Who's Keeping Zombie Malls Alive?

00:05
Speaker 1
If you were a teenager in the 90s or early 2000s in the suburbs of eastern Pennsylvania, the Berkshire Mall was the place to be. Even famed local Taylor Swift shopped there in middle school. And during the holidays, the place was so popular, it could cause 40 minutes traffic jams from people just trying to get in and out of the parking lot.

00:25
Speaker 2
As a kid, I think everybody went.

00:27
Speaker 3
To the Berkshire Mall.

00:28
Speaker 1
That's Michelle Baer. Baer is a native of the area and the borough manager for the local government there.

00:34
Speaker 2
It was the hotspot. It was a place to go, know, hang out, do what teenagers remember. You know, a group of two or three of my friends, hey, my mom will drop us off if your mom will come and pick us up. It was a way to flirt a little bit with boys that were kind of outside of our realm.

00:55
Speaker 1
But these days, the mall is a shadow of what it used to be.

01:00
Speaker 4
How would you describe the state of the mall now?

01:04
Speaker 2
Dilapidated, deteriorated, sad, depressing. I mean, compared to its heyday, it's got maybe 10% of the foot traffic and vehicle traffic. The parking lot is predominantly empty.

01:21
Speaker 4
And the sinkhole.

01:22
Speaker 2
Which one?

01:24
Speaker 1
There's more than one?

01:26
Speaker 2
There's multiple.

01:27
Speaker 1
Today, the Berkshire malls parking lot has five sinkholes, one so massive you can see the water main underneath it. And that's not all that's wrong with it.

01:36
Speaker 2
There's damaged electrical components. There's pest control needed due to cockroaches and mice. There's roof leaks. There's water damage. There's holes in ceiling tiles. And the kicker is, there was raw sewage, including human excrement, flowing onto a public sidewalk at the main entrance to the mall. Yeah, your face says it all.

02:01
Speaker 4
I'm speechless.

02:07
Speaker 1
The current owners of the Berkshire Mall consider it one of the stars of their portfolio. They still make money off the mall, even though there doesn't seem to be any interest in making it a cool place for teens to hang out again. The owners say they've either fixed or are working to fix most of the maintenance issues.

02:22
Speaker 2
They like to purchase property and effectively sit on it, squeezing every dollar out of it.

02:27
Speaker 1
How do you feel about this?

02:31
Speaker 2
Frustrated. Disappointed. It has so much potential because of its size and its location for what it could be, what it could mean to the community, that to know that current ownership isn't thinking along those lines at all, it's frustrating.

02:51
Speaker 1
Welcome to the Journal, our show about money, business, and power. I'm Ryan Knuson. It's Monday, December 18. Coming up on the show, the company that sees profit in dying malls at.

03:16
Speaker 5
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03:52
Speaker 1
The Berkshire Mall is owned by two companies, Namdar Realty Group and Mason Asset Management. Under their partnership, Namdar manages the properties, while Mason handles new leasing. Together, the two companies own a lot of malls that are past their prime. In this case, they bought the Berkshire Mall in 2020 after the previous owners couldn't pay the mortgage. The mall had already been going downhill for years, and the pandemic made business even worse. Namdar and Mason paid $30 million for the Berkshire mall just ten years earlier. According to the local government, the mall was valued at more than $50 million. Here's our colleague Kate King, who has been writing about the decline of malls.

04:33
Speaker 4
So introduce us to this company, Namdar Realty Group.

04:37
Speaker 3
Namdar Realty Group is a real estate company privately held, founded by Eagle Namdar, and they bought their first mall in Florida in 2012, and they just went on a spree since then, and they now own about 80 across the United States. Their strategy is, first of all, to come in and purchase the malls at really low prices. So one of the reason malls are in such a difficult spot right now is that their values have just fallen far below the amount of debt that the owners owe on the property. So their view is that maybe a mall makes more economic sense if you've bought it for the right price.

05:20
Speaker 4
So how do they make money on malls, though? How can they make money on the Berkshire mall, for instance? Because there's not a lot of customers there. There's not a lot of businesses there. It sounds like the property itself needs.

05:32
Speaker 1
A lot of work.

05:33
Speaker 3
So their approach is they come in, they buy a mall at a really affordable price, and then they look to sell off pieces of the mall. So when you buy a mall, you don't just buy this huge, hulking, enclosed shopping center. You also buy the massive parking lot that surrounds it. And in many cases, on that parking lot are freestanding retail or restaurants. So your longhorn steakhouse, your Applebee's, your chili's, now you own these properties as well. And unlike enclosed malls, fast casual restaurants are doing really well right now. So in a lot of cases, Namdar and Mason come in, they buy the mall, which includes all this extra real estate, really, and they start subdividing it.

06:16
Speaker 1
And selling it off at the Berkshire mall. Namdar has already sold the land under red lobster Plaza as Teca and Longhorn Steakhouse for nearly six and a half million dollars.

06:29
Speaker 4
And what about the mall itself? I mean, is that operation making or.

06:34
Speaker 3
Losing money at the mall itself? They are continuing to collect rent from tenants, so maybe they're not making as much money from rent that they would have 20 years ago, but they bought the mall at a much cheaper price than they would have got it for 20 years ago. And a lot of the tenants they do bring in are tenants you wouldn't normally expect to see in malls, call centers, for example. They've placed in some of their malls local small businesses who can get more space at the mall than they would be able to get in a downtown retail district for a somewhat affordable rent. And they are not spending a lot of money on upkeep. So they operate with a very lean staff. They don't have a lot of people employed at the mall.

07:18
Speaker 3
They do not spend a lot of money on repaving the parking lot or doing other repairs that a lot of people in the community would like to see.

07:27
Speaker 4
So the business model is essentially buy it for cheap, sell off some of the valuable stuff in the parking lot, like the chili's and the Applebee's lot, and then keep some tenants in there, but cut costs and keep costs so low that they can still make a profit on the operation.

07:44
Speaker 3
Yes, exactly.

07:47
Speaker 1
Another key part of Namdar and Mason's business strategy is appealing to pay a lower property tax bill. After buying a mall, they go to the local government and say, hey, this property is not worth as much as it used to be. We should be paying lower taxes. And often they succeed.

08:03
Speaker 3
The Berkshire Mall is a perfect example of this. In 2019, the former owner paid more than $660,000 in annual taxes for its ownership of the Berkshire mall. And then after Namdar and Mason bought the mall, they appealed their property tax bills and were granted significant reductions. And so last year, they paid about $95,000 in property taxes.

08:29
Speaker 4
So they're able to reduce costs by, like, $500,000 a year.

08:35
Speaker 2
Yes.

08:38
Speaker 4
So how much money has Namdar and Mason made by deploying this strategy?

08:44
Speaker 3
They do make money. They told me that in 21 and 22, they saw their best year ever in terms of tenant sales. They are a private company, so I don't know the exact details of their finances, but I was able to see that? In June, they made a profit.

09:03
Speaker 1
In June, Namdar reported a gross profit of $86.7 million, a nearly 8% increase from the same month last year. That's according to filings with the Tel Aviv stock Exchange, where the company's bonds are traded.

09:18
Speaker 4
So how do local communities feel about this strategy?

09:23
Speaker 3
Local communities have been unhappy with Namdar and Mason's ownership of their malls, including.

09:31
Speaker 1
The local community around the Berkshire Mall. When Michelle Baer, the borough manager you heard from earlier, first found out that Namdar and Mason bought the local mall, she actually didn't know what to think because she'd never heard of them before.

09:44
Speaker 2
I mean, at the time, the name Namdar meant nothing to me until I started being contacted by people. Hey, you should google the name of the people that purchased the mall and found an article about a mall in Florida, found an article about a mall in New Jersey. And everything I read about at those other properties is and has now happened here. Issues with water lines, sewer lines, electric lines, general property maintenance, code issues.

10:18
Speaker 1
After the break, Michelle Baer and the local government push back.

10:31
Speaker 6
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11:05
Speaker 1
Part of Michelle Baer's job as a borough manager is to accompany officials when they inspect the Berkshire Mall. Recently, she went with a food inspector to check out the food court.

11:16
Speaker 2
And I mean, the evidence of mice was very know penetrations and walls where you could clearly see where vermin could get in. Just again, general lack of maintenance if things were being taken care of, and that's easy. You sign a contract with the local pest control company. They come in once a month, put the traps out, spray, do what they need to do, problem solved. And they're just not doing it.

11:47
Speaker 1
The borough started issuing notices for damaged electrical components, lack of pest control, roof leaks, water damage, and the overflowing sewage problem. It got so bad that the local government threatened to condemn the whole place.

12:02
Speaker 4
How has the company responded to the code violations that it's received?

12:07
Speaker 2
This most recent batch of code violations, I think they took very seriously, mainly because they were hand delivered the notice with the comment, you have until the day before Thanksgiving to fix this, or we are effectively condemning the entire mall.

12:23
Speaker 1
Other than Boskov's is the only department store left at the Berkshire Mall, and it does all of its own maintenance and repairs. So Michelle says that area is fine. In a statement, Namdar said, quote, as soon as any issue is brought to management's attention, it's addressed as quickly as possible. And did they fix everything?

12:45
Speaker 2
They fixed the major issues, the sewage leak. That was the biggest concern just because of the impact on public health and safety. So that was actually a really simple fix. They had a plumber come out, and here it turns out that the sewer line, the sewer trap was clogged with trash. So something as simple as, again, just routine maintenance because they failed to do it. That was the outcome. Now there's other plumbing, sewer issues going on there they need to fix. Bigger picture, but not in terms of creating any type of imminent public health or safety threat.

13:19
Speaker 4
So they met the deadline, though, that you didn't condemn the whole mall.

13:22
Speaker 2
Correct. But they're still very much walking a fine line of there's a slew of other code violations. They need to fix. That, again, are not considered an immediate threat or public safety issue, but still need to be resolved.

13:39
Speaker 1
It's a similar picture in other towns where Namdar and Mason owned malls.

13:42
Speaker 3
Regency Square Mall has fallen into a state of disrepair. The roof has caved in many areas, and there's water damage and mold.

13:50
Speaker 1
There were code violations and fines at the Regency Square Mall in Duvall County, Florida. As the mall is deteriorating, businesses are fleeing and the mall is behind on its property taxes. In Calumet City, Illinois, the mayor threatened legal action over the River Oaks mall. And still in other places, local leaders have begged Namdar to sell the malls. The companies say they take lawsuits very seriously. As for the Berkshire Mall, I asked Michelle Baer about the borough's next moves.

14:20
Speaker 2
We'll continue to push in terms of the code violations and making sure their feet are held to the fire for compliance. I mean, for some of those violations, failure to comply is a fine of up to $1,000 per day. But again, having them pay a fine is not ideal. I would rather see that money invested in repair and maintenance of the property. So my hope is they take the most recent violation notices seriously, do what they need to do to bring everything up to where it needs to be. I'm probably being overly optimistic with that hope.

14:59
Speaker 4
What would you like to see that property used?

15:01
Speaker 1
For?

15:03
Speaker 2
Me personally, I think you could put a whole host of things there that would benefit the community, everything from a mixed use lifestyle center that has components of residential, maybe educational or medical, an indoor recreation center. So indoor soccer fields, ice skating rinks, things like that would be tremendous for the entire county, anything other than what it is now.

15:31
Speaker 1
Namdar said, quote, our business strategy has been and always will be to determine the highest and best use of each of our properties. I asked my colleague Kate if Namdar and Mason's business model might catch on and if we can expect to see more companies doing this in the future.

15:47
Speaker 3
It's a good question. I think a lot of people have been watching Namdar and Mason and I think are trying to figure out how they are making the money that they're making and maybe waiting to see how this plays out. I don't see a huge rush of other companies into dying malls. I think the big takeaway is that a lot of malls are on their way out for sure. And it's a really long and painful process for a mall to die. And in some cases, there are companies that aren't ready for them to die or think that they should hold on a little bit longer and that there's more money to be made. And it's a really complicated process for a mall to go away.

16:29
Speaker 4
This story sort of reminds me of other things with private equity companies that buy, like, say, newspapers, for instance, that are on the decline. And rather than invest in them to turn them around or shut them down, they just cut as many costs as they possibly can to sort of squeeze every last dollar out as long as they possibly can before the business eventually closes.

16:54
Speaker 3
Yeah, I think that's a really personally painful but adequate analogy. It's certainly not pretty to see this play out.

17:17
Speaker 1
That's all for today. Monday, December 18. The Journal is a coproduction of Spotify and the Wall Street Journal.

17:24
Speaker 4
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17:26
Speaker 1
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17:33
Speaker 4
See you tomorrow.