Bonds play role in Michigan city’s plan to recast a moribund mall

Out of the rubble of one of Michigan’s largest regional malls is set to rise a collection of shops, workplaces and homes — with the help of some municipal bonds.

Sterling Heights, Michigan, plans to issue $45 million of limited tax general obligation bonds to help finance a $1.06 billion redevelopment of Lakeside Mall. 

The 48-year-old mall closed its doors this month, and demolition is pending a development agreement.

The redeveloped property is to feature traditional market-rate and senior-living apartments, office space, a hotel, retail space and parks. It is projected to take at least 12 years to complete.

Sterling Heights recently created a tax increment financing district for Lakeside and the adjacent properties, Mayor Michael C. Taylor said.

The TIF capture generated by the project will pay debt service on the bonds, City Manager Mark Vanderpool said.

Two of Lakeside’s anchor stores, Lord & Taylor and Sears, have long since shuttered, and the city began crafting a sustainability strategy more than five years ago. Its collaboration with Out of the Box Ventures will be the largest development project in the city’s history, according to its most recent annual report.

Out of the Box, a commercial real estate fund and subsidiary of Miami-based Lionheart Capital, bought the 1.5 million-square-foot mall in December 2019 for $26.5 million after General Growth Properties defaulted on its $144 million mortgage in 2016.

“Lakeside Mall is a significant amenity in Sterling Heights and the surrounding area,” Taylor said. “At its peak, it was a large economic engine that provided tens of millions of dollars in economic activity to the surrounding area annually, if not more… The city is optimistic that upon full redevelopment, the property will generate approximately $5 million in increased taxes just to the city of Sterling Heights, and generate far more in economic impact to the surrounding area.” 

Sterling Heights, about 20 miles north of Detroit, is the fourth-most-populous city in Michigan, with over 134,300 residents as of the 2020 Census. 

It city has lost $166.9 million in property taxes since 2008, it said in the annual report. Among other things, the state has cut commercial personal property taxes and done away with manufacturing personal property taxes, which together made up 15% of the city’s tax revenues. 

And Lakeside Mall struggled amid the rise of e-commerce, exacerbated by changes wrought by the COVID-19 pandemic. Along with other mid- to lower-tier malls, it has been left behind by its top-tier competitors, who are increasingly outperforming them in revenues, occupancy rates and foot traffic, a June 2023 CoreSight Research report found. 

Non-top-tier malls have driven a contraction in the share of America’s retail gross leasable space that malls comprise, the report said: to 5.5% in 2023, down from 5.7% in 2014. Open-air shopping centers are also siphoning shoppers away from average malls.

Taylor said he’s “optimistic” that a development agreement will be submitted in the third quarter of this year. That should take nine to 12 months to finalize, he said, and then Out of the Box Ventures will apply for demolition permits. 

The timing of the bond sale will hinge on the progress of the development agreement and the demolition process, Taylor said.

Vanderpool said the city is aiming to sell the bonds in the spring of 2026.

“The city has worked closely with its county, state and federal delegations and one or more lobbyists to obtain as much assistance as possible from our partners to help facilitate the redevelopment,” Taylor said.

In May, S&P Global Ratings lowered the outlook on Sterling Heights’ general obligation and Michigan Transportation Fund debt to stable from positive, and affirmed its AA underlying rating on both.

“The outlook revision reflects our view that despite a strong economy and finances, the city’s pension profile remains a credit weakness with below-average funded ratios and elevated costs,” S&P credit analyst Benjamin Gallovic said in a statement.

By June 30, 2023, Sterling Heights had $522.8 million in total liabilities, according to its most recent statement of net position in its annual comprehensive financial report, posted on the Municipal Securities Rulemaking Board’s EMMA disclosure website.

It had $121 million of direct debt outstanding, including $72.5 million of general obligation bonds, and $149.97 million in total pension liability, the ACFR said.

“The remainder of the city’s debt is included in the water and sewer fund and is paid through water and sewer rates,” Vanderpool said.

According to the partially binding memorandum of understanding that the city signed in October 2022, Sterling Heights created the Lakeside Overlay District in 2020. And last July, it adopted a resolution establishing a Lakeside Corridor Improvement Authority, which will be primarily supported by a TIF plan.

Under the memorandum, the developer can apply for economic incentives from the city in the form of TIF revenue and assessment deferral for public infrastructure improvements.

The developer can also apply for state grants and tax exemptions from the Michigan Economic Development Corporation.

The project has already received a $3 million grant to acquire the vacant Lord & Taylor and Sears stores adjacent to the mall. An MEDC spokesperson said the grant went to the city of Sterling Heights, and it was a direct legislative grant, not a grant from the MEDC budget.

The developer expects roughly $70 million more in state incentives, Bridge Michigan reported.

Vanderpool said the latter incentives would come through the MEDC’s Transformational Brownfield program, and the city has already created a Brownfield Development Authority to oversee the distributions involved.

The city agreed to cooperate with Out of the Box Ventures “such that any and all available economic incentives can be obtained in connection with the project,” per the memorandum. It also agreed to provide expedited review of all permits and approvals by all city departments.

“The city administration, economic development team and planning department always knew that in order to achieve a mixed-use redevelopment of the Lakeside property, any potential developer would request and likely require as much public incentive as they could obtain under state and local law,” Taylor said. “We knew this long before Lionheart/Out of the Box Ventures acquired Lakeside. And from our meetings with OOTB, we knew they would be looking for every incentive and entitlement available to them. We’ve worked closely with them to… assist in making this redevelopment financially viable.”

Lionheart Capital declined to comment.

Out of the Box said in the memorandum that it plans to seek private, non-rated bond financing to fund the economic incentives — which are paid over a term of 25 years — up front. It projected that the private bond financing will carry a coupon interest rate of 7% and an average annual debt service payment of approximately $7.9 million for 30 years.

Because the developer expects a shortfall between annual debt service on that private bond financing and the TIF revenues coming in during the first 12 years of the project, the city agreed to $45 million of public bonding.

Principal and interest payments on the public bonds will be repaid through TIF revenue. For the first five years after the issuance, Out of the Box will be responsible for any difference between the actual TIF revenue collected from the project and the minimum expected TIF revenue for debt service on the bonds.

A condition of the public bonding is that the developer, Lakeside Ventures, an offshoot of Out of the Box Ventures, agrees to “provide an irrevocable letter of credit from Out of the Box Ventures… in an amount deemed acceptable to the city, and made payable to the city upon demand, in the event Lakeside Ventures fails to make payment of any guaranteed payment of special assessment… when due,” according to the memorandum.

Taylor said he does not expect that Out of the Box will require any further investment from the city beyond the $45 million of public bonds.

The developer plans to deed back to the city ownership of the public infrastructure areas, including streets, sidewalks in the public right-of-way, a pedestrian loop and underground utilities. Lakeside Ventures will own and maintain the one-acre park in the center of the proposed project.

Out of the Box’s plans call for roughly one-third of the current retail footprint, or about 150,000 square feet of new retail space, with the surviving Macy’s and JCPenney department stores remaining and the rest of the mall demolished, according to Taylor. 

Taylor said Out of the Box has presented a “clear strategy” for a successful redevelopment of the property. The majority of the completed mixed-use development will be housing and publicly owned parks, he noted.

“[Out of the Box] has told me and others at the city that they could proceed without public investment, or with a lower amount, but the development would not nearly be of the size, scale and scope that it can be with public participation,” Taylor said. “The city believes that by bonding for the infrastructure work, the public will receive far greater value than its investment in the long run.”