Every week another national chain of retailers is announcing bankruptcy, downsizing, or other restructuring. What started as a drip has become a flood, and the surge is so strong that it must make shopping center owners, and their lenders, rethink what a shopping center can be in the future.
In Wisconsin, we have seen the Boston Store/Carsons/Yonkers group wind down and close, Sears has closed many of its stores, Kohl’s department stores announced they are shrinking, Payless Shoes is closing all its stores, Charlotte Russe just announced closures, Gap is shrinking some of its brands, Henri Bendel and Christopher & Banks are largely going dark, and word on the street is that other major retailers are not far behind.
In prior years, when large anchor stores went dark, it was possible to fill these stores with new up and coming retailers, who were just expanding at that time: Sports Authority anyone? But even some of those replacement stores are now out of business.
For a landlord of a retail strip or shopping center, or its lender dependent on that income stream, it is becoming more and more difficult to just find a new chain to fill that empty space, to pay that replacement rent, and to bear that store’s percentage of the taxes and common area expenses.
First, every landlord and its lender needs to make sure they are well prepared to fight a tenant bankruptcy, receivership, or foreclosure. Tenants often hire “going out of business” companies to conduct sell-offs of the inventory, and a landlord has rights to control access, and perhaps secure some extra rent from that company. A tenant in bankruptcy must make a determination to “reject” or “accept” a lease, and if the tenant accepts that lease, the tenant can assign the lease to a stranger (notwithstanding non-assignment language in the lease), but must provide “adequate assurances” to the landlord of being paid. Having experienced representation at that stage of litigation may result in the landlord receiving more money, or less risk, preventing an unqualified entity from assuming the lease, or at least freeing the premises from entanglement in the litigation earlier. Sitting passively and taking whatever the bankrupt tenant offers is usually much less beneficial. If the landlord is not willing to take an active role in fighting for as much as possible, the landlord’s lender may need to step in to preserve its collateral and to use powers granted to the lender under the Assignment of Leases, to get done what the landlord may be unable, or unwilling, to do.
Of course, every property has its own set of facts, but if this surge of store closings means that the shopping mall as we know it will not continue into the future, it may warrant a bigger effort to analyze the property, the overhead burden it holds, and the market it is in, to see what the best use may be going forward. Some shopping centers in suburban settings have decided to create an influx of restaurants and entertainment options, in an effort to create a “downtown” that the suburb never had. Others are choosing to bring in private colleges or other educational institutions, even if they are tax exempt and cannot pay much in rent, because they provide a lot of foot traffic for other occupants of the mall. Some are simply deciding that the classic shopping center, with its large fields of parking and ring roads, are no longer justified by the way we shop today, and are carving up parts of that property for other non-retail uses, with more solid income and less joint overhead.
This type of conversion requires a thorough analysis of many factors, and often involves many obstacles to overcome, which is why a team of skilled legal, accounting, and engineering advisors is necessary to make sure there is a path to conversion. A sample of considerations to be examined include:
- Is the parcel owned by one entity, or are the “pads” for each anchor store owned by an entity that may or may not want to cooperate in any change?
- Are the real estate taxes too high for the new value of the center with so many stores missing?
- Do the leases for the anchor stores have provisions that prevent any of the common areas of the center to be changed, or do leases for smaller stores have provisions allowing their rent to be reduced or their leases to terminate if an anchor store “goes dark?”
- Are the traffic and utility layouts set up to allow a parcel to be broken off for another use?
- Does the property have several mortgages from different owners, so lenders would all have to agree on one course of action and perhaps swapping of collateral?
- Was municipal assistance such as Tax Increment Financing used on the center which requires payment of a minimum tax assessment far into the future?
- Would the local municipality cooperate with a restructuring by granting different zoning, traffic patterns and other approvals?
- Is there another strong use that is needed in that area such as for multifamily, office, medical, or educational uses?
We have a team available to help a property owner and its lender through these issues. We can analyze all of the documents regarding a development to see what is possible, and which courses of action would require drastic action. A smart owner or lender would choose to take a look at these options long before a course of action is forced on them by retailers’ actions.
For more information, contact Nancy Leary Haggerty.