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Mall Owners Fight Bankruptcy Law Changes

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One of the things I've suggested--in some of my edit letters, in some of our stories and in the creation of our Site Optimizer e-letter--is that the historically antagonistic relationship between landlords and retailers is not the best approach in the current economic climate.

It seems to me that the extent of the recession and the ongoing credit crunch demand a different mode of operation. We're experienced the longest and worst recession since World War II and the worst financial crisis since the Great Depressions. This is not like the recession of the 1990s or the early 2000s. The job losses in recent months have been nothing short of catastrophic. And the economy is shrinking at an alarming pace. So it doesn't seem like the time to bash heads. Retailers and landlords need to come to some sort of mutually beneficial arrangements. This doesn't mean landlords should prop up doomed retailers. But I do think it means both sides need some flexibility when it comes to renegotiating leases and the like.

With all that said, then, it's a bit dismaying to see that mall owners were in Congress today campaigning against proposed changes in bankruptcy laws.

The International Council of Shopping Centers, a New York- based trade group, wants to retain a 210-day deadline for retailers in bankruptcy to decide which stores to shut, saying it gives landlords flexibility in filling vacancies. U.S. Representative Jerrold Nadler, a New York Democrat, will introduce a plan to lift the limit as early as this week.

The deadline, added to the bankruptcy code in 2005, is “a firewall to keep one retail bankruptcy from harming shopping center owners and other retailers,” said Betsy Laird, a Washington-based senior vice president of the ICSC's global policy office. “The provisions in 2005 were the result of seven or eight years of negotiations.”

Those in favor of reversing the 2005 changes say the current law prevents bankrupt retailers from restructuring because creditors mindful of the deadline press for quicker sales of companies and assets, making liquidation more likely if a going- concern buyer can't be found.

Is it really beneficial in this climate to force retailers through bankruptcy more quickly? In a climate where vacancies are rising and retailers are slowing on expansion plans, are landlords really in a rush to get back the space that occupied by a retailer going through a reorganization? We've already seen an alarming number of retailers go from Chapter 11 to outright liquidation in a matter of months. Is that really the best thing long-term for the industry? In a healthy environment, I could see not wanting to have a space tied up with a bankrupt retailer for more than the 7 months that now must be endured. However, in today's climate--what's the rush?

Perhaps I'm off base. Maybe it does make sense to give retailers less time to decide what stores to keep and what stores to close. Maybe retailers are taking advantage of the window. Maybe 210 days is enough to come up with a viable reorganization strategy. I don't find the records of Circuit City, Linens 'n Things and Steve and Barry's particularly encouraging on this front. But, then again, perhaps it the current economic climate that is making reorganization impossible--not existing bankruptcy laws.

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Elaine Misonzhnik

Senior associate editor Elaine Misonzhnik has been writing for National Real Estate Investor since June 2006 and has covered commercial real estate for more than 12 years. She first became...
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