Investors Treasure Two Holdings After Ditching Beleaguered Oklahoma Property

Even with the downturn of the retail sector, John Flake has no regrets about investing in three regional malls encompassing more than 3 million SF. The Little Rock commercial developer joined with Doyle Rogers Sr. and Sam Mathias of Springdale to buy the properties primarily because of one project: Northwest Arkansas Mall in Fayetteville.

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“Today, it is still the preeminent property because of its location,” Flake said. “You’re not going to see a large regional project like that in Northwest Arkansas. This is going to be a great long-term investment.”

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Built in 1972 and renovated in 1998, the 820,000-SF mall includes 122 acres, of which about 40 acres is undeveloped. Plans for the vacant land, most of which is in the flood plain along Clear Creek, remain undefined until the real estate market rebounds.

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“Retailing is coming back in Northwest Arkansas,” said Mathias, owner of Mathias Shopping Centers Inc. “We’ve recently leased 150,000 SF of various types of commercial space in Northwest Arkansas.”

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Doyle Rogers, veteran Arkansas developer and lead shareholder in Little Rock’s Metropolitan National Bank, couldn’t be reached for comment.

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The investors bought the Fayetteville mall through affiliates of their Midwest Mall Properties as part of a three-mall deal portrayed as a “$400 million” purchase when announced in January 2007, but Flake said the number is not accurate.

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He wouldn’t put a more precise figure to the complicated transaction other than saying the purchase price is much closer to $322.8 million, which is the amount of debt associated with the deal.

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The Macerich Co. of Santa Monica, Calif., a public real estate investment trust, described the transaction as a $373.8 million sale in filings with the Securities & Exchange Commission.

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The reputed sales price jumps to more than $381 million if the valuations on the various deeds are totaled: Citadel Mall in Colorado Springs, Colo., $153.2 million; Northwest Arkansas Mall, $150 million; and Crossroads Mall in Oklahoma City, $78.5 million.

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Thomas E. O’Hern, executive vice president and chief financial officer for Macerich, couldn’t be reached for comment on the discrepancies. A Macerich spokeswoman said the official sales price remains $373.8 million.

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Accompanying the Crossroads Mall was a $61.2 million loan from Bear Stearns Commercial Mortgage Inc. of New York. As part of the acquisition, Midwest Mall Properties agreed to assume the debt.

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The other two malls also are secured by separate mortgages: $136 million on the Citadel Mall and $125.6 million on Northwest Arkansas Mall, which Macerich bought in December 1998 for $94 million.

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But unlike Crossroads, these loans are linked through a cross-collateralization and cross-default agreement. If Midwest Mall Properties defaults on either loan, Lasalle Bank of Chicago can foreclose on both.

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According to Flake, all three loans are non-recourse loans. That means the investors have zero personal liability in the event of a default and the only assets securing the debt are the projects.

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“The Northwest Arkansas Mall and Citadel Mall are doing well right now,” Flake said. “The Fayetteville property is in mid-90s as far as occupancy goes, and the other property is near 90 percent. Rents are clearly down. We’re holding our own. We have two aggressive marketing teams at the properties, and we are pleased with what they are doing right now.”

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Past Interest
Flake’s interest in acquiring the Northwest Arkansas Mall dates back to 2001 with a call to Macerich. Officials at the real estate investment trust were asked if they would consider selling the project.

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That query didn’t result in a deal because of conditions in the financial markets after 9/11, according to Flake. The tables were turned less than five years later when Macerich came calling.

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“In early ‘06, they approached us to see if we had continued interest in the property,” Flake said. “But they asked us to look at a package. We weren’t very interested in the Oklahoma City property. It was a throwaway for them.

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“We really didn’t ascribe any value to it. We said, ‘Hey, if it does [become profitable], it does and if it doesn’t, it doesn’t.’ Who are we to wave a wand and make property like that turn around?”

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Earlier this year, the three-mall deal was pared to a two-mall deal when Midwest Mall Properties forfeited the Crossroads Mall in lieu of foreclosure. The project already was on a downward slide when the Arkansas investors entered the picture.

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The slide became an avalanche when all four anchor tenants vacated, starting with the exit of JC Penney two years ago. Following were Macy’s in March 2008, Dillards in December 2008 and Steve & Barry’s in January 2009.

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“I was not surprised when Dillard’s and Penney’s closed over there because the stores weren’t performing they way they need to,” Flake said. “Foot traffic in the mall is so dependent on the anchors. That dramatically impacts everyone else.”

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Steve Storff, chief commercial appraiser with the Oklahoma County assessor’s office, estimates Crossroads occupancy has fallen to about 50 percent.

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The project at the intersection of Interstates 35 and 240 is remembered as the largest enclosed shopping center in the state of Oklahoma.

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Jim Parrack, senior vice president of Price Edwards & Co. in Oklahoma City, is the receiver for Crossroads.

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He declined comment on the status of the project.

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Oklahoma state government reportedly showed interest in the 46-acre development, but that scenario is wishful thinking, according to one Oklahoma City real estate insider.

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The death spiral of Crossroads Mall is a familiar pattern followed around the nation and at University Mall in Little Rock, Indian Mall in Jonesboro and Phoenix Village Mall in Fort Smith.

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Newer projects luring tenants and troubled retailers going belly up make for a deadly financial combination.

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