Foreclosure at the Mall: General Growth Files for Chapter 11

Forget those 50 percent off signs. A trip to your local mall these days might reveal a new sign in the window of your favorite retailer: "Going Out of Business."

That means big trouble for mall owners already struggling to survive.

As individual store owners struggle to stay afloat, mall operators facing ever-mounting debt are fighting a similar battle.

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General Growth Properties Inc., the nation's second-largest mall operator, filed for Chapter 11 bankruptcy protection today, the latest sign of the challenges facing malls of all sizes.

The nation's shopping center owners are facing a recessionary double-whammy: Consumers who are spending less and real estate investors who are holding back money used to finance their operations.

Those forces are now colliding, causing major problems for some mall owners into bankruptcy. Don't expect your local mall to necessarily close its doors -- although some of the 3,500 malls across the country, mostly smaller malls, might -- but it could very likely be owned by somebody else shortly.

"They have significant problems by and large," said George Whalin, president and CEO of Retail Management Consultants.

Retailers may close 73,000 stores in the first half of 2009, according to the shopping center council, robbing malls of the vital rental fees that allow them to pay off their debts and stay in business.

"General Growth bankruptcy is the beginning of the commercial real estate crisis. It's one of the two big ticking time bombs that has not been reported well in the financial circles yet," said Burt Flickinger, a consumer industry analyst for SRG Insights. "We in the beginning of a record number of retail bankruptcies and a record number of shopping center and shopping mall bankruptcies."

Big chains, including Linens 'N Things, Circuit City, Whitehall Jewelers, Mervyn's and Steve and Barry's have already filed for bankruptcy. Other big retailers, including Talbots, Fashion Bug, Ann Taylor, J. Crew and Liz Claiborne have either announced store closings or scaled back or delayed expansion plans.

Whalin said, "There are going to be a significant number of retailers that will go bankrupt. There's no doubt about that. … We've just never seen anything as bad as this."

General Growth Bankruptcy

General Growth's bankruptcy had been expected for several months. The mall company tried for months to convince its lenders to give it more time to refinance billions of dollars in debt. Today that clock finally ran out.

Most malls are owned through large real estate investment trusts or Reit's. The two biggest are Simon Property Group and General Growth Properties.

In 2004, Chicago-based General Growth spent $12 billion to acquire competitor mall owner Rouse. The deal included assuming $5.4 billion in Rouse debt. The company has racked up billions more in debt from building new malls, renovating old ones and other business expenses.

As credit markets froze over the past year it left General Growth -- which owns more than 200 shopping centers in 44 states -- with roughly $27 billion in debt and no way to refinance. Its assets as of Dec. 31 were valued at about $29.6 billion, according to documents filed with the U.S. Bankruptcy Court in the Southern District of New York.

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