Placing Your Eggs In One Heavily Leveraged Basket

St. Louis Mills mall in St. Louis County had big promises for the City of Hazelwood a few years ago (full story):

In the past, retail establishments have not been a major part of Hazelwood’s economy. But that’s about to change in a big way. Mall developer Mills Corp. recently broke ground for a $250 million shopping center dubbed St. Louis Mills. The 1.2 million-square-foot mall will include 12 anchor stores. Hazelwood city leaders approved $18.7 million in tax increment financing for the project.

The mall, being constructed on part of a Missouri River floodplain, will be anchored by high-end outlet stores, led by the St. Louis area’s first OFF 5th—the outlet version of Saks Fifth Avenue.

Rebecca Zoll, executive director of North County Inc., sees the Mills development as an epic event for the region, perhaps permanently changing its economic make-up and the perceptions of outsiders.

“This will bring in people from around the Midwest, and their dollars will go back into our community,” Zoll says. “There’s been some concern about how the mall will affect local business, but I think it will only help.”

First, I do believe that a mall can change “perceptions of outsiders” but certainly not in the positive. If a mall is an “epic event” the region is worse off than I previously thought. Maybe if you live in Wentzville the idea of getting in the minivan and driving in bumper to bumper traffic on the interstate to shop in generic stores around a food court this is a cool thing.

Aside from the many issues I have with indoor malls and building on a flood plain, a big concern is the financial health of the companies on which municipalities are so dependent. These great saviors of local economies are often teetering on the edge of bankruptcy.

The St. Louis Business Journal is reporting Mills Co, owner of St. Louis Mills, has fired its President. They appear to have a few issues to work out besides getting a new executive:

Mills said Aug. 11 that it would sell its stakes in three shopping centers based outside the U.S. to a Canadian real estate firm for $981 million to help pay off debt.

The company said that Ernst & Young audit reports for 2005 are likely to contain a paragraph saying “there is substantial doubt” about Mill’s ability to continue as a going concern because of deadlines for repaying $2 billion in debt.

Mills is restating its financial reports for the years 2000 through 2005 because of accounting errors, and those errors are expected to reduce net income by $210 million for 2003, 2004 and the first nine months of last year, according to a recent regulatory filing.

St. Louis Mills is among 42 properties owned by Mills Corp.

Hazelwood gave a $18.7 million TIF to a company that is now $2 billion in debt and possibly about to default. Wow, two billion. So creditors will likely take over St. Louis Mills and they will try to sell it. Just a guess but I’m betting it will sell for less than its original $250 million price tag. As long as the registers keep ringing Hazelwood should OK. If stores get a sense things will not be fine with new owners you might see some abandon ship.

Hazelwood is not alone, from a recent Post-Dispatch article:

Now Rock Hill is struggling to survive financially while banking its future on an expansive Novus development at the corner of Manchester and McKnight roads.

Local developer Novus, you may recall, was supposed to do a massive project in Sunset Hills but ran into financing issues for the project last year. From the St. Louis Business Journal:

It’s been about a year since Novus Cos.’ planned $184 million Sunset Hills lifestyle center deal fell apart. City officials and property owners within the development area are working to move on, but Novus’ Jonathan Browne apparently is not.

Browne, president of Novus, made a plea to Sunset Hills’ new mayor, John Hunzeker, June 26 to resurrect the project that has become a poster child for eminent domain reform across the country. In attendance at the one-hour meeting in the mayor’s office were Browne, Hunzeker and City Clerk Laura Rider.

All this to fight over a relatively fixed amount of sales tax revenue. The Sunset Hills project would have relocated a Famous-Barr store from Crestwood Mall (in Crestwood) to Sunset Hills. Good for one municipality but bad for the adjacent community. Some will argue the construction creates jobs but where does that money come from? The overall sales taxes collected in the region are the same yet $184 million would have been spent to get there. Well, this money comes in the form of reduced property values from other commercial properties that used to collect this sales tax, debt carried by the developer and tax incentives. At some point we must realize we cannot keep spending billions of dollars to build newer shopping developments in a region with relatively flat growth. It just doesn’t work.

– Steve