside perspective, but we didn’t realize that it was going to be that drastic.”

All the reasons for leaving the commercial real estate business were present, however. Opus South develops a wide range of property types, from retail and office to industrial, but the real problem arose from its condominium holdings. The company has a massive amount of loans coming due in 2010, including four condominium loans totaling more than $103.8 million. Many of the units in the four Florida condominiums remain vacant. Without the help of lenders, it’s nearly impossible for Opus South to stay together. “For Opus in general, we’ve been in business for 56 years, and we’ve not experienced such a sharp decline in commercial real estate development or seen the complete shutdown of capital and refinancing,” says Winston Hewitt of Opus Corporation.

The quality of Opus South’s portfolio and the firm’s popularity in the market has Smith thinking that a resurgence may be down the road. “Opus is still around, and they could certainly come back into the market once conditions are favorable,” he says. If Opus South truly stays out of the market for the long run, he adds, there is a huge opportunity for new developers to move into the Florida market. “Tampa’s had a pretty varied development community here. There’s certainly a variety of development partners in our market that could step in as the market improves.”

Opus South’s exit is indicative of what has been happening all over the country. As with GGP and many other smaller companies that have been forced into bankruptcy by the recession, Opus South was a strong company that simply couldn’t find much-needed capital. Now that major market players have faced multiple challenges, it’s hard to ultimately know which firms will successfully navigate the recession.  “There could be other repercussions in the market,” Smith says. “These are all good companies, good companies that you wouldn’t ever anticipate having a problem.”

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