Could Eminent Domain Be The Zombie Mall Slayer?
Want to get a jump-start on upcoming deals? Meet the major Atlanta players at one of our upcoming events!
After 45 years in business, and recent years of struggle, the Swansea Mall in the town of Swansea, Massachusetts, closed its doors for good in April.
A new owner is now trying to breathe life into the mall, but is blocked from being able to do much given a set of restrictive covenants Walmart imposed on the property in 2012 under previous ownership. Now, Swansea’s top elected officials are aiming to eliminate those restrictions by advocating the use of a power unique to governments, one that more and more municipalities around the country are looking to use: eminent domain.
“Without government intervention, the mall would never be able to [be] redeveloped. With these types of malls, I think the government has to get involved,” said Christopher Carreiro, a lawyer and a selectman for Swansea township, the town’s term for a council member.
“But for eminent domain, there would be no hope for the mall. Those restrictions last 30 years, and then they have renewals after that,” Carreiro said.
Eminent domain has a long tradition in the United States, where public entities are able to forcefully purchase private land for a project that is deemed in the public good. Often those are major infrastructure projects, such as new or widened roads or new government facilities and sports stadiums.
But some municipalities are beginning to push the idea of using eminent domain to address blighted malls and retail centers in their jurisdictions. The use of eminent domain in those instances is somewhat rare.
But as the American retail paradigm shift continues, and more malls — particularly in suburban and rural communities — fall victim to shuttering retailers, it may become more commonplace.
“It's not something that happens frequently because eminent domain is a process that is highly complicated,” said CBRE Senior Vice President Neill Kelly, part of CBRE's restructuring and disposition platform. "But it is a tool that municipalities have used in the past and continue to use, and I do expect an uptick .. as you see a parallel uptick in failing and blighted malls."
The health of many malls across the country is likely to deteriorate further. Mall vacancies are at close to their highest rate in the past decade at 9.3% during the second quarter, according to Reis. Those rates are threatening to rise as more retailers declare sweeping bankruptcy-related closures.
Across the country, public entities have used, or threatened, property condemnation to deal with dead malls.
The city of Longmont, Colorado, pushed to condemn a Dillard’s department store attached to the Twin Peaks Mall, and in turn sell it to another developer to transform the dying mall into a mixed-use development. After the parties settled in 2014, the developer — NewMark Merrill — reinvented the mall into the 442K SF Village at the Peaks power center, now 90% leased, in conjunction with the city’s urban renewal authority.
There have been more recent efforts to exert eminent domain against malls and other properties. Last year, Boise State University got the greenlight to condemn parcels of land near the school to build a new baseball stadium, although it ultimately purchased it without using eminent domain. And in February, Worcester, Massachusetts, threatened a landlord with eminent domain against what many saw as a neglected mall in its downtown. The landlord sold the mall to a private developer this past May.
“A lot of these malls have lost their market, lost their stores. At some point under the laws in most states, if you have something that is blighted ... at that point, eminent domain can at least be a plausible strategy for any municipality,” said Alan Mallach, a senior fellow at the nonprofit Center for Community Progress, which consults with local governments on how to address distressed communities or properties and turn them around.
In Palm Springs, California, the College of the Desert engaged in a four-year eminent domain battle against the owner of the defunct Palm Springs Mall. The parties eventually settled for $22M and the college is now expanding its campus onto the property.
While Palm Springs wasn't involved in the eminent domain battle, Mayor Robert Moon was in full support of the move and lauded the college for taking down a deteriorating property.
“My opinion is that it's wonderful. It's been sitting there blighted and terrible,” Moon said. “I certainly think that is in the public interest.”
How New London Set A New Standard
The use of eminent domain to help spur a private development under the guise of public use stems from a 2005 Supreme Court case, Kelo v. New London. New London, Connecticut, attempted to use its eminent domain authority to condemn properties and sell them to a private developer to build a new complex for the drugmaker Pfizer, arguing that the move would create jobs and increase tax revenues.
The Supreme Court sided with the city in a 5-4 ruling, arguing that the Fifth Amendment allows for a broader interpretation that public use of a property could be used for economic development. In the end, Pfizer never moved forward with its office in New London.
Because eminent domain is controlled both by federal and state constitutions, many states moved to tighten restrictions on what cities could use eminent domain to varying degrees, with some cities enforcing stricter standards in the wake of the Supreme Court ruling, George Mason University law professor Ilya Somin said.
The use of eminent domain can be an uphill and expensive battle, especially if the targeted landlord takes the municipality to court, Parker Poe special counsel Charles Pursley said. Pursley is viewed as a prominent expert on eminent domain laws in Georgia, having helped the MARTA transit system through a series of condemnations since the 1970s as it built out its rail network.
“There [are] going to be some fine lines in all of this,” Pursley said.
That line is often the interpretation of what “public good” stands for and whether just forcing the sale of a mall for private redevelopment meets that threshold.
“The governmental entity would have to have some legitimate way to support that there is some public use,” Pursley said. “I think there will be serious legal issues involved in condemning a large retail mall and then putting it out to developers. I think that will be very difficult to support.”
Still, the temptation to use eminent domain is there for local governments and agencies wishing to get rid of eyesores. That was the case with the Gwinnett Place Mall, in suburban Gwinnett County, Georgia, which has long been faltering.
The 1.3M SF mall was purchased in 2013 out of foreclosure by Las Vegas-based Moonbeam Capital, an investor that has since been a source of frustration for county officials after it made promises to redevelop the property, but did little while many retailers closed their doors.
Most recently, the mall was partially transformed into its 1980s glory for the third season of the Netflix show Stranger Things, but it has since returned to its mostly dormant state. Some county officials would love for the government to use eminent domain to take over the property, even if it's only to demolish it and turn it into a public park.
“I think there could be worse things that could happen with the mall than the county acquiring it for greenspace,” Gwinnett Place Community Improvement District Executive Director Joe Allen said. “That would be an amazing Gwinnett central park.”
Gwinnett County Board of Commissioners Chairwoman Charlotte Nash, though, said the burden of proof for the county to use eminent domain is too strict under Georgia law. While the property can be condemned for some public use like a park, the county must wait 20 years before anything else can become of the property or the original owner can reclaim it with compensation, she said in an email to Bisnow.
“These restrictions make it difficult to use condemnation proceedings effectively when redevelopment of the property that is being acquired by the private sector is the ultimate goal,” she said.
JLL Retail CEO Greg Maloney said he has yet to see a mall under his company's management face threats of condemnation. Instead, he said, most owners of struggling malls are more than willing to work with municipalities to come up with plans.
“Most of the time, it's 'Let's partner together and let's figure this out together,'” Maloney said. “A lot of owners are going to the city [and] are saying, 'I need help with this.' That's really what we've seen and we've done in numerous cases.”
It is likely easier and less expensive for municipalities to negotiate a sale without the threat of eminent domain, Somin said. He said many owners of struggling retail properties would probably be willing to get the properties off their hands.
“If they are completely unwilling to talk, that is a sign that they place a very high value on the land” and may have another redevelopment idea in mind, he said. “In those cases, we should be reluctant to view [it as] the government knows best.”
Mallach said that there are set standards that have to be met to wield eminent domain with busted malls: The mall has to be considered blighted, the owner is not responsive or responsible, and there is a potential reuse that is valuable to the community.
“If I spend a couple of million dollars acquiring this thing, what's my endgame? This is where it really gets difficult,” Mallach said. “You want to have a pretty good idea that there's something you can do with that.”
For the town of Swansea, there is an endgame: turn the mall into a mixed-use destination that also will be home of the city government, Carreiro said. The city has proposed partnering with local developers to turn the project around after it takes over the mall.
Carreiro said redeveloping the mall is compelling for the good of the town overall. As of 2017, Swansea's population was 16,500 people. At the height of the mall's operations, it employed 2,000 people, Carreiro said, adding that the town has seen tax revenues decline by $7M since 2002 when the first tenants began to shutter.
“Our local economy has suffered tremendously in that area,” he said.
Carreiro said the city has plenty of validation to pursue eminent domain. A Walmart that shares the property has control over the mall through covenants to dictate what types of tenants can take space there. Carreiro called those tenants “restrictive” and “onerous.”
“There [were] a lot of people who had interest in buying the mall, but no one would buy it because of the restrictions,” he said.