When Northwood Investors bought the Sears building at Northgate Mall in Durham in June, the New York-based real estate investment company didn’t stop at just acquiring the property of a struggling legacy retailer.
Northwood, a firm with around $7 billion of assets and properties around the world, also scooped up two large promissory notes, on which the mall owed millions of dollars.
Now, about four months after buying the notes — valued at nearly $62 million after interest — the investment firm has moved to foreclose on the mall after the mall’s owners, Northgate Associates, defaulted on the debt, according to documents at the Durham County courthouse obtained by The News & Observer and The Herald-Sun.
On Wednesday, a clerk at the Durham County Superior Court decreed that Northwood could proceed with the foreclosure of Northgate Mall and conduct a sale of the property. The sale cannot be conducted until Dec. 14, according to the court documents.
Efforts to reach Northwood have so far been unsuccessful.
James C. Adams II, a Greensboro legal counsel for Northgate, said that the mall’s owners are “doing everything it can to avoid foreclosure.”
“We have been in conversation with (Northwood) prior to October — ever since they acquired the notes earlier this year,” Adams said in an interview. But “Northwood ceased conversations with us (about the debt) on Oct. 1.”
Adams said absent an agreement with Northwood, the only way for Northgate Associates to avoid foreclosure would be to pay off the note in full, likely by the end of December.
Northwood is also no stranger to buying Sears properties. Before buying the Northgate Sears property, Northwood had already purchased Sears stores in Cambridge, Mass.; Centennial, Colo., and Pittsburgh, which the company describes on its website as “three income-generating properties in high-quality markets with the ability to create significant value through redevelopment.” Sears, which owned a lot of the land its stores were on across the U.S., has been offloading property to help pay off its debts.
The company appointed Raleigh lawyer Louis E. Wooten III to execute the legal action against Northgate. Wooten has helped administer foreclosures in central North Carolina for more than 20 years, according to the lawyer’s website.
Northgate sent a letter to its tenants at the mall last month — long before Wednesday’s court decree — about its dealings with Northwood.
In the letter, Northgate Associates said: “Since the purchase of the notes from its prior lender, Northgate Associates has had ongoing discussions about sustaining the management and oversight of improvements to the mall property. Northgate is disappointed that Northwood has chosen to file a legal action against the property. However, discussions continue and Northgate hopes to reach an agreement in the near future.”
Northgate Associates is the landlord of a building where The Herald-Sun newspaper is located — though, since that building is not at the mall, it was not sent the letter by Northgate.
The promissory notes, which are written promises by one party to pay another party, date back to the last decade. They have changed hands several times, according to court documents, but the most recent transaction was this year, transferring from TransAmerica Life Insurance Company to NW Northgate I LLC, a limited liability company associated with Northwood Investors.
The largest note, executed in March 2001, has an original principal of $58.5 million, according to the court documents. The other note was signed in June 2007, with an original principal of $27.5 million. Both notes were modified several times over the years to have smaller principals, according to court documents. The notes were originally issued to refinance older debt and make improvements to the mall.
The notes were secured against deeds of trust associated with the mall property. Currently those notes are valued at around $62 million after interest.
The court documents state that Northgate “failed to pay all principal and accrued interest by the maturity date of May 31, 2018,” putting the mall into default on the notes.
A mall in flux
Northgate Mall has existed in some form on Club Boulevard north of downtown Durham since the 1960s. The mall is owned by Northgate Associates, which is controlled by Ginny Rand Bowman, who took it over from W. Kenan Rand.
The mall, like many malls across America, has been in flux for many years. It has struggled as some its largest department store tenants left in the face of competition from internet retailers such as Amazon and from newer malls such as Durham’s Streets at Southpoint.
Macy’s closed its store at Northgate in 2017, and then sold its property there to Duke University for $4.5 million. And this year, Sears decided to offload its large footprint there for more than $6 million to Northwood. Northgate did not own the Macy’s or Sears properties at the mall.
After Macy’s left in early 2017, Northgate Associates said it would prepare a master plan for the future of the mall. But nearly two years later, no plan has materialized. Northgate has slowly tried to wean itself off retail tenants in recent times, signing non-retail businesses to space at the mall.
Educational testing firm Measurement Inc. now has offices there, Planet Fitness has a gym and the Durham Library is temporarily renting space.
Ryan McDevitt, an associate professor of economics at Duke’s Fuqua School of Business, said Northgate’s struggles have followed the trend of the industry as a whole.
Legacy malls and department stores, like Sears, “are a dying retail format,” McDevitt said. “As retail has been disrupted by online retail over the past two decades, and consumers tastes have changed, these old mall formats are being redeveloped into having more of a restaurant base and experiential retail, like healthcare services and gyms.”
McDevitt added that since Northgate Mall is in a growing city that is receiving a lot of investment right now, it would make sense to try and redevelop the mall into a new format.
“The Triangle is a booming market, and investors are jumping in,” he said.