Horton Plaza’s second act as a $275 million mixed-use office campus is at risk with an acrimonious tenant dispute threatening to kill the project.
Macy’s West Stores, Inc. filed suit in San Diego Superior Court on Monday against new mall owner, Los Angeles-based real estate investment firm Stockdale Capital Partners. The department store, one of the center’s last remaining tenants, aims to stop the developer from converting the retail plaza into a mixed-use office campus. Macy’s contends that the use is in violation of its lease and an even more substantial agreement that essentially gives it veto power over property improvements.
“To protect the ongoing operation of its store at the Horton Plaza Shopping Center, Macy’s asks the court …. to permanently enjoin (Stockdale) from proceeding with the redevelopment,” the complaint reads.
The suit puts the fate of the mostly deserted mall in limbo, as Stockdale may be unable to find a construction lender willing to assume the risk associated with the litigation.
“Stockdale has been in discussions with Macy’s for over a year about the project. We are extremely disappointed by this lawsuit, as it puts the redevelopment of Horton Plaza and Horton Plaza Park in jeopardy, as well as the potential for thousands of new jobs downtown,” said Dan Michaels, managing director for Stockdale. “This is particularly troubling given the widespread support for the project, including the unanimous approval by the San Diego City Council. We are hopeful for a swift resolution.”
The firm purchased the 10-block property from Westfield for $175 million expecting to turn the distressed mall into a thriving downtown employment center for Bay Area-like tech giants whose staffers would also be encouraged to dine, drink and work out on site. But in order to flip the property from a mostly retail space to a predominately office-oriented plaza, Stockdale needed a change to its “Owner Participation Agreement” with the city. It received the go-ahead from City Council in May and has since started interior demolition work.
The developer has been working toward a goal of getting office tenants moved in before the end of next year. Forward momentum will slow substantially, however, if a settlement isn’t reached soon.
The Macy’s complaint formalizes a dispute that’s played out mostly behind the scenes, save for a single contentious public comment by the Cincinnati-based retailer. Opio Dupree, the company’s vice president of government and public affairs, told members of the city’s economic development committee in April that the retailer had special rights under what’s known as the, “Construction, Operation & Reciprocal Easement Agreement.”
The contract, which dates to 1985 and has been amended over the years, serves as the foundation for Macy’s legal challenge. It mandates that Horton Plaza’s owner maintain the property as a “first-class shopping center,” requires a mix of retail tenants and grants Macy’s approval rights over improvement plans. The reciprocal easement agreement originally included Horton’s four anchors: Mervyn’s, Nordstrom, Broadway and Robinson’s. Macy’s entered the picture when its then-parent company Federated Department Stores acquired Broadway Stores in 1995.
The department store and Stockdale are now the only two parties remaining in the agreement, and the former is, at least on paper, pushing for Horton to remain a shopping mall.
“Macy’s is excited about the revitalization of this project. While the most recent proposal does not fully take the retail perspective into consideration, we look forward to plans for a re-imagined Horton Plaza that will create an improved and vibrant shopping destination,” said Radina Russell, who is a spokeswoman for the department store.
But money also appears to be a motivating factor.
“(Macy’s) is going to make the argument that it has an ironclad lease in order to extract as much money out of Stockdale as it can,” said Gary London, a downtown real estate expert who is familiar with the feud.”That is what this is all about.”
London has provided consulting services to Horton tenant and grocer Jimbo’s Naturally, who is also at odds with the developer as documented in a separate-but-related lawsuit.
“Jimbo’s has a future at this center. … Macy’s has no role. All they have is a big footprint,” he said. “Macy’s is a very financially challenged company. It’s involved in vestigial retailing. One of its prospective profit centers are these leases.”
Macy’s position is bolstered by an advantageous lease agreement. It pays just 28 cents per square foot at Horton Plaza, meaning its annual rent of $457,000 is substantially below market rate. The department store also has a long-term lease with options that run through 2060. Those factors mean the sum that would be required to buy out the Macy’s lease is substantial, according to a May 2019 report prepared for the city by real estate economics advisory firm Keyser Marston Associates.
Macy’s West Stores, Inc. v. SCP Horton Owner 1, LLC et al., case number 37-2019-00053157-CU-CO-CTL, was filed Monday in San Diego Superior Court. A case management conference is scheduled for June.