Destiny USA, Syracuse’s mammoth mall, faces a crisis of debt and uncertainty (Part 1)

Syracuse, N.Y. — Destiny USA is in serious trouble.

Destiny, New York’s biggest shopping mall, is buried in an almost-unimaginable load of debt.

Pyramid Management Group, the mall’s owner and operator, owes $715 million on the property. That has not changed much since Pyramid opened a big addition in 2012 and changed the mall’s name from Carousel Center to Destiny USA.

Meanwhile, time and some harsh changes in the retail business have pummeled Pyramid. The mall is now worth $203 million, according to a recent appraisal.

Think about it: $715 million owed on a mall worth slightly more than $200 million.

“The Canyon” is the name Pyramid gave to the section of the mall that holds entertainment attractions and restaurants, but the word could also be applied to the hole in which Pyramid finds itself.

This cannot go on much longer. The Covid shutdown sped up a decline that has been years in the making. Destiny’s vacant storefronts are growing, and Pyramid stopped making its mortgage payments for most of last year.

Pyramid declined to comment on its predicament. But the company recently notified city officials that it has hired counsel to explore a possible restructuring of its debt.

READ MORE: How it could end for Destiny USA: Some unpleasant ways out for the struggling mall (Part 2)

The company has hired Orrick Herrington & Sutcliffe, a law firm that advises on transactions, litigation and compliance matters, and Houlihan Lokey, a global investment bank with expertise in mergers and acquisitions, capital markets, financial restructuring, and valuation, according to the Wall Street Journal, which cited people familiar with the matter.

Pyramid’s independent auditors recently warned that current financial conditions have “created uncertainty” about the mall’s ability to generate enough money from operations to cover operating expenses and debt this year.

“The company plans to continue to implement cost control procedures, negotiate revised terms on its debt service requirements, and rely on capital contributions from the partners, which are at the discretion of the partners and uncertain in nature, to cover any cash flow deficiencies,” Ernst & Young said in notes to a financial statement issued by Pyramid.

It’s not clear how it will end, but it may not be pretty. Someone will likely have to take a big loss.

“This is sort of a crisis situation,” said Erasmo Giambona, a finance and real estate professor at Syracuse University.

In two news stories, Syracuse.com will look at the crisis. On Tuesday, we explore Pyramid’s options for a way out, and all of them involve pain for someone.

The mall operator declined to answer questions. Instead, we’ve explored public records and talked to those with knowledge of these kinds of projects to imagine the destiny of Destiny USA, a critical part of the Central New York economy.

The problem

The consumer trend toward online shopping and away from brick-and-mortar retail started years ago. But the coronavirus pandemic accelerated the shift.

The state forced Destiny to shut down for four months last year, and it has been slow to bounce back since reopening in July.

Rent revenues from tenants in the original, Carousel Center section of the mall have fallen from $55.6 million in 2015 to $32.2 million in 2020, according to the mall’s latest financial statement.

The mall’s overall occupancy rate dropped from 85.1% in 2014 to 62.6% in November 2020, according to the Kroll Bond Rating Agency. That means a third of the mall is vacant.

Among the death toll: Sports Authority, Sears Outlet and Bon-Ton in 2016. J.C. Penney and Lord & Taylor in 2020. Best Buy in 2021.

A walk through the mall shows most of its in-line stores remain filled. But a closer look reveals that many of its anchor stores, which contain lots of the mall’s square footage, are vacant.

A shopper can stand in one spot in the original section of the mall and see the recently vacated J.C. Penney store on one side and the empty Best Buy store on the other, with two vacant smaller storefronts — formerly Lavish Jewelers and Athletic Apex ― nearby.

In the Canyon, located in the mall’s newer section, the former Sears Outlet store and Gordon Biersch Restaurant Brewery sit vacant.

Walk through the western section of the mall and you’ll pass the empty Sports Authority store and then come across the newly vacant Lord & Taylor store.

The mall on the south shore of Onondaga Lake has a lot of retail space. Its original Carousel Center section, which opened in 1990, has 1.5 million square feet of leasable space. An 874,200-square-foot addition opened in 2012 when the project became Destiny USA. That’s nearly 2.4 million square feet of rentable space, making it one of the largest malls in the nation.

Pyramid had been trying to fill the addition with outlet stores, entertainment, dining and other attractions that require customers to visit. But the pandemic hammered that business.

All of which means fewer tenants paying rent to Pyramid and less cash to pay its lenders.

How bad is the fall? A recent appraisal, the first since 2016, puts the mall’s value at $203 million. That’s 71% less than the $710 million it was appraised at in 2014.

So the debt is three and a half times greater than the value of the mall. Imagine being a homeowner with a $700,000 mortgage on a house worth $200,000.

The drop is the largest of Pyramid’s New York malls, and that’s saying something. According to Bloomberg News, the value of Pyramid’s Crossgates mall near Albany has fallen 40%, its Palisades Center in West Nyack by 52%, its Poughkeepsie Galleria by 71% and its Walden Galleria in Buffalo by 64%.

It’s a national problem. U.S. mall values fell an average 60% after appraisals triggered by payment delinquencies, defaults or foreclosures in 2020, according to an analysis by Bloomberg. The drop slashed about $4 billion in value from 118 retail-anchored properties, it reported.

The appraised value of the largest mall in the country, Mall of America in Bloomington, Minnesota, dropped last year from $2.3 billion to $1.9 billion after the mall’s owners missed three months of payments on $1.4 billion in bond debt, Bloomberg reported.

Destiny’s struggles and the drop in the mall’s value raise the possibility that Pyramid could decide at some point it cannot continue the current arrangement.

As a result, three ratings agencies have lowered their ratings on the mall’s debt to junk status. That means the agencies believe holders of the debt are at substantial risk that Pyramid will not pay them back.

Who’s owed what

There are two main loads of debt on the mall. They are paid off in different ways.

Bank-issued debt

Pyramid has two mortgage loans, one for $300 million and another for $130 million.

J.P. Morgan Chase, the global financial giant, wrote those loans in June 2014. But now the bank is off the hook.

The bank bundled the loans and sold them on Wall Street as commercial mortgage-backed securities (CMBS). These are bonds that pay investors a return from loans for offices, retail centers and other non-residential properties. Such bonds are typically bought by large institutional investors such as mutual funds.

The principal on the mortgages hasn’t shrunk by a penny since they were issued in 2014. Seven years later, the debt’s the same.

How could that be? Under the terms of the loan, Pyramid has been required to make only interest payments on the loans.

That’s common on commercial properties. They’re known as “bullet loans,” and the principal is expected to be paid in full when the loans mature.

When things got rough during the Covid shutdown, Pyramid sought and received a deferment of eight monthly payments on this loan. By December, the deferred payments totaled nearly $9 million. The company began making its payments again in January of this year.

Destiny’s mortgages were originally scheduled to mature in June 2019. But Pyramid was unable to pay off the loans or refinance them. It has received extensions to June 2022.

At 3.81%, the annual interest on the mortgage loans totals about $16 million.

Government-issued bond debt

Destiny also still owes $285 million on bonds issued by the Syracuse Industrial Development Agency, a branch of City Hall, in 2007.

Those bonds gave Pyramid $325 million to expand the mall, then known as the Carousel Center.

The bonds are paid off by Pyramid’s taxes.

Normally, businesses given tax exemptions by local government are required to make discounted property tax payments known as “payments in lieu of taxes,” or PILOT payments. But in an unusual arrangement, the city and Onondaga County agreed to waive their rights to those payments.

Instead, they agreed, Pyramid could use the money to pay down the debt on the bonds for 30 years. In effect, the city traded property tax revenue for the sales taxes the mall would generate and the jobs it would create.

Pyramid has stayed current on this debt.

The company will owe $22.2 million on them in 2021, an amount that will increase 4% a year, maxing out at $35.6 million in 2035. The bonds are due to mature in 2036.

Since local governments don’t receive this money, they won’t directly suffer if Pyramid fails to make its PILOT payments.

Instead, the losers will be the institutional investors who bought the bonds. Again, that’s mutual funds and pension funds.

If Pyramid default on the bonds, it would be the second-largest default in the state and local government bond market since the coronavirus pandemic slammed the economy last year and would also mark the first ever on debt backed by payments developers agree to make instead of property taxes, Bloomberg reported.

However, if Pyramid fails to make these payments, the bondholders’ only recourse is to foreclose on the mall. They can’t come after local taxpayers for the money.

Is foreclosure an option?

If Pyramid can’t make its payments, bond holders could foreclose on the mall and try to seize possession of it.

This is not a great option. Remember: Lenders are owed $715 million on a property that’s only worth $203 million.

Of the two classes of debtors, the holders of the PILOT bonds are in the best position. They have the primary position in a foreclosure.

Those holding the bonds backed by the two J.P. Morgan Chase mortgage loans on the mall are in much worse shape.

In the event of a foreclosure, they would only get paid if there were money left over after the PILOT bond holders are paid. That’s unlikely.

What it means to CNY residents

While taxpayers are not on the hook, Destiny’s troubles still matter to Central New Yorkers.

Yes, even if ownership of the mall changes hands, Destiny will still operate. Shoppers would likely see little or no change, as long as the new owners managed the center properly.

But the dramatic consumer shift away from malls is bad news for the city, which gave up property taxes on the mall for 30 years in exchange for the economic benefits the giant development might bring.

Prior to the pandemic and the loss of several anchor stores, an estimated 5,000 people worked at the mall. The number is smaller now but significant.

Destiny also is the center of a decades-long effort to make the shore of Onondaga Lake into an economic force. The mall’s uncertainty complicates that effort.

The city counted on the mall attracting shoppers from well outside of Central New York, a sort of retail tourism. Before the pandemic, Destiny regularly drew visitors from Canada. But they stopped coming when the pandemic began, and it’s unclear when they will return, if ever.

“This is a city that made a big bet on this one asset class,” said Giambona, the Syracuse University finance and real estate professor, “and now it turned out to be the wrong decision.”

Coming tomorrow: How does Destiny get out of this hole?

See more:

How it could end for Destiny USA: Some unpleasant ways out for the struggling mall (Part 2)

In Covid era, Destiny USA staggers under pre-existing conditions: debt, vacancies, Amazon

Destiny USA reveals pandemic’s toll on the mall: plunging rent income and ‘uncertainty’

Destiny USA is losing another anchor store

Destiny USA loses 15th major retailer in 5 years: See the full list

Destiny USA retailer to close as store shutdowns speed up

Rick Moriarty covers business news and consumer issues. Got a tip, comment or story idea? Contact him anytime: Email | Twitter | Facebook | 315-470-3148