Over the past two years, Jones Lang LaSalle Retail, a giant in the third-party management business, has encountered a wide range of distressed assets. From April 2009 to April 2010, its U.S. retail portfolio under management rose from 57.8 million square feet to 79.7 million square feet, nearly a 38 percent increase.
Because of its long-term expertise and unique niche in management of regional malls, Jones Lang LaSalle Retail often is appointed by the courts as a receiver for retail properties whose owners have defaulted on their loans. In such situations the original owners often have been running short on funds for some time, and in some cases they may have neglected various property management duties.
If the lender wants to eventually sell the center and believes that its value can be improved through additional investment, Jones Lang LaSalleâ€™s task is then to fix whatever property-level problems exist before a buyer is found. The scope of that responsibility can range from raising occupancy levels to getting accounting books in order to improving the centerâ€™s image within its community.
There are also cases where the lender believes the propertyâ€™s value has been diminished for good. In such instances, the receiverâ€™s job is usually to find a buyer as soon as possible and get the asset off the lenderâ€™s books.
In addition to its receivership duties, Jones Lang LaSalle Retail is also picking up traditional management contracts, including the recent acquisition of the 11.2-million-square-foot third-party management business from General Growth Properties and its recent appointment as asset manager for the Xanadu Meadowlands project in East Rutherford, N.J.
Retail Traffic interviewed Greg Maloney, president and CEO of Jones Lang LaSalle Retail and head of Jones Lang LaSalleâ€™s value recovery services team, about what his staff encounters when taking over a distressed center.
Retail Traffic: When it comes to physical maintenance, can you tell us what shape distressed retail properties are in when you take over the management?
Maloney: Every single property we take over has its own issues. Some are very poorly maintained. With some properties the borrower didnâ€™t have money and the bills were not being paid. It depends on who the owner was, what it was trying to do and how cooperative the borrower and the lender were in working together.
If it were a center where the occupancy has gone way down, where itâ€™s fallen from maybe 80 percent to 50 percent, we might see deterioration in all aspects of property management, including maintenance and in security. But I donâ€™t think weâ€™ve come across anything where the property was in such shape.
For the most part, the shopping centers [we take over] are maintained very professionally. The [owners] try to stretch their dollars. For example, instead of maintaining the parking lot every day, they do it every other day. Or they used to mop the floor once a week, and now they mop the floor every other week.
RT: How often does the reputation of the distressed center get tarnished in the community and how do you fight the negative public perception?
Maloney: Anytime we take over the management of a distressed asset, itâ€™s generally very well known in the community. The localmedia covers whatâ€™s happening to the property. So, the perception is we have a troubled mall.
When the call comes to me, the first question from the reporter is [always]: â€śSo, is the mall going to close?â€ť In all the cases where Iâ€™ve been assigned as receiver, the answer is â€śno.â€ť But we absolutely have to tell our customers in the community that we are coming in as a manager and weâ€™ll give them the experience they expect, and they will see the same fine stores at the mall they did before.
We do it through the media and newspapers. Weâ€™ll ask the local staff to get the word out, through signage at the mall and through meetings with retailers. The retailers are our first line of communication. Once we get them informed of what we are going to do, then we go out to the local community and talk to the shoppers to let them know that we are here to stop any of the bleeding.
RT: What do you see as your most common management challenge?
Maloney: A big question centers on department stores. What do you do with the space when they leave? A lot of people see this situation as very bleak. But generally speaking, we can fix it.
We do a lot of things with department store spaces. Depending on the size, we have broken them up into big boxes, or weâ€™ve expanded them into mall space. In some cases we might lease them out to temporary stores on the upper level, and on the lower level weâ€™ll put in a smaller department store. In some cases weâ€™ve brought in churches and colleges. It all depends on where you are located and what makes sense for the community.
RT: If the previous owner wasnâ€™t keeping up with invoices, how do you repair the centerâ€™s relationship with vendors?
Maloney: We come in with a court order that says anything that youâ€™ve done at the property you are going to get paid for. I canâ€™t necessarily pay you for things youâ€™ve done in the past, but from the day we come in as a receiver, we will make sure everything is paid.
The vendors, for the most part, feel much better that a receiver has been put in place. On the reverse side, when we are collecting the money, quite frankly, if you donâ€™t pay, you leave. We tell the tenants, â€śYouâ€™re occupying the space. Youâ€™ve signed the contract. Live up to it.â€ť
RT: Is that a situation youwith frequently?
Maloney: In a lot of these cases, the borrower has just given up and a lot of things have not been accounted for. Itâ€™s quite a tall order because we have to rebuild the whole financial structure of the property. I think with every situation we go into, we have one or two retailers that have just not been paying rent or canâ€™t afford to pay it any longer. Itâ€™s a common occurrence.
But if itâ€™s a situation where the centerâ€™s occupancy is down to 50 percent, that tenant is probably struggling and canâ€™t make its sales. We try to keep tenants there if it makes sense for the property. If we have to do something to change the rent to keep them in the asset, weâ€™ll do it.
RT: What happens if itâ€™s a relatively healthy tenant in a relatively healthy center?
Maloney: If they are doing well, weâ€™ll give them whatever the amount of time the law says before we evict them. Then we just turn it over to the lawyers.
RT: How much money might it take to get a distressed center into decent shape?
Maloney: It really depends on what the deferred maintenance has been. It can range from several thousand dollars to hundreds of thousands of dollars. Iâ€™ve taken over one center where the cost was nothing.
RT: Can you give some examples?
Maloney: We took over a couple of properties where we needed to reseal the parking lot because you couldnâ€™t see the stripes anymore and it caused confusion. We also had to fix HVAC units that werenâ€™t working.
We went to the lender to get approval and it cost us $125,000 to get everything up to speed and operating. We did it within the first 30 days of coming into the property. It was very well received by the tenants because they complained about it for some time.
RT: Can you think of centers where youâ€™ve spent virtually nothing on additional care?
Maloney: Thatâ€™s probably more normal than the reverse. We may have to spend some dollars to hire some people, but for the most part the centers are being maintained well or to an acceptable level. I would say thatâ€™s the norm.
RT: Is the situation today similar to what you encountered during the previous big downturn in the 1990s?
Maloney: It was different back then. Even though we had problems in 1991 and 2001, the difference is we have a financial problem here. Back then it was a real estate problem. You could get a new owner to come in and take over pretty quickly.
Today, itâ€™s the lenders that are taking it over and the lenders are just trying to bring the property to a point in time when they can sell it. They are not going to spend a lot of money on it. The properties in the last two recessions seemed to turn over quicker. In our analysis, it was within a 24-month to a 30-month period.
We are in a 30-month period right now, and a lot of these properties are just [not being sold] and the lenders are not spending the money on them. They are maintaining the status quo rather then improving the centers.