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Why Taubman Turned Regency Square Over to its Lenders

Taubman Centers Inc. has turned over the keys to Regency Square in Richmond, Va., transferring title of the 1970s-era regional mall to a mortgage lender on behalf of LNR Partners LLC as the asset’s special servicer.

The Bloomfield Hills, Mich.-based REIT, which also owns and operates Stony Point Fashion Park in the Richmond market, has been relieved of $72.2 million of debt obligations plus accrued interest associated with Regency Square on a loan originally worth $82.5 million.

In addition, the company expects to recognize in the fourth quarter of 2011 a non-cash accounting gain estimated to be in excess of $45 million, representing the difference between the book value of the center's debt and other obligations extinguished and the net book value of the property.

Taubman, which has owned the 820,000-sq.-ft. property since July 1997, stopped paying the mortgage on it last June, according to Karen MacDonald, the REIT’s director of communications. The mortgage had an original stated rate of 6.75 percent plus a 4 percent default rate and was originally scheduled to mature in November 2011.

MacDonald says that Taubman decided to let the property go back to the lender because the cashflow from the shopping center wasn’t covering the interest expense on the loan. She adds that the REIT did not try to work with the special servicer to avoid losing the property.

“Most REITs have been in the same situation and have surrendered properties,” says Gerard V. Mason, executive managing director of Savills. “The tipping point comes when you have a property that requires additional investment, yet it’s not worth the debt it has on it. Why would Taubman or any other owner invest more money in a center when it’s never going to provide a return on that investment? You want to get the dead wood off the books.”

In the third quarter of 2009, Taubman announced it would recognize an impairment charge of $59 million for Regency Square, which experienced declining net operating income and increasing capital expenditure requirements. Subsequently, the company’s board of directors concluded that it was in the best interest of the company to discontinue its financial support of Regency Square.

Regency Square is anchored by two Macy's, JCPenney and Sears. Other tenants include Aldo, Charming CHARLIE, Sephora and Forever 21. Although Taubman declined to disclose specific numbers regarding Regency Square’s occupancy and retail sales, industry experts says the property is generating less than $250 per sq. ft.

“When the sales per sq. ft. get that low, it’s usually a death knell for a mall,” Mason says. “The bottom line is that Regency Square is an old format, and there are plenty of other options for shoppers. Richmond is over-retailed, and this property is bookended by two newer spectacular properties: Forest City’s Short Pump Town Center and Taubman’s Stony Point Fashion Park. In a way, Taubman cannibalized it own center when it opened Stony Point, and frankly, I don’t think there’s a lot of hope for Regency Square.”

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