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Part 3: Litigation clouds future of Kirkland's Totem Lake Malls
When co-owners Coventry Real Estate Advisors (an investment management company) and Developers Diversified Realty (a real estate management company) purchased the Totem Lake Malls in 2004, they intended to redevelop the site.
The joint agreement between the two companies was not the first – but is probably the last.
This is the third part of a five-part series on Totem Lake Malls, which started with the history and continued with the demise of the property. This week, the Reporter will profile the two companies, their joint agreement to redevelop retail property and take a look at the lawsuit that has stymied redevelopment efforts in Kirkland.
The group purchased the Totem Lake Malls site from the California Public Employees’ Retirement System for $37 million in 2004. But the relationship between the two companies has turned into a tangled mess of litigation.
In addition to Totem Lake, the joint agreement included 11 other malls nationwide that are now listed in the lawsuit filed by Coventry against the $17.9 billion Developers Diversified Realty (DDR). Most of the sites were acquired with the idea of taking under-performing malls and redeveloping them. As a part of the agreement, DDR has provided 20 percent of the required equity capital for projects, while Coventry is responsible for the remaining 80 percent. However, Coventry now asserts that DDR has not fulfilled the agreement.
The Totem Lake site is a part of the $500 million fraud lawsuit filed in New York state. During the past three months, the Reporter has made numerous phone calls and e-mails to both companies and their lawyers with no response.
Though city officials can’t say if the lawsuit is solely to blame for Totem Lake Malls’ delayed plans, the litigation has certainly played a role.
“It’s hard to say whether it’s the lawsuit or the economy that is clouding redevelopment plans to the property,” said City of Kirkland Economic Development Manager Ellen Miller-Wolfe. “What I have understood from Coventry was there are certain things they could do whether there is or isn’t a lawsuit, some things like leasing on a short-term basis.”
According to court documents, the legal action encompasses a total of 12 malls and a Service Merchandise Portfolio with 51 separate locations involved in the co-venture.
The lawsuit asserts that DDR failed to commit adequate resources, left Coventry “in the dark on material aspects of the properties,” overvalued assets sold to Coventry and purposely inflated fees.
The suit also states that “the effect of DDR’s scheme has made many of the properties commercially untenable.” The complaint was filed in November of 2009 – the same year the co-owners backed out of a redevelopment agreement with the City of Kirkland for the malls.
Coventry accuses DDR of “allowing the properties to flounder and ultimately fail, while focusing on its real goal: to collect as much in fees as possible while making only the most cursory effort to perform its responsibilities.”
DDR, an Ohio-based company, has responded that “this action is nothing more than a meritless breach-of-contract case,” in a motion to dismiss.
New York-based Coventry stated in court documents that DDR has collected $28 million in identifiable fees from Coventry. Continuing to collect money on the properties has given DDR’s stock a boost at Coventry’s expense, according to court records.
DDR said it “vehemently denies the allegations, will vigorously defend itself against such allegations in any legal proceeding” and denies it has breached any terms of any such agreements with Coventry.
The plaintiff asserts that many of the projects could have been completed prior to the downturn in the economy. DDR’s actions have also “placed itself in position to acquire at distressed prices some of the same properties it recommended that Coventry acquire, and which it promised to develop, lease and manage for Coventry.”
In 2006, the City of Kirkland and the co-owners entered into a $126 million redevelopment agreement in which the city would have invested $15 million into the project. The city was to receive $3 million from the state for the project as well. When the co-owners walked away from the agreement the $3 million was redirected to the Parkplace development in downtown Kirkland.
DDR has done some work on other properties. The problem, according to Coventry, is that the majority have not been redeveloped or upgraded. The lawsuit claims that any completed work has been at Coventry’s expense. In court documents, Coventry said that DDR redeveloped 316,000 square feet of gross leaseable area across the 12 properties and charged Coventry $15.5 million in fees. Third parties contracted by Coventry have performed 715,000 square feet of redevelopment for less than $4.5 million.
“DDR’s performance of its development, leasing and management duties has been marred by its chronic refusal to act,” said the complaint. “Despite its obligations, and Coventry’s repeated pleas, DDR did little or nothing to control its subcontractors’ development work and their pervasive cost overruns, and it provided Coventry with little information, if any, about its performance and results.”
Kirkland City officials are not certain where the lawsuit is at in the process or how long it will continue, as DDR officials have remained tight-lipped.
“I have not been in communication with DDR the last several years, but I have been with Coventry,” said Miller-Wolfe, noting a Coventry representative even attended the city’s recent symposium on the malls. “My experience in terms of their responsiveness has been very good, albeit there is no development happening at the malls, but when we have a concept to throw at Coventry, they have been very responsive.”
In the future, the city also has several legal options to pursue should city officials find it necessary to expedite the redevelopment of Totem Lake Malls.
City Attorney Robin Jenkinson points to the redevelopment agreement. Article 16 discusses dispute resolution, mediation, arbitration, litigation and equitable proceedings, though Jenkinson said “nothing has been triggered under the redevelopment agreement, at this point, that would give the city a basis for pursuing any of these avenues.”
She added that “litigation is costly and complex and at some time may be considered by the city council, but not as a first step. The city continues to be committed to the redevelopment of the Totem Lake Malls as reflected in the redevelopment agreement.”
Eleven other malls
Most of the 12 mall properties in the lawsuit, including Totem Lake, have not been redeveloped. Others have been downright abandoned.
One of the worst is the $350 million redevelopment of Bloomfield Park Mall, in Bloomfield Hills, Mich., which was slated for redevelopment even prior to the companies’ purchase in 2006. Bloomfield Park’s 93 acres dwarfs Totem Lake’s 26 acres, but the redevelopment issues are similar.
Bloomfield was once touted as a $2 billion development that would bring jobs, residents and upscale buyers. But the project is now abandoned, said Bloomfield Township Supervisor David Payne, who fought the project for 15 years.
“There has been no work for the last several years and what exists today is several large parking structures and the uncompleted shells of a number of buildings,” Payne told the Reporter.
“I cringe when I drive by,” he told the Detroit News in 2009. “It’s our worst nightmare.”
It was even abandoned by DDR’s Web site as there is no listing for the mall that is named in the lawsuit. The Michigan property is, however, listed on Coventry’s Web site.
Coventry also accuses DDR of charging nearly $1 million for development fees for a mall in Texas, Westover Marketplace, where no work has been performed.
The two companies own two malls in Texas: Westover Marketplace in San Antonio and Watters Creek at Montgomery Farm. Westover was set to open an expansion in 2009 that has yet to be built.
Of the 12 properties involved in the lawsuit, Merriam Village, a 35-acre shopping center in Kansas, is the third-smallest in size at 280,662 square feet – just in front of Totem Lake Malls’ 220,000 square feet and Marley Creek Square, in Orland Park, Ill., at 120,000 square feet. Like the Totem Lake Malls, the Kansas property has remained mostly empty, except for a few temporary leases, including a seasonal Halloween store. It has 53,182 square feet of available space.
Also part of the lawsuit, Ward Parkway Center in Miss. was set to foreclose during a contentious dispute between the co-owners, just four months after the lawsuit was filed in 2009. Coventry redeveloped the 800,000-square-foot shopping center and brought in new tenants, like Staples, after the company and DDR financed and purchased the property in 2003.
However, a $35 million loan on Ward Parkway Center matured and the lender sent the owners a notice of default in February 2009. Around the same time, the pair defaulted on a $17 million land loan for the stalled Merriam Village shopping center in nearby Johnson County (foreclosure proceedings were not announced for that property).
DDR blamed Coventry for the foreclosure initiated against Ward Parkway Center, citing Coventry’s “failure to fund a mortgage paydown,” Robin Lybarger, a spokeswoman for DDR, told the Kansas City Business Journal in March 2009.
“Developers Diversified has fulfilled our obligation, and we have no obligation to fulfill our partner’s obligation,” David Oakes, DDR’s chief investment officer, said of the foreclosure in a written statement.
Soon after, DDR announced the Otto family – owners of a leading European retail development firm that owns Crate and Barrel – 30 million shares of DDR stock, making the family the single-largest shareholder of DDR. In addition, the German family committed to make a five-year $60 million loan to help DDR enhance liquidity and provide the company with significant capital for debt reduction.
The purchase made it possible for the owners to work out a debt-repayment deal for Ward Parkway, though the Reporter could not confirm whether the property foreclosed or not.
But things have not been all bad between the two companies.
According to court documents, they entered into a venture between 1998-2007 that was designated Coventry Real Estate Fund I. In this “Coventry Fund I,” Coventry raised $210 million from investors, and co-invested these funds with DDR in 60 commercial real estate projects across the country. Coventry Fund I was a success. At the end of the fund’s term, all properties acquired had been sold, resulting in a 42 percent rate of return.
Despite the lawsuit, Kirkland residents have wondered if there is anything the city could do to push the malls’ redevelopment plans forward.
“No, unfortunately not,” said Miller-Wolfe. “It’s a privately held property and because of that, the city doesn’t have much leverage here.”
Coventry is a real estate investment manager that offers a broad array of services to investors. The company has invested more than $2.5 billion in transactions since its inception. According to its Web site: “Coventry has developed a successful track record of identifying and capitalizing on unique opportunities in the retail/mixed use sector.”
One of the largest retail real estate owners and managers in the world, DDR was created in 1965 to develop shopping centers. DDR currently independently owns and manages approximately 590 retail operating and development properties in 41 states, Brazil, Canada and Puerto Rico totaling more than 134 million square feet. The properties range in size from 6,500-400,000 square feet and 145 of the sites are anchored by a Walmart, Kohl’s or Target.
DDR acquired 404 of those properties, or 68 percent, after the Totem Lake Malls between 2005-2010.
DDR stock plunged more than 95 percent in 2009 and the company began selling off properties, according to a story the Reporter ran in March 2009. In addition, the company’s consolidated debt as of January is $4.1 billion, according to DDR’s year-end update.
Despite the plummet and overall debt, the company seems to be slowly rebounding.
DDR raised more than $4.7 billion in capital in 2009-2010 and leased approximately 11.3 million square feet of retail space in 2010.
According to its Web site: “We own, manage and develop a dynamic international portfolio of highly valued shopping centers, creating experiences that delight shoppers and enhance quality of life.”
After the co-owners walked away from the redevelopment agreement with Kirkland, rumors began to surface of Totem Lake Malls being for sale.
“They’re pursuing a number of options,” former City Manager Dave Ramsay told the Reporter in 2009. “I had heard, basically on the street, that it was for sale.”
Miller-Wolfe told the Reporter that Coventry/DDR had put the redevelopment of Totem Lake Malls on hold while seeking new tenants for leases up to three years, but the languishing mall as a whole continues to shed retailers.
In part four, the Reporter will examine what is actually in Totem Lake Malls and the neighborhood, a symposium held last August by the city on the failing site and the economic impact on the city.
How Totem Lake Malls compare
Project size (in square feet)
Phoenix Spectrum Mall (Christown): 1.15 million
Tri County Mall: 1.3 million
Buena Park Mall and Buena Park Place: 1.1 million
Watters Creek at Montgomery Farm: 900,000
Ward Parkway: 800,000
Bloomfield Park: 600,000
Westover Marketplace: 600,000
Fairplain Plaza: 457,300
Merriam Village: 280,662
Totem Lake Malls: 220,000
Marley Creek Square: 120,000
Bloomfield Park: $250 million
Merriam Village: $73.5 million
Totem Lake Malls: $37 million
Fairplain Plaza: $26 million
Date DDR acquired
Bloomfield Park: 2006
Fairplain Plaza: 2006
Marley Creek Square: 2006
Westover Marketplace: 2005
Phoenix Spectrum Mall: 2004
Totem Lake Malls: 2004
Buena Park Mall and Buena Park Place: 2004
Watters Creek at Montgomery Farm: 94
Marley Creek Square: 92
Merriam Village: 82
Westover Marketplace: 72.4
Fairplain Plaza: 72.1
Buena Park: 71.8
Phoenix Spectrum Mall: 65
Totem Lake Malls: 53.1
Bloomfield Park: 0
* The information listed was confirmed by the Kirkland Reporter. Some information on the various sites could not be confirmed and therefore is not listed.
Next week the Reporter will look at the economic impact of the mall and what is currently at and around the site.
To voice your opinion for the final piece of the series, sound off in a survey at “sleeping giant.”
Editor Carrie Wood contributed to this report.