Archive for April, 2014

What’s the ROI for waiving Wausau Center Mall fees?

Posted in Uncategorized on April 12, 2014 by Jim Rosenberg

Image

 

This from the April 9 edition of the Wausau Daily Herald:

“WAUSAU — The city is considering waiving rental and other fees totaling $146,000 for the owners of the struggling Wausau Center mall.

The city’s Finance and Economic Development committees unanimously recommended Tuesday that the city allow mall owner CBL & Associates Properties to forgo rent for one year, totaling $76,000, and another $70,000 in additional cash flow that would go to the city under terms of the lease between Wausau and CBL.

The full City Council will vote on the measure April 22.

CBL, which has leased property from the city since 1980, asked the city to waive the fees after learning JC Penney would be closing its doors in the mall as JC Penney’s corporate parent shutters 32 other stores across the country.

The agreement would require the company to pay $1 in rent for one year starting May 1.”

In other coverage in the Wausau Daily Herald, CBL, Sears, Younkers and J.C. Penney pay property taxes at the mall totaling about $992,000 annually, according to Economic Development Manager (and former Wausau Center mall manager) Megan Lawrence. They also have a parking lease for the ramps, for which they will pay $144,000 in 2014.

There is no question that the loss of an anchor tenant likes Penney’s in the Wausau Center mall is a big deal. On the other hand, I have no idea where that leaves CBL in the big picture with the Wausau Center mall. Does it mean they’re losing money — or just making less? But $1 in rent sounds pretty cheap and a year looks pretty long, (although filling or repurposing that much floor space is certainly a tall order and it could take even longer.)

“The risk of failure for a mall increases dramatically once you see anchor closures,” said Cedric Lachance, managing director of Green Street Advisors in a January article in Business Insider. “Their health is very important … and most of them are highly likely to continue closing stores.”

http://www.businessinsider.com/shopping-malls-are-going-extinct-2014-1#ixzz2yfTuOQBq

So does an agreement like the one being contemplated by the City of Wausau make sense in a dynamic environment, where some of the writing may already be on the mall wall?  Should taxpayers be

providing an operating subsidy to a $3.1 billion corporation to commence at the moment that Penney’s moves out? Without some offsetting consideration, it just looks like another attempt by a business to socialize some lost income, while continuing to assure that profits are unfailingly privatized. Heads, they win and tails, you lose.

What might a counteroffer look like? Well, if you’re anybody else investing in CBL Properties, you get something for your money besides the knowledge that you’re doing what you can to keep a huge presence in your downtown from failing.  CBL & Associates Properties Inc. is a Real Estate Investment Trust for which between two and three million shares trade daily on the New York Stock Exchange. It pays a dividend of nearly five and a half percent; fairly lofty — but it also sells for 66 times earnings, which is really lofty. It’s a company with substantial assets and more than $1 billion in annual revenue.  Of 18 analysts rating the stock, four said to buy it, 12 said to hold it and two recommended selling it. The accommodation being requested by CBL from the City of Wausau is around one-fourth of the annual base salary of the company’s CEO, whose family owns many millions of shares. Besides his father, the chairman of the board, other big investors include Vanguard, T. Rowe Price and BlackRock. These are not charities.

And by the way, this is nothing against CBL, which appears to be an extremely solid and ethical operator. As they say in the Godfather, this is just business – but that doesn’t mean CBL’s offer is one that we can’t refuse, (or modify.)

If the city is putting up money for CBL, then the city needs to honor its fiduciary responsibility to its citizens and not just give funds to a corporate entity with no hope or mechanism for a tangible return because somebody happened to have the audacity to ask for it.

 

Here are some things to think about:

  1.  Do not enter into a one-year agreement for $1. If there is to be a waiver, a better approach would be a shorter agreement – say, six months — that can be extended and modified, as necessary. The city is planning to hire a consultant to deal with the Wausau Center Mall issue. Why bring that expert advisor on board AFTER cutting a one-year deal, when all of the leverage has already been deferred until May 2015? If we don’t have anything for our consultant to do, then let’s not get one until we do.

 

  1. We need more than talk about how important the mall is to our city, how everyone enjoys indirect benefits from its presence, or how the city’s relationship with the mall is unique. At present value, the city’s contribution to CBL over the coming 12 months would be an amount equal to 8,150 shares of CBL stock. While it involves risk, it’s far superior to just kissing the money goodbye in a giveaway. Having the city receive an equity stake equal to the average cost for each month of the waiver treats taxpayers fairly and gives them an opportunity for a direct return on their investment. It also sets up a far more defensible precedent for the activity and that is important, since CBL isn’t the only distressed property owner out there.  It requires city leaders to treat the city’s investment as exactly that: an investment; not a donation. Make no mistake that the money being waived will be coming directly out of the city’s general fund and that it was already committed to other things in the current budget before this topic came up. The benefits to taxpayers should have the possibility of being just as direct, substantial and measurable as they are to CBL. A city-underwritten micro Troubled Asset Relief Plan for the mall with no prospect for recoupment and no strings attached doesn’t do that. (By the way, when the federal government became involved in saving automakers, banks and insurers, the feds took equity stakes that enabled recovery of a lot of that outlay for the taxpayers.)

 

  1. Providing an operating subsidy via fee waivers inherently reduces pressure on CBL to fill the space. Yes, vacant space of this magnitude can be pretty toxic – but if you’re an accountant in Chattanooga, it may not seem nearly as toxic to you, so long as the money is green. Perhaps if the city wants to reinvest this money in the Wausau Center operation, the funds should continue to be collected and set aside in a separate fund administered for that purpose so that there is some oversight over these public dollars, some criteria for its use and some delineation of expected outcomes. I’m not seeing that with this deal. Instead, I’m seeing what are now public dollars in a revenue stream being waived and essentially turning them into private dollars (by altering the agreement and never letting them become public dollars.) Once the city stops collecting the fees, then that is the status quo.

 

  1. Understand that regardless of what we do, the end game may well be eventual redevelopment of mall. If that occurs, it will almost certainly be the result of a combination of factors extending far beyond prevailing economic conditions in Wausau and some local fee waivers for CBL.

Port Plaza demolition

(Above: Opened in 1977, Green Bay’s Port Plaza Mall, later known as Washington Commons, was demolished in April 2012.)

Earlier this month, the Milwaukee Journal-Sentinel reported that Milwaukee City Council voted to provide a $1.2 million subsidy to its downtown Boston Store, which is losing about $600,000 annually. In return, Bon-Ton Stores Inc. will keep the department store, with about 100 jobs, open through at least January 2018, extending the existing lease by three years. The company also will maintain its downtown Milwaukee corporate offices, with about 650 jobs, through January 2018. All told, the company operates 270 stores in 25 states, but only nine of them are downtown stores. The company lost $3.6 million last year, following a loss of $21.6 million in 2012.

Ald. Bob Bauman, whose district includes downtown, said he supported the proposal in part because it’s important to keep the Bon-Ton corporate jobs. But Bauman also said he had reservations about the financing plan.

“We’ve never subsidized operating losses before. Now, we are,” Bauman said.

JR

UPDATE:  Wausau Center Mall owner CBL to sell 21 properties:

http://timesfreepress.com/news/2014/apr/12/chattanooga-based-cbl-to-sell-21-shopping-centers/

Motley Fool on CBL stock:

http://www.fool.com/investing/general/2014/04/18/3-dividend-paying-stocks-lets-go-shopping-for-mall.aspx

UPDATE: City agrees to $755K package for CBL over 5 years, with conditions:

http://www.wausaudailyherald.com/article/20140527/WDH01/305270385/Updated-City-gives-mall-755-000-relief-incentives