As Malls Circle the Drain, What About the Outstanding Municipal Revenue Bonds Used to Pay for Them?

“A report issued by Credit Suisse in June predicted that 20 to 25 percent of the more than 1000 existing enclosed malls in America will close in the next five years.”

Big article today in the NY Times on the decline and ongoing fall of malls. The fancy ones that cater to upscale customers are still doing OK, but not “regular” malls. See Steven Kurutz, An Ode to Shopping Malls, NY Times, July 27, 2017, at p. D1. The article’s hard copy is worth taking a look at, for its color photos of abandoned, empty malls.

The article is mostly a personal display of the author’s nostalgia — about the good ol’ days when he and his teen-age buddies took part-time jobs and chilled out at the mall. But that was then — this is now.

What makes this stuff of particular interest to this blog which is mostly concerned with eminent domain and land-use, is a subject that is pertinent to malls, but is not mentioned in this article (or others like it). Many of these malls were constructed as redevelopment projects, which means that in many of these cases somebody’s privately owned land was taken by eminent domain (with just compensation payable from the proceeds of tax-free, revenue, municipal bonds, the idea being that as the mall prospered and generated new property taxes, the increment of those taxes over and above pre-existing property taxes would go to the bondholders and eventually pay off the bonded debt).

But what happens when things go south, and there are no such incremental taxes, so the redevelopment agencies that issued those bonds default on them? Nothing we have read about the mall failures addresses that subject. However we did see the opinions in an Illinois case in which the cash flow from bonds secured by taxes paid on land that was taken for a public project ceased paying the bondholders when the subject land was taken. Too bad, said the Illinois Supreme Court to the bondholders — you invested in bonds and one of the risks you took was that the bond issuers would default. But your bonds were not taken, so you are not entitled to “just compensation.” Your bonds were secured by expectations of a future cash flow, so when that cash flow ended so did your security interest.