Loan on mall partly owned by Simon about to default

Wed May 12, 2010 5:10pm EDT

* Mall owners to default on $141 mln loan

* Simon Property Group owns 25 pct of mall

* Simon shares close up 1.4 pct

NEW YORK, May 12 (Reuters) - A $141.1 million loan on a Maryland mall, 25 percent owned by Simon Property Group Inc (SPG.N), has been put into special servicing because its owners are about to default, Fitch Ratings said.

The loan on the 1.1 million square-foot Lakeforest Mall in Gaithersburg, Maryland, near Washington D.C. was sliced into two and securitized into commercial mortgage-backed securities (CMBS) bonds in 2005, according to Fitch.

The mall is anchored by Sears, Macy's, JC Penny and Lord & Taylor. But the downturn in the economy and weak spending by U.S. consumers helped drive down occupancy to 63 percent from 89 percent in 2005, Fitch said.

A special servicer steps in when a CMBS loan is in trouble. Only the special servicer has the power to modify a CMBS loan, sell it or liquidate the property to recoup the maximum amount for bondholders. A CMBS loan cannot be modified until it is transferred into special serving.

A spokesman for Simon, the largest U.S. mall owner, declined to comment.

Simon inherited the mall in 2007 when it bought the Mills Corp. Mills owned the mall in partnership with General Motors Asset Management.

Transferring a loan into special servicing or even handing back the keys to the lender sometimes makes the most business sense, especially when the value of the property has fallen below the loan balance, Stifel Nicolaus analyst Nathan Isbee said.

Simon did that last year when it allowed a loan on a mall in Westbury New York to default so it could broker a refinancing deal after the major tenant, Fortunoff, filed for bankruptcy. Simon owns 25.5 percent of that mall, according to a company filing.

Simon defaulted on a loan on a mall in Palm Beach Florida after furniture retailer IKEA [IKEA.UL] backed out of a deal to take a significant portion of a redevelopment there. Simon is a 100 percent owner of that mall, according to a company filing.

Simon stock rose 1.4 percent, or $1.29, to close at $91.31 a share on the New York Stock Exchange. (Reporting by Ilaina Jonas; editing by Andre Grenon)

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