Updated at June 9, 5:51 PM with information from General Growth's opposition briefs to its lenders claims.
General Growth Properties' bankruptcy proceedings are turning out to be every bit as complicated as commercial real estate industry experts feared. The firm is in a pitched battle with some of its creditors over the inclusion of some malls in the filing and hearings on the assets could drag on for weeks. The REIT might also be forced to pay unforeseen administrative fees in the aftermath of its debtor-in-possession financing auction. Meanwhile, aside from its in-court drama, the REIT has quietly appointed a controversial new member to its board of directors—hedge fund investor William A. Ackman, founder and managing member of Pershing Square Capital Management, L.P.
The most serious obstacles General Growth faces are motions by lenders seeking to dismiss bankruptcy filings for a number of its malls. On May 4, ING Clarion Capital Loan Services LLC, which serves as a special servicer to lenders including Wells Fargo Bank, N.A., Bank of America N.A. and Metlife Bank N.A., among others, asked the court to dismiss bankruptcy filings for seven General Growth properties, claiming the properties in question are not in financial distress and don't need to be rehabilitated through Chapter 11. Furthermore, the lenders claim that since the REIT owns the properties through special service entities, accepting their bankrupt status would shake investors' and lenders' confidence in such vehicles.
For its part, General Growth on Monday filed opposition briefs to those claims on Monday. The documents can be viewed at a section at Kurtzman Carson Consultants' Web site. Specifically two documents lay out General Growth's argument. The firm points to the difficulties in the current environment in securing financing and challenges the assertion that it made the filings in bad faith. One is 1,415 pages. The other is 203 pages.
One of the documents reads, in part:
These decisions to pursue reorganization were made only after General Growth Properties, Inc.’s (“GGP”) efforts to refinance billions of dollars of maturing secured and unsecured debts on its own behalf and on behalf of its project-level subsidiaries proved unsuccessful. This departure from GGP’s past successes in refinancing billions of dollars of debt pointed to a broader problem: a drought in the real estate financing markets. Not only is real estate credit from “traditional sources,” like institutional lenders, largely unavailable for a company of GGP’s size and scale, but the financial paradigm has shifted, as new issuances of commercial mortgage-backed securities (“CMBS”) and other instruments that had financed hundreds of billions of dollars of real estate each year have evaporated, leaving no apparent alternatives.
Special service entities are supposed to protect assets from being ensnared in bankruptcy proceedings if the company that owns them experiences financial distress. However, such entities can file for Chapter 11 separately if they can't stay solvent at the individual property level. The lenders in General Growth's case say that in a number of instances, General Growth included assets in the filing to improve its financial position through applying for modified loan terms even though there was no distress at the property level.
For example, according to the lenders, the loan on Valley Plaza Shopping Center in Bakersfield, Calif., which General Growth owns through Bakersfield Mall LLC and RASCCAP Realty, Ltd., does not expire until July 2033. The loan currently has a $95.4 million unpaid balance and the property exhibits positive cash flow, enabling it to comply with all monthly loan charges. Nevertheless, General Growth included the asset in its bankruptcy proceedings. Other properties in similar situations include Visalia Mall in Visalia, Calif.; Tucson Mall in Tucson, Ariz.; Park City Center in Lancaster, Pa.; Washington Park Mall in Bartlesville, Okla.; Regency Square Mall in Jacksonville, Fla.; Stonestown Mall in San Francisco; and Fashion Place in Murray, Utah. A hearing on the matter has been set for June 17.
In addition, on May 29, Metropolitan Life Insurance Company and KBC Bank, N.V. filed similar motions in connection with White Marsh Mall LLC, White Marsh Mall Associates, White Marsh Phase II Associates, White Marsh General Partnership, Providence Place Holdings LLC, Rouse Providence LLC and Howard Hughes Properties, among others. The lenders claim the bankruptcy filings for the above entities were made in bad faith.
"Even though MetLife is the holder of the loan and familiar with the property, is one of the largest insurance company providers of real estate capital and is currently making loans, the White Marsh debtors made no attempt to approach MetLife about a refinancing or extension of the loan prior to the time the Chapter 11 petitions were filed," read one of the motions.
The REIT's decision to change its DIP financing provider has also sparked some controversy. When General Growth first announced its bankruptcy proceedings, it had secured a commitment for a $375 million DIP loan from Pershing Square Capital Management, a New York City-based hedge fund sponsor. But the loan terms, which included a 12 percent interest rate and warrants to Pershing Square to issue General Growth stock, sparked objections from some of the REIT's lenders. The REIT ended up receiving DIP offers from Farallon Capital Management L.L.C., a San Francisco-based investment firm, and a joint venture of Goldman Sachs Mortgage Co. and Brookfield Financial, LLC. After an auction on May 11, Farallon Capital was chosen to provide a $400 million DIP loan to General Growth.
On June 1, however, Goldman Sachs and Brookfield Financial filed a motion asking for a $5 million administrative fee and approximately $779,030 in reimbursement expenses from General Growth on the grounds that their participation in the bidding process helped the REIT secure better financing terms. For example, the Farallon-provided financing features a 24-month timeframe vs. an 18-month timeframe originally offered by Pershing Square. It also abolishes the call to secure second mortgages on already encumbered properties, one of the main issues of contention for General Growth creditors. Goldman Sachs and Brookfield Financial claim Farallon improved its offer after becoming familiar with the terms of their bid. A hearing on the matter has been set for June 24.
General Growth's decision last week to add Pershing Square founder William Ackman to its board of directors might add some fuel to the fire. Ackman controls a 7.5 percent stake in voting securities through his Pershing Square Capital Management, L.P., according to an SEC filing from June 8. Pershing Square and related entities also have additional economic exposure to approximately 54 million common shares under certain cash-settled total return swaps, bringing their total aggregate economic exposure to 77,531,369, or approximately 24.7 percent, of General Growth's outstanding common shares. (You can read General Growth's SEC filing, which includes the text of the letter it sent to Ackman here.) However, Pershing Square seems to be unpopular with General Growth creditors and Ackman has been known to engage in ill-timed proxy battles, most recently with retail operator Target Corp., in which he owns a 7.8 percent stake.
General Growth did not return calls seeking comment. Ackman is reportedly traveling overseas and is not currently available for comment.