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Mall owners may seek to recoup some money then sell, analyst says

PRESQUE ISLE, Maine — The Aroostook Centre Mall is now in the hands of the previous owner’s mortgage holder, after years of low profits, an exodus of retailers and no other interested parties bidding at a Halloween auction of the property.

What does that mean for the future of the mall?

In short, the multiple investors of the 2007 mortgage want their money back, said Orest Mandzy, managing editor of the industry publication Commercial Real Estate Direct.

The mall was built by the Widewaters Group of New York and opened in 1993. In 2001, it was sold to its most recent owners, Sitt Asset Management of New York, for $10 million.

In 2007, Sitt took out a loan for the property for $11.2 million with a 10 year term but  a longer amortization lifespan, Mandzy said. Compared to traditional home mortgages, commercial real estate mortgages can be highly complex and include a range of payment schedules and options.

Sitt’s loan did not require any payments for the first four years, and after several years of payments and then non-payment, the remaining balance is around $10.3 million, Mandzy said. The loan was from the bank Wachovia, which was acquired by Wells Fargo in the wake of the Great Recession.

Mandzy, whose publication analyzes commercial real estate trends and transactions, said that the Aroostook Centre Mall just wasn’t generating enough rental income for Sitt to cover the mortgage. According to Mandzy and data he has analyzed, the mall saw profits of $820,000 in 2016 — compared to pre-recession profits of $1.2 million in 2007.

Mandzy said the property also was recently appraised by a private source at $6.95 million — less than the $10.3 million still owed on the mortgage and nearly half the city of Presque Isle’s $13.6 million assessment for property taxes.

Private appraisals are based on the current market value, analyzing factors such as cash flow, while municipal property assessments are purely for tax purposes and don’t factor in market economics, Mandzy said.

Nonetheless, if and when the mall is sold again, it’s likely a new buyer would cite the appraised value to request a reduced assessment and thereby a lower tax bill. The mall is currently Presque Isle’s second-largest local taxpayer, contributing $350,208 this year to local tax revenue.

Sitt, which has not responded to requests for comment, did not have much of an incentive to try to keep paying the mortgage at a loss, Mandzy said. “Why continue paying out of pocket for something that’s not worth the debt owed against it?”

With no other bidders at the auction Wednesday, Wells Fargo, the bank and trustee of the mall’s mortgage, purchased it for $4 million.

Wells Fargo is not the only business with money at stake, though. As a commercial mortgage-backed security, the loan for the mall has multiple institutional investors, or bondholders, Mandzy explained.

The bondholders of the mortgages trust may include banks, insurance companies, pension funds, mutual funds and private-equity funds, he said.

“They effectively had been owed $10.3 million and now hold in its place a property that might be worth $6.95 million.”

The bondholders have hired Torchlight Loan Services, a property management company or “special servicer,” to try to improve the mall’s financial situation, Mandzy said.

A division of New York-based Torchlight Investors, Torchlight Loan Services’ website says it specializes in “distressed debt” and oversees properties totalling $16.4 billion in value across the U.S. The company did not respond to a request for comment.

Patty Crooks, who has managed the mall since 1995, said Tuesday that she would be remaining in her position and working with a management firm hired by Wells Fargo that she declined to name at the time.
She did say that she was optimistic about the property’s future prospects and that “the new management company that works for the lender is known to turn things around.”

Mandzy said he thinks the special servicer will likely try to increase leases at the Aroostook Centre Mall and generate income to pay off bondholders.

The mall currently counts 22 tenants who together employ around 300 people, including JCPenney and a free-standing Lowes. More than 20 percent of the mall’s space is vacant, although how much is actually occupied by retail tenants is not clear, as the mall counts a number of non-traditional tenants, such as All Star Gymnastics and Freedom Church.

While the Halloween auction had no other takers, the mall is likely to go up for sale again.

The servicer and bondholders are looking to generate short-term income and then find a buyer, Mandzy said.

“It’s end game is not to be a long-term holder,” he said. “After all, bondholders simply want their money back. It’s goal is to maximize value and sell the property.”

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