Much of the local chatter surrounding the ongoing General Growth Properties death vigil has surrounded Faneuil Hall Marketplace. The historic market is on the auction block, and will soon be sold. But while Faneuil Hall looms large in the region’s psyche, it’s not General Growth’s biggest investment in Massachusetts. Not even close.

That honor belongs to the Natick Collection – a half-billion dollar bet that is currently floundering quite spectacularly.

General Growth is, at the moment, the nation’s second–largest mall operator. It won’t retain that status much longer. Whether it’s by the company’s own volition or at the orders of a bankruptcy judge, General Growth is hurtling toward a spectacular asset sell-off. That sell-off might happen soon. It might, by scrimping and begging for leniency, get delayed until 2010. But the reckoning is coming. When it does, the only questions will be: How big a loss will General Growth take on its Natick gambit, and who will inherit the firm’s glittering experiment?

Tight capital markets and a bleak retail landscape have had General Growth staggering to the grave for some time now. The firm is carrying a $27 billion debt load, including nearly $10 billion due to mature this year or next. It is in default on a number of loans, including more than $1 billion in past-due mortgage payments. It recently missed a $395 million bond payment. That move caused both Moody’s and Standard & Poor’s to knock the company’s credit ratings down to near-default levels.

General Growth owns more than 200 properties and ended 2008 with $169 million in cash on hand. By contrast, Simon malls ended the year with more than $773 million in cash on hand. Even for firms with good credit ratings, the capital markets are tight, and demand significant levels of cash. Any loan alteration, in or out of bankruptcy court, will require the capital to deleverage. Faneuil Hall’s sale, as part of a three-property portfolio, is part of that effort. That portfolio is said to have attracted a bid of $400 million – enough to cover that single missed bond payment.

The problem with selling now, on a freefall to the economy’s bottom, is that most of General Growth’s recent acquisitions aren’t worth anywhere close to what they paid for them. That’s not a situation that’s unique to General Growth. But it’s compounded by the fact that would-be buyers believe they can wait and squeeze even better prices out of the faltering retail giant. There’s money on the sidelines, and it’s waiting for the estate sale to start.

Potential Partner Problems

In the event of an estate sale, General Growth wouldn’t be the only loser. A financing statement on file with the Middlesex County Registry of Deeds lists Prudential Insurance as the secured party on the Natick Collection. Neither Prudential nor General Growth would say how much that loan was for, what the terms are, or how much hard cash General Growth sunk into the Natick project. But based on General Growth’s financing patterns, the loan on the $500 million project is likely to put both the mall operator and the insurer in line for a serious haircut, thanks to plummeting real estate values.

Consider what any potential purchaser would be acquiring: The project’s Nouvelle condominiums, which bet that buyers would pay downtown prices for Route 9 views, have struggled even by the standards of today’s weak housing market. Eighteen of the Nouvelle’s 215 units have sold. The developers have logged just one sale since Dec. 1. (By contrast, the project’s off-site affordable housing component has piled up 45 sales.) Fannie Mae’s recent decision to not guarantee condo mortgages in buildings less that 70-percent full will only serve to slow sales further. General Growth recognized a $40.3 million impairment on the Nouvelle in November. The company has said in regulatory filings it doesn’t expect to fill the condos until the third quarter of 2012.

‘Forget About It’

The near-term outlook for retail isn’t any brighter. Few segments of the economy have endured worse treatment during the recession than luxury retail.

“A higher-end mall is dependent on spending that’s highly discretionary,” said shopping center developer Len Bierbrier. “It has a direct correlation to disposable income.”

A commercial broker, who asked to remain anonymous because he handles lease negotiations, had an even bleaker outlook.

“Retail is over as we knew it. It’s hard to grow retail rents. The devaluation of retail is inevitable.”

Discretionary retail, in this view, is losing ground to Internet sales – ground that it will never recover. Most mall owners don’t make their real money off base square footage rents; the gravy comes in percentage agreements, which are rent escalators built on sales growth. If sales are challenged, so then are rent revenues. In any sale, would-be buyers will be looking to compensate for the slowing of sales growth by carving breathing room out of the purchase price.

The industry insider predicted, “Guys will be lining up, but not before a realistic capitalization and valuation rate. There’ll be several buyers for the trophy properties, and the rest, forget about it.”

Fearful construction firms have been slapping preventative liens on the building since the fall of 2007. Those liens, which are being levied and released on a rolling basis, have been for unpaid construction bills anywhere between a couple thousand and several hundred thousand dollars. They serve as insurance against possible default by the retail giant. Since mid-January, two subcontractors have filed paperwork claiming General Growth owes them in excess of $268,000 for unpaid contracting work.

Dimeo Construction, the lead contractor on the project, told Banker & Tradesman that General Growth has stayed current on payments to them. Nevertheless, Dimeo slapped liens against the mall and the Nouvelle condos last November.

If General Growth has a game plan for its Natick properties – a leveraged bet on luxury delivered to the worst possible market for leverage, or luxury – it hasn’t told Martha White, Natick’s Town Administrator.

“We have not been advised of any contingency plan,” she said. “There’s been very little communication. We’re concerned. The mall is an important component of the community – it’s large, physically and in terms of a business presence. I hope they find their way out of it. They haven’t had good communication with us.”

That might be, she added, because “our key contact people” have been laid off.