How the Fashion District shopping mall’s financial woes are impacting the 76ers’ arena plan

For the last year, the 76ers’ development company has pushed for City Council to green-light the team’s plan to build a new arena in Center City sooner than later, initially setting a deadline of this past June for city approval before pushing the timeline back twice while facing political headwinds.

The development team behind the arena hasn’t said why it’s in a rush to get City Hall approval for an arena that wouldn’t open until 2031. One factor appears to be the precarious financial position of the Fashion District, the East Market Street shopping mall that replaced the Gallery and would be partially demolished to make room for the arena.

» READ MORE: The 76ers are pushing back the timeline for winning over City Council on a Center City arena

The owners of the struggling mall — PREIT and Macerich — have a $75.8 million loan that matures on Jan. 22, according to the parent companies’ most recent quarterly filings with the U.S. Securities and Exchange Commission. PREIT reported that it won’t be able to make its share of the payment without outside help.

If the mall were to fall into bankruptcy, it could complicate the 76ers’ efforts to acquire the property it needs for the arena, which would occupy a footprint of Market Street to Filbert Street, between 10th and 11th Streets.

Last week, the Sixers nonetheless abandoned their most recent self-imposed deadline of winning Council approval by the end of the year — a concession to the political realities of pushing the controversial plan through a lame-duck session of Council — and referenced the Fashion District in their statement.

“We’re committed to doing our part to make sure the mall remains solvent while the process plays out,” said Nicole Gainer for 76 DevCo, a partnership between the team’s owners Josh Harris, David Blitzer and David Adelman, who is also a real estate developer.

It’s unclear whether the 76ers would put up money to help the mall meet its obligations or whether the Fashion District’s lender would extend the loan to allow the arena project time to get approved. Gainer declined to say how the team would help the mall stay afloat.

Philadelphia-based PREIT declined to comment. Macerich, based in Santa Monica, Calif., did not respond to requests for comment.

The Fashion District, which sits on East Market Street from 8th to 11th Streets, opened in late 2019 as a reimagination of the gentrification-retail-gallery-mall-makeover" target="_blank">faded Gallery mall, a 1970s mega-project that was meant to revitalize the area east of City Hall.

From the outset, the reborn downtown mall had its doubters. Then the pandemic hit, undermining the Fashion District’s promise. The 76ers’ interest in the property is a lifeline for the mall’s owners.

The Fashion District’s ownership is split evenly between Macerich and PREIT. But at the end of 2020, PREIT gave its partner managing control of the mall in exchange for Macerich paying down $100 million of its mortgage debt.

At that point, the companies’ ambitions to bring high-end shopping and dining to East Market Street had foundered. Malls throughout the country suffered sharp declines in business, and the Fashion District continued to struggle as the pandemic wore on and office workers did not return to Center City in full force.

Since the pandemic, the stock values of both companies have fallen dramatically. But PREIT — whose share price has fallen 99.6% in the last five years — is in a substantially worse position than Macerich, whose share price has fallen by 78.7%. PREIT faces almost $1 billion in debt due in the coming months, including its share of the Fashion District loan, and suffered a shareholder revolt earlier this year.

In PREIT’s most recent filing with the Securities and Exchange Commission, the company noted that “management projects that the company would not be able to satisfy its obligations if the [Fashion District of Philadelphia] loan agreement were to become due and payable at its maturity date.”

In a May earnings call, Macerich’s CEO Tom O’Hern said that his company can make its share of the payments. But that doesn’t mean it will step in to take on PREIT’s half. And that means the Fashion District could face bankruptcy early next year.

For the 76ers, who want to acquire a third of the mall, bankruptcy could create new hurdles. Chapter 11 bankruptcy cases typically involve the creation of a creditors committee that would, among other things, examine all potential sales of the bankrupt company’s assets, greatly increasing the complexity and cost of transactions. Any sale would require court approval, and the team would have to hire bankruptcy lawyers.

“The main thing is that a bankruptcy could increase the expense, create an opportunity for alternate bidders, and delay the transaction,” said Sally McDonald Henry, a professor of law with expertise in bankruptcy at Texas Tech University. “I can see why the Sixers would really like to close this deal before year end because there could be complications and additional costs that are material.”

Sam Katz is a former city mayoral candidate and public finance expert who worked on the deal that led to the construction of the Wells Fargo Center, as well as Camden Yards in Baltimore and Coors Field in Denver.

He was recently hired as a consultant for Comcast Spectacor on development plans at the South Philadelphia stadium complex, where the company envisions partnering with the city’s other sports franchises to build a mixed-use residential and entertainment area. That places him squarely on the opposite side of the 76ers in the debate over whether Council should approve the arena plan.

Consequently, he’s been following 76 DevCo’s moves closely.

“Were the property to default on Jan. 22, the lender will work with them for some period of time to avoid having to write it off or write it down, but not for a very long period of time,” said Katz, who cofounded the Public Financial Management, a Philadelphia-based firm that provides financial advising for government agencies and large nonprofits. “So if the bills were to have passed [by Council] prior to Jan. 22, Macerich and PREIT have a story to tell the lender: ‘Look, we need six more months. We’re in the process of transferring the title.’”

Katz said the 76ers’ statement last week about the approval timeline being delayed suggests that a deal has been struck to keep the Fashion District out of bankruptcy.

“The Sixers decided to take their foot off the gas pedal and relieve the pressure on Council to pass the ordinances in this calendar year only because something transpired that made the pressure to relieve these loans go away,” he said.

The deal could take several forms, he said. The lender could have agreed to extend the loan to allow the property transfer to go through after the bills pass. One of the real estate firms that owns the mall could have used money or credit from elsewhere in its portfolio to pay off the debt. Or a third party could have stepped in to make the payment or guarantee the loan.

That third party, he said, would likely be the 76ers or the team’s owners, given their interest in the property.

Councilmember Mark Squilla, whose 1st District includes the proposed arena site and who will be the point person on the legislation enabling the arena construction, acknowledged last week that the Fashion District was a factor in the team’s legislative timeline.

“They have a payment due,” he said. “Listen, these are business people. They’re going to make a decision based on what they need to do.”

Council, he said, will consider the proposal on its own schedule.

Architecture critic Inga Saffron contributed to this article.