Asian Journal- The Filipino-American Community Newspaper

YOU may not know it, but the owner of Glendale Galleria, General Growth, and the 2nd largest mall owner in the United States has been in Chapter 11 bankruptcy since April of 2009. It has the distinction of being the biggest real estate bankruptcy in American history, and ranked 10th largest bankruptcy in terms of assets.

The company owns more than 200 malls in the United States and lists total assets of $29.56 billion and total debts of $27.29 billion. The company collapsed when it was unable to refinance maturing mortgages due to the credit crisis, forcing it to seek bankruptcy protection last year. Chicago based General Growth also owns the Fashion Show mall in Las Vegas and started in 1954 by brothers Martin and Mathew Bucksbaum as an expansion of their family’s grocery business with a shopping center in Cedar Rapids, Iowa. But the ongoing recession and global financial crisis has made it impossible for the company to obtain new loans to refinance maturing loans, forcing the company to knock on the doors of bankruptcy court. General Growth expanded by building and buying malls. Its largest acquisition was in 2004 when it purchased high end mall ‘Rouse’ for $14.2 billion. Unfortunately, the purchase was 100% financed by debt, doubling its total debt load. If the company did not buy ‘Rouse’, it may not have had to file for bankruptcy because it would have 50% less debt to service. The company had tried to restructure the $14.2 billion debt used to buy ‘Rouse’ but failed to get funding.

The company stated that it would keep exploring strategic alternatives during bankruptcy. This normally means that the company will agree to convert debt into equity if the company is unable to find new loans to pay off old loans in bankruptcy, diluting equity of the Bucksbaum family. If no reorganization plan is confirmed, the bankruptcy will be dismissed. Secured mortgage holders will foreclose on properties owned by the company, and the company will be powerless to stop foreclosures. Thus, the company will exert all efforts to stay in bankruptcy until new money comes in for reorganization. It appears that a knight in shining armor has finally shown up on the horizon. Canadian firm Brookfield Asset has agreed to invest $2.5 billion in exchange for 30% ownership. This will certainly help the company exit bankruptcy. But it remains to be seen if a 10% of total debt infusion is enough to keep the company afloat while the recession continues and commercial real estate prices are depressed. I would imagine that the company would have to wait until real estate prices go up to sell prime properties to pay off debt and realize a profit. The $2.5 billion infusion may be enough to keep $27 billion of debt current for one year. But if real estate prices do not start improving in 2011, the company and its new partner will be back to square one and will have to return to bankruptcy court.

Again, too much accumulated debt has caused the collapse of a very big business, in fact the 2nd largest mall owner in the United States. If this company did not have too much debt, it would not be bankrupt today. It would sail through this recession without any difficulty.

On a personal level, we cannot overstate the debilitating effect of too much debt on the individual. Even if income is good, too much debt will ruin the individual, as it ruins a business. To illustrate, if your net income is $5,000 monthly, total necessary monthly expenses also $5,000, with $50,000 of credit card debt, have too much accumulated debt. $50,000 of credit card debt requires $1,500 a month of minimum payments to keep them current. You don’t have $1,500 a month of extra income. So, you will have to borrow $1,500 a month or $18,000 a year to keep $50,000 of debt current. In 24 months, you will owe $86,000 of credit card debt.

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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave., Bldg. A-1 Suite 1125 Unit 58, Alhambra, CA 91803.