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McKinley Mall loan seen at risk of default

The McKinley Mall is in financial trouble.

The owner of the McKinley Mall is at risk of "imminent monetary default" on the largest piece of a $35.5 million commercial mortgage, according to a special bulletin just issued by national debt research firm Fitch Ratings.

The email alert by Fitch and a subsequent notice from commercial real estate advisory Trepp warned investors that administration of the loan was transferred to the "special servicer." That company – in this case, Rialto Capital Advisors – is brought in to handle troubled loans and prevent losses.

That doesn't mean the mall is about to be foreclosed upon. Rather, Rialto's job will be to work out a solution with the borrower, Stoltz Management of Delaware, to ensure the loan can be repaid, avoid foreclosure and keep the mall in private hands.

However, the transfer is also often the first step on the long road to a court-ordered seizure of the property, which Rialto would also handle if necessary.

Right now, the loan is current in payments, with no delinquency, and it's not slated to mature until July 2023, according to Trepp. But it was already on a "watch list" because of "major deferred maintenance," and its revenues have declined, Trepp noted. Additionally, one of its anchor stores, Macy's, closed in 2016, while other lead tenants – including Bon-Ton Stores and Sears – are themselves troubled.

Stoltz Management officials declined to comment.

Claire's to close store in McKinley Mall

Built in 1986 and renovated in 2008, the 728,133-square-foot regional mall at 3701 McKinley Pkwy. in Hamburg was 96 percent occupied as of the end of last year, according to Trepp data. The Macy's store was not part of the collateral behind the loans, so it's not included in the figures.

The largest tenant is Sears, with 146,577 square feet or 20.1 percent of the space, with a lease that expires in September 2020. Other major tenants include J.C. Penney with almost 15 percent of the space, Bon-Ton with 13.4 percent, Best Buy with 4.6 percent and Barnes & Noble with 4 percent, Trepp noted.

Sears and J.C. Penney have each been closing or selling stores at a rapid pace in recent years, while Bon-Ton is in Chapter 11 bankruptcy. Best Buy has also been retrenching and cutting costs, while Barnes & Noble is battling stiff online competition from Amazon.com and others.

The property was appraised at $56.5 million, so Stoltz took out two loans from Natixis in July 2013, refinancing a prior $33.3 million loan balance. One of the new loans was for $28 million, now down to $26.17 million; the other was $10 million, now down to $9.35 million. Both had interest rates of 4.79 percent. Both were packaged with other loans and sold to investors on Wall Street as part of separate securities.

Ulta Beauty leaving McKinley Mall

According to Trepp data, since then, the mall's revenues have fallen by 22 percent, its net operating income is down 17 percent and cash flow has been reduced by 19 percent, according to Trepp data. That affects Stoltz's ability to repay the debt.

Additionally, the most recent annual property inspection in February 2017 noted maintenance and "life safety" concerns. Specifically, according to Trepp:

  • The parking lot lamp post near the front of the Sears store is damaged, leaving electrical wires exposed, and
  • The parking lot curb in the lot behind J.C. Penney is broken, "creating a tripping hazard."

Trepp noted that only the larger piece was sent to special servicing, but "we assume the latter will show up shortly."

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