Lawndale Gets Offer to Buy Its Interest in Mall

The city of Lawndale, still smarting from a $1.68-million investment loss last year, could bounce back this year with a multimillion-dollar windfall if the city sells its interest in the Galleria at South Bay.

“The city is in a very unique and wonderful position, after all the negative things that have happened in the last year,” said City Atty. David J. Aleshire, referring to the investment loss and serious problems in the planning and municipal services departments.

The City Council met in closed session Tuesday to discuss a buyout proposed by the mall developer, South Bay Associates, a division of Forest City Enterprises, Inc., of Cleveland. Developer spokesman Brian M. Jones was not available for comment Wednesday.

Mayor Sarann Kruse said in an interview Wednesday that the council, after lengthy deliberations Tuesday night, asked the city staff and financial advisers for further financial information. The council hopes to receive a report at its Oct. 20 meeting, she said.

Buyout funds would be a boon to the city, which made numerous cuts earlier this year to balance its $7-million budget. The city’s financial picture darkened last year when officials discovered the loss of $1.68 million in a speculative securities investment. City Treasurer Ray Wood was fired when the loss became known.

Lawndale has joined with several other cities and agencies in a lawsuit seeking to recover at least $8.4 million from the brokerage companies--Shearson Lehman Hutton and First Investment Securities Inc.--and individual brokers involved. The case is pending in federal court.

By contrast, the city’s participation in the Galleria was a financial coup, according to city officials. Under a complex agreement, Lawndale in 1984 obtained an $8-million federal Urban Development Action Grant, which then was loaned to the developer for the $70-million mall renovation and expansion in Redondo Beach. Affluent Redondo probably would not have qualified for the federal funds, which are earmarked for economically disadvantaged communities, officials said. The mall is on the border between the two cities.

The mall, once known as the South Bay Center and renamed the Galleria at South Bay for its opening in 1985, is anchored by Nordstrom, May Co. and Mervyn’s. It has 150 shops.

Buyout Amount Debated

Although city officials do not know exactly how much the developer will offer to buy out the city, the city’s financial share in the mall “is certainly worth more than $8 million,” Aleshire said in an interview Wednesday.

He cautioned that the developer is likely to argue that the city should receive less because the buyout money would be paid in a lump sum in today’s dollars. Under the 15-year mall loan agreement, the city would be paid back in monthly installments in dollars whose value will shrink with inflation over the years.

If the city accepted a lump sum, the money could be reinvested at a higher rate of interest than the 6% the city is receiving from the mall, Aleshire said.

Under the complicated loan agreement, Lawndale has three sources of income from the mall, Aleshire said:

- The developer must repay the $8-million loan, plus 6% interest, in monthly payments of $47,964 with a balloon payment of $4 million at the end of the 15 years.

- The city is to receive a share of the proceeds should the developer sell or refinance the mall.

- The city also will get a share of mall profits if funds are left after operating expenses and after a 14% developer’s profit has been deducted from mall income. Thus far, the shopping center has not generated enough profit to reach that threshold, but “the gap is narrowing” and the city could share in profits before long, Aleshire said.

The city will have to weigh the revenues it would receive from the mall--including an ultimate share of mall profits--against the value of having money in hand today, the city attorney said.