Center City’s Fashion District debt — and control — abandoned by Philly mall operator

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Philadelphia-based shopping mall operator Pennsylvania Real Estate Investment Trust — otherwise known as PREIT — filed for Chapter 11 bankruptcy protection, the company told investors on Monday morning.

It’s not the first time, either.

PREIT filed for bankruptcy three years ago in November 2020 — during the height of the COVID-19 pandemic that began in March 2020.

Back then, PREIT restructured about $2 billion in debt, including an unsecured loan approved by Wells Fargo Bank.

This month, PREIT had more than $1 billion in debt it was in danger of defaulting upon, which prompted the bankruptcy and financial restructuring of its debt that comes with that process.

Except this time, when the bankruptcy court process is over, PREIT won’t likely be a publicly traded company on the stock market anymore but will be privately owned by investors.

Either way, PREIT’s shopping mall portfolio, which includes the beleaguered Center City Fashion District, has been prominent across the Delaware Valley.

Its portfolio also includes the Cherry Hill Mall in New Jersey, Plymouth Meeting Mall, and Willow Grove Park, among others.

The future plans for the Fashion District — which may include a new $1.5 billion NBA arena for the 76ers — is still in the works, according to a statement from 76 Place, the developer. That sentiment was retweeted by David Adelman, co-owner of the Philadelphia 76ers and chair of 76 Devcorp.

“This does not affect our plans or ability to deliver a $1.5 billion world-class arena and residential building,” according to the statement.

In the marketing materials for the Fashion District, the new NBA basketball arena is mentioned on Macerich’s website but no plans or contracts have appeared to have been shared with investors at this time.

But what’s clear is that the deal between Santa Monica-based Macerich Company and the Philly mall operator PREIT has changed as a result of the bankruptcy, U.S. Securities and Exchange Commission records show.

Macerich Company is taking over the $350 million debt and the asset in addition to daily operations, records show.

In January 2018, a joint partnership between PREIT and Macerich known as PM Gallery LP took out a $250 million loan to redevelop the Fashion District in Philly and to “repay capital contributions to the venture previously made by the partners.”

The $350 million plan to transform the then-Gallery mall into the Fashion District included more than $90 million in taxpayer dollars. More than half of that total was tied to a financing deal involving subsidies typically earmarked for economically depressed neighborhoods.

Developers promised the retrofitted mall would generate nearly $200 million in new tax revenues over 20 years while bringing thousands of jobs.

That was before the COVID-19 pandemic halted the economy, thrusting the U.S. brick-and-mortar retail market into a death spiral.

In December 2020, the deal changed again, so PREIT was on the hook for 50 percent of that total $350 million loan after Macerich paid down $100 million to $250 million.

In January 2023, the joint venture paid down another $26 million of the loan and extended the loan’s maturity date to January 22, 2024.

At the time, PREIT told investors it was unsure if it would be able to keep paying down the Fashion District debt if the loan comes due in full in January 2024.

As of September 2023, $73.3 million was still owed to Wells Fargo, which included $36.7 million owed by PREIT.

On December 9, 2023, PREIT transferred all of its ownership interests in the Fashion District to Macerich in exchange for the release of the debt payments.

Macerich did not immediately respond to requests for comment for this news story.

PREIT declined to comment on the Fashion District and deferred all inquiries to Macerich.

The company noted that all its shopping malls will “remain open for business and will continue operations without interruption” during the bankruptcy court process.

PREIT told investors that it expects to emerge from bankruptcy in February 2024. It touted that the bankruptcy enables the company to reduce its debt load by $880 million. If approved by the bankruptcy court judge, its ‘diverse group of leading investors’ led by New York City-based Redwood Capital Management LLC and Nut Tree Capital Management LP will have more control as a private business.

Both of these new investors appear to be private equity hedge funds, which typically take otherwise financially distressed companies and seek ways to repay debt, such as selling real estate.

PREIT’s chairman and CEO blamed its failure to compete in the market successfully on the economic climate with higher than average interest rates and inflation.

“Unusual economic conditions have limited the company’s options with respect to its debt obligations as meaningful achievements on the operating front were met with inflation and rising interest rates,” said Joseph F. Coradino, chairman and CEO of PREIT, in a news release.

This is a developing story. Check back for updates.