Publication

June 11, 2019Client Alert

Retail Remedies: How can we Reuse Closed Retail Spaces?

Every week the news reports another national chain of retailers 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 potential developers, 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, including K-Marts, 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, Gymboree, Shopko, and Christopher & Banks are largely going dark; and word on the street is that other retailers are not far behind.

Replacement Retail: 

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. So, are there “retail remedies” we can apply to redevelop and reuse these spaces, and to make them produce rent, cash flow, and taxes again?

Changing the Purpose of the Mall: 

A few years ago, mall owners tried to change the purpose of their malls by making them mixed use “live/work/play” towne centers, or a new downtown the city had never had. More recently, some mall owners are trying to make them entertainment or experience centers filled with destination restaurants, bars, and entertainment venues; including bowling, video gaming centers, and virtual reality outlets. As these mixed use centers get older, the presumptions behind them have grown thin: empty nesters may not want to live next to a bar; millennials may not want to live above a grocery store or parking lot; and the “lively neighborhood” feel of the center may be very dependent on money spent for movies, concerts, and other programming. Owners are now turning to removing some of the excess retail area and trying to replace it with housing, office buildings, or other services to make sure that the amount of retail space is “right sized” for the way we shop now.

Infrastructure and Legal Rights:  

Before a current shopping center can be reused for other purposes, the owner needs to make a thorough study of what currently exists, who owns what rights, and how they can be changed. A complete survey of the land, including the location of all buildings, utility services, easements, and restrictions, is necessary. An engineering study to gain accurate information about actual square footages, shared utility services, fire walls, ADA accesses, and easement locations, is necessary before decisions on separating buildings can be undertaken. A thorough title search is needed to see which cross easements, deed restrictions, and covenants affect the land. The existing leases themselves, and leases which have not been terminated for dark stores, must be reviewed for options to expand and renew, covenants against certain uses or changing common areas, easement rights, and exclusive use and parking arrangements. If the tenant has gone through bankruptcy, termination of those leases or assignment to a new party, may not be reflected in the title search, and the bankruptcy records must be evaluated to understand current rights.

Planning:  

Only after you have done a thorough due diligence review of the property can you start planning, determine what final arrangement you want, and then start evaluating what tools you have to accomplish that final plan. A developer can try to negotiate away rights that interfere with a final intended plan, but may need to rely on litigation, condemnation, and possibly foreclosure, to remove rights of hold-out parties who just want to maximize a payout.

Driving Force: 

Clearly, someone needs to be the driving force to have the vision to remake the retail space. That party may be the current owner, or a prospective owner under an offer to purchase, but is often the municipality, who wants the land revamped in order to pay off TIF debt, or in order to maximize the tax revenue that would come from a remodeled development. Other than the owner and lender, often the respective municipalities have the most at stake as many of these properties used to make up a large portion of the tax base and are now worth land value, or even less. If there is a common lender on the project, that lender also may want to take these steps to maximize the value of the collateral.

Professional Help: 

Michael Best has a team available to help property owner, lenders, developers, and municipalities, work 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. If you are an owner or lender, we strongly recommend you take a look at these options long before a course of action is forced on you by a retailers’ foreclosure or bankruptcy.

For more information, contact Nancy Leary Haggerty or Nick Boerke.

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