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

by on December 22nd, 2015

(Cross posted with permission from Jim Rosenberg’s blog.)

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 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.)

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.


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