Mall Talk: Is CBL’s bailout plan really the best Wausau can do?

CBL

So somehow, I ended up in the (still restricted somewhat, I guess) mall presentation and I’m showing you a piece of one of the PowerPoint slides just to prove it. I don’t regret my comment about supporting Wausau’s downtown or the need to redevelop the Wausau Center Mall.

But I do not agree that there is only one way to do this or that the single option that people are being shown is the best way to accomplish what needs to be done. I can’t accept the inherent “too big to fail” argument, as it relates to CBL and the Wausau Center. There should be alternative strategies instead of working from what is essentially just a list of demands from CBL. It is a disservice to Wausau that there are not.

Let’s look at a few aspects here.

First, CBL is asking for an unsecured loan at 2 percent for 20 years. This is well below the cost of money for this type of activity. It doesn’t reflect the risk and the city will not be able to borrow money at that rate to give it to CBL. Money will be diverted to CBL for the first part of the plan from a successful Tax Increment District in the Wausau West Industrial Park. (Yes, it’s the same money that the city wanted to spend to move Wausau Chemical and if that had happened, it wouldn’t be there to talk about now. It’s also money that could be available for other purposes and even shared with other taxing entities, but for this new plan.)

The reason CBL needs city money, I understand, is because they’ve mortgaged the Wausau Center to the hilt and they can’t take on any more debt. While that may be true in the case of this particular property, CBL shares pay an 8.5 percent dividend and the company has a market cap of $2.1 billion – a bit less than the entire equalized value of the City of Wausau. (Real Estate Investment Trusts like CBL invest only in real estate and they are required to pay out at least 90 percent of their earnings in the form of dividends, which relieves them of the obligation to pay income taxes. Jim Rosenberg’s blog does not provide tax advice. Please consult with your tax advisor.)

My take: CBL borrowed the money on the Wausau Center to spend it elsewhere and they are now asking Wausau taxpayers to cover that problem. They want to compartmentalize the Wausau Center now, when it has issues and it is convenient for them, but they were only too happy to take the money and run when things were humming along. (Of course, I could be wrong about that.)

KONICA MINOLTA DIGITAL CAMERA

There is talk about being stuck with eight blocks of blighted buildings, if the mall closes. But the parking ramps, Sears and the Younkers store are not owned by CBL and the buildings are not blighted now. The reason that CBL wants to move Younkers is so they can collect the rent, instead of the owner of the current Younker’s property collecting it. Does that sound like a fair thing for the city to be involved in funding — literally picking a winner and a loser? Moreover, shares of the parent company of Younkers, Bon-Ton Stores, Inc., (NASDAQ: BONT), currently go for less than $2. Bon-Ton’s dividend is now at 10.5 percent, if you want some of that action. The  company has lost more than 85 percent of its market cap over the past five years. The story is that moving Younkers will enable CBL to secure a 10-year lease from them. Okay — but let’s hope that the next five years are much better for Bon-Ton.  And let’s not forget that Sears, the other remaining anchor at the Wausau Center, continues to close numerous stores as it attempts to reposition itself. It has lost more than a third of its value over the past year. (Jim Rosenberg’s blog does not provide financial advice. Please consult with your financial advisor.)

There is talk about jobs. There may well be 750 jobs in the mall, but it would be a much lower number if it was translated into full-time equivalents. I am of the belief that all jobs are important, but it’s also fair to point out that 750 jobs at the mall are not the same as, say, 750 jobs at Google.

There has been talk about several hundred thousand dollars in county sales taxes generated annually by Wausau Center sales. That’s not small potatoes, but it’s important to remember that it makes no difference to Marathon County if people spend that money on the Rib Mountain strip, at the Wausau Center or at other local business. To the extent that some things might be purchased online or outside of the county if the mall closed, that would be a net loss of sales tax revenue — but it’s disingenuous to pretend that entire amount is at risk and it is not a very important justification for an aid package. (For this reason and others, the county declined to participate in the bailout plan.)

Alderman Keene Winters has suggested that the city simply buy the mall and fashion its own redevelopment plan. I’m not sure that I love that idea yet, but I sure like having options and it is a legitimate avenue to explore. This course of action would leave the city actually getting something for the money it is laying out. The city would be in a position to proceed with a redevelopment plan without having to make CBL happy going forward. Owning something more than a promise of giving things another try makes some sense to me.

Here’s another idea. Before I left Wausau, I talked with an executive at Eastbay about the idea of moving their retail operation into the Penney’s space. I made it clear that I wasn’t representing anyone but myself, but he still gave me 30 minutes to lay out my idea. It would free up space and parking at their (converted shopping center) 1st Avenue location and create an instant new anchor at the Wausau Center. The city and CBL could give them a couple of years of free rent and incentives for far less than $4.1 million initial package to CBL. I still think it’s a good idea and Foot Locker is one of CBL’s more common tenants across their properties.  Foot Locker Inc. stock (FL: NYSE) is up 243 percent over the past five years. Securing a solid new anchor from a largely home-grown global company selling those product lines would change the dynamics for other mall tenants significantly. Moving Younkers seems more like rearranging the deck chairs on the Titanic.

Turning the mall “inside out” by developing exterior storefronts on Washington Street is an important way to improve the mall and this type of renovation has been successful at other properties. I think it should be done, but I also think that city taxpayers should have a better role than being bankers operating at a loss to get it done. Let’s see a deal that reflects more of an equity partnership, if that is what is going to happen, instead of this “heads I win-tails you lose” deal that is currently on the table. Without leverage or equity, the city could someday end up paying a premium for improvements that it financed itself.

We need to think about other “what if” scenarios, too. Let’s imagine that a few years down the road, CBL and the city’s largesse end up in the hands of a hedge fund. We all know how much a group like Starboard Value cares about local communities after the Wausau Papers situation in Brokaw. Suffice it to say that a hedge fund’s idea of ‘unlocking value for shareholders’ may well be at odds with Wausau’s best interests, just as it has been before. Since this is the environment in which Wausau could find itself operating, forget about loaning out money at less than a quarter of CBL’s dividend rate over the next 20 years.  A 5-year deal would give CBL a fair opportunity to right the ship and get new financing. A 20-year deal establishes an unsustainable model that is all but permanent.

Then there is money that CBL wants for a marketing director. Could the mall instead join the Business Improvement District, which supports Wausau’s River District Main Street program? Other downtown property owners pay from $250 to $2,500 annually for this. Is it fair or smart for the city to fully bankroll another marketing representative dedicated exclusively to the Wausau Center, which supports downtown, but also competes with non-mall retailers for consumer dollars? And what about the idea of funding tenant improvements to mall shops with low interest loans that are not necessarily available to businesses outside the mall doors?

In short, the city wouldn’t seem to be getting anything in the way of real leverage for its outlay in the present mall deal.  Loaning money at a loss to prop up a Real Estate Investment Trust on an unsecured basis to a company that is paying dividends of more than four times that rate to its own shareholders today may drive up costs to secure the property tomorrow, if that eventually proves to be necessary. A good share of the “repayment” is covered by other concessions that the city would be offering to CBL as part of the plan.

The taxable value of Wausau Center property was recently reduced, amounting to another hit on the city’s operating budget from the mall.  If we don’t like things like not mowing the grass in the parks or cutbacks to police, fire and public works, then efforts to make sure that the mall can keep chugging along without causing too much heartburn in Chattanooga may be at odds with our vision. We may want look at this thing a little harder.

JR

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17 Responses to “Mall Talk: Is CBL’s bailout plan really the best Wausau can do?”

  1. Thank you for this Jim. I have felt that the City is being blackmailed but saw no light at the end of the tunnel. Your idea of Footlocker seems excellent,wish our leaders would look into it. The length of the loans and amounts seem incredibly high and the pressure to do it right away or they will go and leave a black hole in the ground are just not believe able. Hope our council takes a closer look.

  2. Jim,

    Great analysis.

    However, it is clear to me that for the powers that be inside of 407 Grant St, (in the words of George Carlin), “we don’t have time for rational solutions.”

    I have talked to a number of council members who have stated (as it pertains to City control of the mall) that they don’t want the city to be in the mall business

    I agree, but…

    The city may not have a choice. IF the city is going to end up in the mall business, I would prefer it happen BEFORE we empty the war reserve.

  3. Fred Tealey Says:

    Disappointed with your take on the issue, Jim, as I know you always have a positive spin on Wausau’s future. I had thought with your knowledge of lacrosse’s situation in their rebuilding of the downtown that you’d envision the same here. There’s lots of suppositions in your blog …” What if, what if ” and those same suppositions existed when the mall was constructed 30 years ago. In life there are many risks, but for sure we both know that if CBL closes it, our downtown is doomed. That is not a supposition.

    • I think the city needs a better deal and that 2 percent, unsecured for 20 years is way too much to ask for or to approve. You’re right about La Crosse doing very well downtown, but they are doing it with deals that call for investment on both sides — not unsecured, subsidized money with a single, out of town REIT.

      • Remember also that when Green Bay closed Port Plaza Mall downtown, it did not end their downtown redevelopment effort. It changed it — and many today would argue that it changed it for the better. So no, I do not believe the downtown is doomed if the mall closes and I also do not believe that the mall needs to close if the city doesn’t approve CBL’s deal in less than two weeks.

  4. Fred tealey Says:

    Jim,
    Younker’s has already announced it will leave if it cannot move into the jc penny space. Younker’s is on a month to month lease. When they pull out other smaller stores have stated they will not renew. We will have a very large empty building with many jobs lost. Perhaps we couldn’t prevent Wausau papers from closing, but we can prevent the mall from ending a very successful run. Every job is important…many in the mall have been working there since it began in 1984. Maybe they are not Google jobs, but they are important jobs…every job is. Unfortunately our culture now seems to put down jobs that some feel “don’t measure up”

    • As I said, I think that all jobs are important. The thrust of my piece is that there should be a full examination of alternative strategies. A two percent unsecured loan for 20 years to CBL is an unreasonable request, in my view.

      • Fred Tealey Says:

        I was in Wausau when the decision to build was mall was made…30 years ago. A very large mall (750k ft) with 4 large anchor stores was proposed near ntc in the city, but the voters made the right decision by building a smaller mall downtown costing the city 18 million.. The mall proposal by ntc had no city funds. But the original monies for the mall an sure have come back 10 fold through higher assessments downtown, peripheral developments (Dudley tower, palladium, united health), bringing with them hundreds of jobs, be companies etc that never would have occurred had the mall not being built. The present loan of 4 million is miniscule compared to the 18 million stipend (probably double in 2015 dollars) back in 1983. This is our chance to continue our developments downtown just add lacrosse and eau Claire are doing. Let’s not be left behind and become a 3rd class town.

      • The $4 million is just a down payment on what needs to be done to make the Wausau Center viable and people need to realize that. A true revitalization will run between $12 million and $20 million. My issue is not with investing in the revitalization of the mall. My issue is with the terms and conditions under which that should be done — whether it is a balanced deal, whether it adequately protects taxpayers, whether it is fair to all of the stakeholders, whether it sets bad a bad precedent, and whether the position that it leaves the city in is sufficiently strong for the amount of money being invested. In its present form, I don’t think that the deal does that. It can be fixed and it ought to be fixed. I can understand why CBL wants it that way, but they may not be able to get it that way.

  5. Fred Tealey Says:

    Jim, if we don’t act now, all will be lost. Another example of how failure to act caused a major blow was the council dragging it’s feet on annexing Brokaw. It s a once in a lifetime chance to extend city borders, gain taxable property, gain new developments. Now that Maine has annexed Brokaw, it shuts out any future annexations from either Maine or Brokaw, which makes Wausau even more landlocked. Thus, failure to act on the mall issue (hell, it all started what a year ago when Penny’s pulled out) will doom the downtown.

    • Who said anything about not acting? What I’m talking about here has much to do with the terms — as I ask in the title, ‘Is this the best we can do?’ I don’t think that it is. But beyond that, I don’t share the opinion that it’s either take CBL’s plan as it currently stands or face certain doom. Some people would like you to believe that, but it just isn’t true. And even in the worst case scenario in which CBL doesn’t get what it wants, they walk away from their past contracts and they turn out the lights, it would be a matter of dealing with other challenges and also having other opportunities. Would it be convenient, fast, cheap or easy? No. But this plan isn’t, either.

      • Fred Tealey Says:

        If we don’t act, it will stay as empty as the old elementary school on Stewart… A huge eyesore for decades…
        The time is now when we have a national developer who has saved worth saving malls all over the country. They have the know how and the resources. Other communities have helped them along also and they’ve prospered. I personally don’t understand the negativity here again. It’s too pervasive. Not in my home town of eau Claire where a huge revitalization is taking place including commercial, Business, retail, theatres, all with govt help.

      • We’ve done a lot of redevelopment in Wausau over the past 18 years. This will get done, too. We know that other communities have gotten involved and we will get involved with revitalizing the mall, too. It just may not be that CBL’s initial wish list is exactly the way that things should shake out to make it a wise and sustainable program for the Wausau Center over the long haul. CBL has interests to protect, too — but so far, it looks like they’re willing to invest only money that Wausau provides to them unsecured and at a loss. They don’t even want to pay their own marketing director. Redevelopment is worth something. It is not worth just ANYTHING, however.

      • Paul Henning Says:

        Greetings Jim, Happy New Year! Outstanding piece, that I somehow missed originally. Professional, as usual. You’ve been around this game long enough to know…If it walks like a duck,…if it quacks like a duck…IT”S A DUCK!! Hello McDuck! Your earnings/share data and CBL fiscal information help put it into perspective for those who don’t understand the business aspects. Most will never get it, even when it’s obvious, as you point out numerous ways. Very strong, informed observations.

        Investing in the re-development of the mall is fine and it’s still a worthwhile asset to preserve. But…do it smart! CBL is obviously going for the golden ring, here. City Hall is way over their head again and swimming with the sharks. CBL smells the blood in the water. We can only hope they take a good, long look at this deal. Wanna make a bet?

        Hope you’re enjoying LX. Take care, ph

  6. Why does Fred Tealey scream bloody murder when any other billionaire gets taxpayer handouts (such as friends of Walker or Bush), yet all of a sudden changes his tune and says it’s OK when his friend Tipple is handing them out?

    Hypocrisy of the first order.

    It’s not OK if someone I don’t like gives corporate welfare, but its A-OK with Fred when his friends at city hall do it.

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