GUILDERLAND — On Oct. 16, Crossgates Mall will try to make a case for why its $282 million tax assessment should be cut nearly in half. It’s an argument that, at first blush, appears hard to make, and harder to believe. And yet, it’s one that other Pyramid-owned malls have made with significant success. 

But Crossgates’ attorneys won’t be squaring off against lawyers from the town of Guilderland in the Albany County courtroom of Supreme Court Justice Margaret T. Walsh next Friday; rather, the case will be decided on paper.

The town, according to the filing, “is required to serve a verified answer, if any,” to Crossgates’ attorneys “at least seven days prior” to the court proceeding,  which is Oct. 9, to allow the mall’s lawyers time to reply to the answer, and, on Oct. 16, all of the paperwork will go to Justice Walsh for a decision. 

Starting on the day of the proceeding, the court has a 60-day guideline in which the judge can make her decision. 

While there’s a successful playbook for individual Pyramid properties looking to lower their tax bills, the broader story of the Pyramid Management Group since the pandemic began is one of permanent-tenant closings, millions-of-dollars in loan delinquency payments, and lawsuits — not only in Guilderland but across the state. 

Pyramid did not respond to a request for comment.

Guilderland’s 2019 town-wide revaluation, its first since 2005, led to approximately 46 property owners this summer challenging the assessment of 77 of their properties in Albany County Supreme Court, the lowest level in the state’s three-tiered court system. The single-largest among these challenges is Crossgates’ attempt to cleave $139 million off of its $282 million assessment. 

The company in its lawsuit claims its assessment should be reduced because, “Prior to the issuance of the Town’s tentative assessment roll for 2020, [Crossgates Mall] provided and offered information to the Town’s Assessor concerning the Property and its value, and advised the Assessor that the Property’s value had declined year-over-year due to continuing pressure on its ‘bricks-and-mortar’ business from e-commerce, sales declines, and record bankruptcies, and store closures, particularly for department stores and fashion retailers that were once the primary focus of [Crossgates’] business.”

The suit goes on to claim that “fair market value of the Property ... had also been negatively affected by the devastating impact of the COVID-19 pandemic catastrophe on the condition of the Property.”

Crossgates has seen the permanent closure of at least one of its anchor tenants, Lord & Taylor, while it will continue to reel from the ongoing closure of another major tenant. Although movie theaters in New York State have been closed since the pandemic shutdown began in March, the British parent company of Regal Cinemas — which operates 18 theaters at Crossgates — announced this week that it was temporarily closing all of its theaters in the United States. 

In the tax year 2019, the seven tax parcels listed in Crossgates’ lawsuit against Guilderland collectively paid entities within the town — the school district, the public library, and the town government — about $7 million in property taxes. If Crossgates were to win its lawsuit, the taxes it pays to the town could be cut by about half. 

Heather Weinhold, Guilderland’s new assessor, told The Enterprise in August that, if a complainant wins a tax certiorari case, the length of time the new assessed value applies to the property depends on the court order, but she said the new value is usually frozen for three years.

 

 

 

 

Nine tenant suits 

While Crossgates is trying to stick Guilderland residents with a larger tax bill, the mall is doing its best to make sure it’s not on the hook for other companies’ pandemic-related problems.  

Crossgates is suing nine of its tenants — Banana Republic, Old Navy, The Gap, Athleta, Journeys, Underground by Journeys, Journeys Kidz, Ruby Tuesday, and Uno Chicago Grill — for about $1.3 million in combined back rent.

In four of the lawsuits filed in Albany County Supreme Court in August, the mall claimed four of its retail tenants: Banana Republic, Old Navy, The Gap, and Athleta — all owned by Gap Inc. — had barely paid rent since February. The dereliction of lease payments led to a collective past-due amount through August, totaling over $710,000. 

In August’s three suits, Crossgates claims the shoe retailers Journeys, Underground by Journeys, and Journeys Kidz, which all have the same Tennessee-based owner, stopped paying rent in March and owe the mall approximately $162,000 in combined back rent.  

On Sept. 24, the limited liability company that owns Crossgates filed an eighth lawsuit, this time in Onondaga County Supreme Court, against one of its tenants for past rent due. The mall claims that Ruby Tuesday owes it $154,680 in rent from when it stopped paying its lease on March 31. 

And on Monday, Crossgates filed its ninth complaint against a tenant, again in Onondaga County. The mall claims the Uno Chicago Grill restaurant owes it back rent worth $228,975.

 

A successful tax suit

The Pyramid-owned Champlain Centre is suing the city of Plattsburgh in Clinton County to lower its assessment from $25 million to $4 million, using the exact same language that Crossgates uses in its suit against Guilderland: “Prior to the issuance of the Town’s tentative assessment roll for 2020 ….”

But this isn’t the first time the Champlain Centre has sued Plattsburgh.

The court filing states that in 2008, “as a result of previous proceedings,” the two sides agreed to a $36 million assessed valuation for the Champlain Centre, which remained unchanged until the 2015-16 tax year.

Between 2008 and 2015, according to court papers, the mall’s finances “declined precipitously”; however, the city of Plattsburgh ignored the “declining performance” and, for the 2015-16 and 2016-17 tax years, increased the Champlain Centre’s assessed value to $49.4 million.

“It did so despite not only its declining performance, but also the impending closure of one of Champlain Centre’s anchor tenants [Sears, which closed in April 2016], the continuing downward spiral of brick-and-mortar retail, and the absence of a town-wide revaluation,” the court filing says.

The Champlain Centre challenged the increase and won, with the court ordering an assessment reduction to $28 million for 2015-16 and then to $25 million for 2016-17.

According to the most recent Securities and Exchange Commission filing, the Champlain Centre had an appraisal reduction of $7.4 million on Sept. 8. When the loan was originated, in 2011, the mall had an appraised value of $61 million. 

The $29.8 million loan was transferred to special servicing in May.

The mall had a net operating income of $2.5 million in June; by September, its net operating income was $867,299, according to the SEC filing.

 

Pyramid’s coronavirus response

The pandemic has hit both Crossgates Mall and its owner hard.

Time Magazine reported in May that, “as lawmakers in Washington rushed to pass a historic, nearly $2.3 trillion stimulus package last month, lobbying firms of all stripes lined up at the trough, pushing to secure bailout money, tax breaks and sweetheart deals for their clients.” 

The pandemic stimulus was a new-client boon for lobbyists, Time reported.

And one firm stood head and shoulders above its peers in new-client acquisition, according to Time — Brownstein Hyatt Farber Schreck, which signed up a “real-estate development firm … which bills itself as ‘the largest privately held shopping mall developer in the northeast.”’ 

Pyramid signed on with Brownstein Hyatt Farber Schreck for $30,000, and was registered with Congress as one of the Brownstein’s clients on April 9, seeking to have the firm lobby on its behalf to the House, Senate, and Department of the Treasury — specifically on “issues related to COVID-19.”

On April 15, Pyramid received a CARES Acts Paycheck Protection Program (PPP) loan valued between $2 million and $5 million. In addition, one of the company’s affiliated limited-liability corporations based in Syracuse received a PPP loan worth between $350,000 and $1 million.

 

[A primer: The commercial mortgage-backed security industry]

 

Crossgates’ CMBS loans

Crossgates Mall had an unaudited net operating income for the first six months of 2020 of $5.8 million, according to the latest Securities Exchange Commission filing; for the same period in 2019, that number was nearly $15 million.

Crossgates has three mortgage loans worth a cumulative $263 million that are at least five months delinquent — those three loans have collective outstanding principal and interest payments totaling $8.3 million, according to the most recent SEC filings.

The specially-serviced loan detail for Crossgates’ $63 million loan notes that the COVID 2000911 loan was transferred to a special server on April 10, 2020. Crossgates requested COVID relief. Then, on June 23, a document was executed for deferral of six months of debt-service payments with repayment beginning in January 2021 in 12 equal monthly installments.

In July, the appraised value of Crossgates Mall was lowered from $470 million to $281 million.

In very short and overly-simplified terms, the reappraisal means that loan servicers are on the hook for less upfront money; in turn, that reduced cash flow is then passed on, in a manner of speaking, to the bond buyers at the bottom of the CMBS tranche — known as the subordinate class of certificate-holders.

Take, for example, a residential mortgage-backed structure. In this instance, a servicer is supposed to advance funds up to the point where they deem the money a lost cause, at which point the servicer stops throwing good money after bad. 

But the major difference between a residential and a commercial loan is what happens when the borrower defaults on their mortgage. 

Commercial loans are non-recourse, meaning, in the case of a default, the lender can’t take the loan’s underlying value, for example, a mall, as collateral. In the case of a default on a residential loan, the bank can foreclose on the borrower, take the home, and resell to turn a profit or just get the loan off its books. 

Since it’s difficult to repossess a mall, the CMBS (re)appraisal process — which, for example, can be undertaken in the case of a loan default or if a revenue-generating property no is longer producing the income it once was — is an instrument that allows the servicer a way to limit the funds it has to advance on a secure asset, or illiquid asset, something that can’t quickly or easily be sold — a mall, for example, whose value has decreased. 

 

Pyramid’s loans

On March 19, Governor Andrew Cuomo ordered the state’s malls to close, and, with the exception of stores with their own exterior entrances, malls were not allowed to reopen until July 10.

This summer, a report from the credit rating agency DBRS Morningstar listed 10 Pyramid Management Group loans with a balance of $1.3 billion that had gone into special servicing.

The largest among the 10 was the $418.5 million loan on the Palisades Center in West Nyack in Rockland County. 

As of its Sept. 1 SEC filing, the loan was six months months delinquent.

In July, Moody’s downgraded four CMBS classes related to the loan.

“The property’s performance has continued to decline since securitization,” Moody’s noted. 

Since July 2017, the Palisades mall has lost three major tenants: J.C. Penney, which occupied three floors and 157,000 square feet; Lord & Taylor had 120,000 square feet of floor space; and Bed Bath and Beyond, which had two years left on its lease, closed in June, occupied 45,000 square feet. 

Due to the pandemic-caused shutdown, according to Moody’s, a number of tenants stopped paying rent.

“We expect the store closures, weakened tenant credit profiles and re-opening uncertainty will pressure the mall’s performance for the rest of the year and the first half of 2021,” the credit-rating agency notes. “Furthermore, the loan matures in April 2021 and may face significant refinance risk as a result of the declining performance and the current retail environment.”

Pyramid holds a $139 million mortgage, split across two loans on the Poughkeepsie Galleria in Dutchess County. The loans are five months delinquent with outstanding principal and interest payments totaling $4.9 million, according to the most recent SEC filings.

The Poughkeepsie mall had a net operating income of $1.3 million for the first six months of this year, according to the SEC filings; for the same period in 2019, the Poughkeepsie Galleria’s net operating income was $5.9 million. 

Under the specially-serviced loan comment section of the filing it says, “Loan recently transferred for Imminent Monetary Default at borrowers request as a result of the Covid-19 pandemic. Borrower has engaged third party consultant and proposal has been received.”

In addition to the two major mortgages, there is also a $7.3 million loan associated with the Poughkeepsie Galleria whose own mortgage-loan status was 121 days or more delinquent with outstanding principal and interest payments totaling $232,395. The Sept. 30 filing also notes the mall’s appraisal was reduced by $15.7 million.

Last month, the credit-rating agency Fitch downgraded seven certificate classes of a commercial mortgage-backed security in which two Pyramid-backed loans made up 43 percent of the pool.

The downgrades reflected “increased loss expectations and refinance concerns on the two specially serviced regional mall loans, Holyoke Mall and Sangertown Square,” according to Fitch. “The coronavirus pandemic is expected to exacerbate already existing pre-pandemic performance deterioration on these properties. Both mall loans, which were 60+ days delinquent as of July 2020 … have upcoming maturities in February 2021 and January 2021, respectively.”

Pyramid holds a nearly $182 million loan on the Holyoke Mall in Holyoke, Massachusetts. Fitch noted that, as of March, the mall is only at three-quarters occupancy, and that the loan was transferred to special servicing in May “due to imminent payment default.”

Pyramid’s Sangertown Square Shopping Center in Oneida County carries a $53.4 million loan.

Fitch noted in August the mall’s “collateral occupancy” in March was 93.6 percent — however J.C. Penney, which occupied nearly 17 percent of Sangertown Square’s floor space, closed in September. Further, according to Fitch, “Macy’s [15.6 percent] also has an upcoming lease expiration in January 2021,” which could decrease the mall’s collateral occupancy to just 61.2 percent. 

And since Sears shut down in 2015, Fitch noted, Sangertown Square’s net operating income debt-service coverage ratio went from 1.48 in 2014 to 1.21 last year. In the world of corporate finance, the debt-service coverage ratio (DSCR) is a measurement of a firm’s ability to pay its current debt obligations with available cash flow. Sangertown Square went from being able to cover 148 percent annual debt payments in 2014 to being able to pay off 121 percent of debt in 2019.

For comparison, Crossgates in May had a debt-service coverage ratio of 1.28; while as of this month, as a fully-pandemic-ravaged mall, it had an outlier DSCR of 0.51. 

And Sangertown, like Crossgates and the Champlain Centre, is suing the municipality in which it is located to lower its assessed value, citing the pandemic and general decline of brick-and-mortar retail, with the exact same language used in its sister malls’ court filings, as its justification for the decrease: “Prior to the issuance of the Town’s tentative assessment roll for 2020…” 

The Sangertown Square Shopping Center tax certiorari case filed against the town of New Hartford in Oneida County seeks to lower the mall’s assessed value from $62.5 million to $17.8 million, a $44.7 million reduction.

Approximately 50 miles north of Albany is Aviation Mall in Queensbury, Warren County. Pyramid holds a $19.7 million loan on the mall that is only about 72 percent occupied and, like many of Pyramid’s other loans, was “transferred to special servicing in May due to imminent monetary default at [Pyramid’s] request of the coronavirus pandemic,” according to Moody’s.

 

Walden Galleria

Similar to Crossgates, the Walden Galleria in Erie County is suing a number of its tenants for back rent. 

In total, the Pyramid Walden Company has filed suit against five of its tenants — Things Remembered; Victoria’s Secret Stores; Pink, which is owned by Victoria’s Secret; Bath and Body Works; and White Barn, a Bath and Body Works subsidiary — for $611,000 in past due rent.

Pyramid holds a $246 million loan on Walden Galleria that, according to the most recent data from the Kroll Bond Rating Agency, from July, is at least 60 days delinquent. Also in July, Kroll downgraded all five classes of certificates associated with the single-borrower Walden commercial mortgage-backed security. 

“The downgrades reflect the decline in operating performance of the collateral,” Kroll noted that Walden Galleria’s current cash flow had been down 25 percent from when the bond was first issued, in 2012. 

Kroll’s July Surveillance Report states Walden Galleria “has exposure” to a number of high-profile bankruptcies.  

Lord & Taylor, which recently closed its 38 stores for good, was the mall’s third-largest tenant, leasing 100,000 square feet. 

Using the rent from the court filings in Pyramid Walden Company’s suit against its five tenants, the rent lost from Lord and & Taylor’s bankruptcy could be $43 per square foot per month on the low end to $56 per square foot per month on the high end — both of which translate to tens-of-millions of dollars annually.

Additionally, Kroll notes, the mall “has exposure” to Regal Cinemas, which has been closed since the spring due to the pandemic but also announced on Monday that it would be temporarily closing all of its theaters across the country.

Walden also “has exposure” to Macy’s, according to Krolls, the mall’s second-largest tenant, which announced in February that it would be closing 125 of its stores over the next three years (Walden was not on the list), and avoided bankruptcy this summer by putting up $3.15 billion in real-estate assets to secure $4.5 billion in financing.

And Kroll says the galleria has exposure to J.C. Penney, which filed for bankruptcy protection in May and “continues to close underperforming stores,” although its Walden store is not one of them. 

“To our knowledge,” Kroll notes in its July Surveillance Report, the special servicer of the $246 million Walden loan and Pyramid “have reached an impasse on a possible forbearance. Pursuant to the Pooling and Servicing Agreement (PSA), the special servicer shall be authorized to pursue alternative resolution strategies including accelerating the loan, and initiating foreclosure, and receivership actions.”

The report also states the mall, valued at $600 million in 2012 when the loan was originated, will be reappraised 

Kroll also identified the Walden mortgage as a “Loan of Concern (K-LOC).”

A Kroll “Loan of Concern” can be either a specially serviced loan or a “non-specially serviced loan in default or at heightened risk of default in the near term.”

“In determining the K-LOC designation, KBRA considered the possibility of sustained performance declines of the collateral and negative implications related to COVID-19. At this time, KBRA does not estimate a loss on this asset; however, it is possible that alternative forms of financing and/or additional equity may be required to refinance the loan at maturity [in May 2022],” the report states. ​