GUILDERLAND — In what appears to be an attempt to hold Crossgates Mall accountable for every penny of the $139.2 million reduction it’s seeking on its $282.5 million assessment, the town of Guilderland has demanded the mall turn over dozens of financial records to augment an earlier request for an income and expense statement from Crossgates as proof that the property “is not income-producing.”
With the United States economy shrinking by an unprecedented 9.1 percent between April and June of last year — the fastest the quarterly rate has dropped since records have been kept — New York State’s economic output lagged even further behind, contracting by nearly 12 percent in the second quarter of 2020 compared to the year prior.
And, while non-auto-related retail sales in the country were down 8.5 percent during the second quarter of 2020 compared to April through June of 2019, the the type of retail that sustains a mall — restaurants; clothing stores; sporting goods, hobby, and book stores; and department stores — fell off a pandemic-induced cliff nationwide during the same period, down 39 percent year-over-year.
Which is to say nothing of the retail sales that migrated online during the same period — e-commerce went from accounting for 10.8 percent of all sales in the second quarter of 2019 to 16.1 percent of all retail sales from April to June of last year; that figure has since dropped to 14.8 percent.
The federal government’s various economic-data agencies don’t break down the 50 states’ gross domestic product in the exact same way that they do the country’s overall economic output.
In New York State, for example, the pre-pandemic $74 billion retail trade, which accounts for about 4 percent of the state’s overall economic output, is a broad economic classification of retailers who sell merchandise to the general public for personal or household consumption — a trade that also includes motor vehicle and parts dealers, a distinction from the national data.
Retail gross domestic product in New York State declined by about 17.5 percent between April and June of 2019 compared to 2020; nationally, the Bureau of Economic Analysis does track the non-auto retail trade, which declined 9.1 percent during the same three-month period. This time last year, about 911,000 New Yorkers were employed in retail — that number is now closer to 826,000.
To cite another example of a somewhat mall-dependent industry, the economic output of the accommodation and food-services industries, which employed 783,000 New Yorkers in January 2020, dropped by 64 percent during the second quarter of 2020 compared to the year prior, while the industry shed about 265,000 jobs in the process.
Whichever way you slice it, New York fared worse than nearly every other state during the economic nadir of the pandemic: Just six states’ economies faltered worse than New York’s did between April and June of last year.
Crossgates seeks redress
As a record number of well-known and well-to-do stores file for bankruptcy, there are perhaps as many as one-fifth fewer small businesses in Albany County as there were this time last year. And, stepping into this morass, seeking to further redress itself from these retail woes, is Crossgates Mall, which filed suit against the town of Guilderland in July 2020 in an attempt to knock $139.2 million off its $282.5 million tax assessment — a near 50-percent drop in the assessed value.
The petition, filed by three separate affiliated companies of Crossgates in Albany County Supreme Court, claimed the mall should receive a reduction in its $282.5 million assessed value because, “Prior to the issuance of the Town’s tentative assessment roll for 2020, [Crossgates] provided and offered information to the Town’s Assessor concerning the Property and its value, and advised the Assessor that the Property’s value had declined year-over-year due to continuing pressure on its ‘bricks-and-mortar’ business from e-commerce, sales declines, and record bankruptcies, and store closures, particularly for department stores and fashion retailers that were once the primary focus of [Crossgates’] business.”
The suit went on to claim that “fair market value of the Property … had also been negatively affected by the devastating impact of the COVID-19 pandemic catastrophe on the condition of the Property.”
Heather Weinhold, Guilderland’s assessor, told The Enterprise in August 2020 that, if a complainant were to win a tax certiorari case, the length of time the new assessed value would apply to the property would depend on the court order, but she said the new value is usually frozen for three years. If, after the three years, there were changes or improvements to the property, then the town could undertake another revaluation process, Weinhold said at the time.
In tax year 2019, the seven parcels of land that collectively make up Crossgates Mall paid entities within Guilderland — the town itself; Guilderland schools; and the public library — about $7 million in property taxes. If Crossgates were to win its lawsuit, the taxes it pays to the town could be cut by about half.
All of the legal paperwork filed by the town and mall was set to go to Albany County Supreme Court Justice Margaret T. Walsh on Oct. 1, 2020, with a ruling on the matter expected within 60 days of the filing.
But by Oct. 8, the town had yet to receive proof, in the form of a verified income and expense statement, from Crossgates that its property was “not income producing.” Crossgates Mall had an unaudited net operating income for the first nine months of 2020 of $8.5 million; for the same period in 2019, that number was nearly $22 million.
Instead, on Oct. 28, Crossgates, in what seems to be little more than a stalling tactic, filed an amended petition that appears to be the same as the July 2020 petition. But what Crossgates did address in this filing was one of the town’s arguments for why the suit should have been tossed in the first place.
Guilderland, in its Oct. 8 court filing, stated the suit should be dismissed because no one from the limited-liability corporations that own the Crossgates property signed off on the suit, as is required by state property law.
The town claims that state property law “provides that a petition to review an assessment ‘shall be duly verified by the petitioner, an officer thereof, or by an agent thereof who has been authorized in writing to verify and file such petition and whose authorization is made a part of such petition.’”
With no one from either Crossgates Mall General Company Newco, LLC; Crossgates Mall Devco LLC; or PCC Newco LLC having signed the July 27 petition filed in Albany County Supreme Court, the town argues, it’s “not properly verified and fails to comply” with state property law.
In its Oct. 28 court filing, Crossgates included paperwork from its affiliated limited-liability corporations designating persons allowed to sign-off on the suit.
Demand for discovery
Just before the New Year, the town made a demand for discovery and inspection, seeking from Crossgates, among other financial documents:
— Copies of leases the mall had with anchor tenants.
One of Crossgates’ anchor stores, Lord & Taylor, shut down permanently. In October of last year, the mall filed a lawsuit against the luxury retailer for $594,407 in back rent while also requesting $20 million in damages.
In June 2013, Crossgates had entered into a 15-year lease with Lord & Taylor, which opened in September 2014, that was to run until 2029 and which included “a critically important operating covenant” that extended until 2024.
Crossgates claimed to have invested over $23 million on the “transaction” — including a $14.5-million build-out of the 80,000 square-foot “custom fashion department store retail space,” according to the filing.
Crossgates claimed this was the largest investment either it or its parent company, the Pyramid Management Group, had ever made in a tenant, and, with monthly lease payments of $80,000, “Crossgates also gave Lord & Taylor below-market rent for the entire term of the Lease,” according to the October 2020 court filing.
With annual rental payments of $960,000 a year, Crossgates would have taken in $14.4 million over the life of the 15-year lease — an approximate $8.6 million loss on the mall’s initial $23-million investment.
All of these investments were made, the court filing states, in pursuit of “mature and high-income customers, traditionally female, who are influencers as to spending-decisions in family units and social groups within the community.”
The lease transaction, according to an affidavit included with the court filing, “was not driven by rent. It was driven by Crossgates’ strategic imperative of obtaining a continuously operational fashion department store tenant.”
In exchange for Crossgates’ multi-million dollar investments and below-market rent, according to the lawsuit, Lord & Taylor agreed to an operating covenant, which required the store “to continuously operate a fashion department store in the Premises for no less than 10 years ….”
The judge in the case has since tossed the $20 million damages request while allowing the back-rent portion of the suit to proceed;
— Copies of leases Crossgates holds with its non-anchor tenants.
Not counting Lord & Taylor, Crossgates has filed lawsuits against 11 of its tenants for nonpayment of rent — Banana Republic, Old Navy, The Gap, Athleta, Journeys, Underground by Journeys, Journeys Kidz, Ruby Tuesday, Uno Chicago Grill, The Standard Supper Club, and World of Beer.
The tenants at one point owed the mall at least a collective $2.3 million in combined derelict lease payments; three of the suits, all against the parent company of various iterations of the shoe retailer Journey’s, have since been discontinued “without prejudice and without costs” to Crossgates, according to the court filings;
— Rent rolls for the years 2017, 2018, and 2019;
— “Detailed annual retail sales reports by tenant with annual total” for the years 2017, 2018, and 2019;
— Expenditures on capital projects for the mall itself as well as tenant-improvement allowances for 2017 through 2019;
— A list of real-estate tax reimbursements given to tenants for the years 2017 through 2019; and
— A copy of the appraisals completed with respect to one of the three mortgages held on the property.
CMBS re-appraisal
In July 2020, the appraised value of Crossgates Mall was lowered from $470 million to $281 million.
In a commercial mortgage-backed security (CMBS), securitization means taking an illiquid asset, something that can’t be quickly or easily sold — a mall, for example — and transforming it into an easily bought and sold financial instrument like a stock or bond.
A lender creates a commercial mortgage-backed security by taking a group of income-producing commercial-property loans (for example, mortgages held on hotels, warehouses, apartments, and retail property like a mall), bundling them together, and selling them as tranched — different “classes of certificates,” each with their own rate of return — securitized bonds.
“The typical CMBS [commercial mortgage-backed security] loan is a 10-year, non-recourse, fixed-rate loan,” according to the Federal Reserve.
This means the typical CMBS loan is short-term in that the borrower has only a 10-year loan term; however, the monthly payments made by the borrower are set up as if he or she is paying off a standard 30-year loan.
So, for example, with a 10-year loan that is amortized, spread out equally, over 30 years, a borrower is doing little more than covering the interest on the loan and not putting a dent in the principal, leaving the borrower with a large balloon payment on the principal that comes due at the end of 10 years.
So, in very short and overly-simplified terms, the reappraisal means that the banks and other financial institutions servicing the loans on the property are on the hook for less upfront money when it comes to paying out the bondholders; in turn, that reduced cash flow is then passed on, in a manner of speaking, to the bond buyers at the bottom of the CMBS tranche — known as the subordinate class of certificate-holders.
Take, for example, a residential mortgage-backed structure. In this example, a loan servicer is supposed to advance funds up to the point where they deem the money a lost cause, at which point the servicer stops throwing good money after bad. But the major difference between a residential and a commercial loan is what happens when the borrower defaults on his or her mortgage.
Commercial loans are non-recourse, meaning, in the case of a default, the lender can’t take the loan’s underlying value, for example, a mall, as collateral. In the case of a default on a residential loan, the bank can foreclose on the borrower, take the home, and resell to turn a profit or just get the loan off its books.
Since it’s difficult to repossess a mall, the CMBS re-appraisal process can be undertaken in the case of a loan default or if a revenue-generating property no longer produces the income it once was. The re-appraisal process is an instrument that allows the loans servicer a way to limit the funds it has to advance on a secure asset, or illiquid asset, something that can’t quickly or easily be sold — a mall, for example, with a decreased value.
The three Crossgates mortgage loans, which total approximately $263 million, are held in separate commercial mortgage-backed securities. Those three loans in October had collective delinquent principal and interest payments totaling $8.3 million.
However, in June of last year, the mall had already worked out a deal with its loan servicers for a six-month deferral of debt-service payments and was scheduled to start repayment this month.
Published by The Altamont Enterprise
