Can Lakeforest Mall in Gaithersburg survive?
That was one of the questions percolating after the mall sold for $19.1 million in a foreclosure auction on Tuesday—far less than the $100 million Connecticut-based Five Mile Capital paid for it in 2012, according to The Washington Business Journal.
U.S. Bank, which held the note that Five Mile used to purchase the property, ended up buying the mall. Five Mile owed $80 million on the note when it stopped paying in January.
The bank plans to keep the mall open.
“There are no anticipated changes to the property at this time,” the mall’s general manager, Paul DeMarco, said Wednesday, reading from a statement provided to him by the bank. “We anticipate a smooth transition to new ownership and expect the center to continue to serve the community as a viable shopping destination.”
The mall has about 160 stores; 75 percent of the properties are leased, DeMarco said. It was built in 1978.
Montgomery County Council member Sidney Katz, the former longtime mayor of Gaithersburg who was a member of the city council when the mall opened, said Wednesday he doesn’t think the mall has changed much.
“It looked very similar to what it looks like now,” Katz said, although he noted there has been turnover at the stores as well as renovations to the interior and courtyard. “When it first opened there was an ice rink in there and a movie theater, that type of thing.”
The property sold Tuesday for far less than its 2016 assessed value of $80 million. The owner paid about $1.1 million in taxes that year to the county and city of Gaithersburg, according to tax records.
Previous owners have struggled to make the property successful. Prior to Five Mile’s 2012 purchase, the mall giant Simon Property Group defaulted on a loan balance of $138.7 million that year.
Local officials say the site would be a prime opportunity for a mixed-use development, but there’s a problem. The mall’s anchor stores—Sears, JCPenney, Macy’s and Lord & Taylor—all own their buildings, land and parking lots at the mall site.
U.S. Bank owns the main mall building that connects the four anchors as well as parking at the site. Any owner would have to negotiate with the anchor stores to get them to sell their property or agree to a redevelopment proposal.
“The long-term vision for the mall would be an entire redevelopment for the area into a much more robust, mixed-use area with significant retail,” Marilyn Balcombe, the president and CEO of the Gaithersburg-Germantown Chamber of Commerce, said Wednesday. “The difficulty is there are five different owners.”
Balcombe said she understands that the retail anchors are doing fairly well at the mall and might resist selling their properties.
“It puts the whole discussion into, ‘Well, the mall’s not going anywhere until something happens with these other pieces,’” Balcombe said.
Sears has been selling off its real estate as it has struggled to grow retail sales. Meanwhile activist investors have encouraged Macy’s and Lord & Taylor’s owner, the Hudson Bay Company, to sell off some of the companies’ valuable real estate. JCPenney closed 138 stores earlier this year.
Tom Lonergan, the director of economic development for Gaithersburg, said Wednesday that the mall’s future is “of critical importance” to the city.
“The city’s master plan has long called for a mixed-use development on this site,” Lonergan said. “It’s 100 acres. We certainly think there’s broader redevelopment potential for the site down the road.”
Lonergan said city staff members met with U.S. Bank officials a few weeks ago and the conversation focused on the foreclosure process. The bank officials said at the time the mall would continue to operate, he said.
Five Mile Capital proposed $20 million in renovations shortly after it bought the mall, but those plans failed to materialize. Five Mile did not return a request for comment Wednesday. Lonergan said he did not know why those plans fizzled.
Montgomery County is intimately familiar with how difficult redeveloping a mall with anchor-owned stores can be after watching the White Flint Mall and Lord & Taylor lawsuit play out.
The retailer sued the mall’s owners—Lerner Enterprises and The Tower Cos.—after the owners closed the mall as part of a plan to redevelop the property into a massive mixed-use town center. Lord & Taylor won the lawsuit and was awarded $31 million after a jury found the owners breached a contract with the retailer to maintain the mall as a “first-class” shopping destination.
White Flint Mall has since been demolished. The owners have not said what they’ll do next with the Rockville Pike property. The Lord & Taylor store is still open at the site.
Dozens of stores such as Aeropostale, Bath & Body Works, Foot Locker, Hollister and Zales remain open in the main part of Lakeforest Mall.
However, the main property’s revenue has been falling, according to Washington Business Journal, which reported the mall had $14.68 million in net income in 2012, then $6.18 million in 2016.
Balcombe said the mall likely competes for customers with other retail centers in the area, such as the outdoor RIO Washingtonian Center and the newly opened Clarksburg Premium Outlets. She didn’t think there was any overlap in stores between the outlet center and the mall.
“When we look at areas like RIO, which is doing great, the feel is different,” Balcombe said.
Lonergan said he has seen the trend of enclosed suburban malls built in the late 1970s and ‘80s struggling to compete with newer, open-air shopping centers and online retailers such as Amazon. Asked whether he thinks Lakeforest might end up like White Flint Mall, he responded, “There’s always concerns and that’s why we monitor this very closely.”
“It’s obviously a very significant property for the city,” Lonergan said.