Get aggressive, advisers tell owners

If a shopping center has lost a key tenant like Macy's or Linens 'n Things and other tenants are threatening to leave, a landlord needs to take aggressive steps to forestall a disastrous exodus and potential insolvency.

“Landlords have to be more aggressive and proactive. When you've lost a Circuit City or a Linens, you've lost a significant amount of synergy and income,” says Al Williams, a principal of Excess Space Retail Services, based in Lake Success, N.Y. The company advises retailers on lease and space disposition issues.

Understanding the pressures retail tenants face helps a landlord in the long run. Retailers are closing weak stores. Their creditors, including vendors and suppliers, may demand cash upfront and cancel previous 30- or 60-day credit agreements, leaving the retailer strapped for credit and inventory.

Scratching for credit

A property owner or retailer facing bankruptcy needs debtor-in-possession (DIP) financing to pay operating expenses while restructuring.

But with credit scarce, many borrowers are at the mercy of their existing lenders, who may be in no mood to issue a new loan to a defaulting client, says Keith Shapiro, former chairman of the American Bankruptcy Institute and now an attorney with the Chicago office of Greenberg Traurig. That's why it's so hard today for a company to emerge from Chapter 11.

At the start of a bankruptcy case, the judge typically issues first-day orders, including interim approval of DIP financing. A liquidator like Excess Space or Northbrook, Ill.-based Hilco may help close unprofitable locations, hiring, say, NAI Global, a Princeton, N.J.-based real estate network, to sell the inventory. NAI Global has more than 5,000 real estate professionals in 325 markets.

Landlords should understand that a retailer has a limited period to accept or reject leases in Chapter 11, normally 210 days, including an extension. Rejected leases can be auctioned, with the sale usually held at the debtor counsel's law office. Interest in the auctions has weakened, however, since few retailers are expanding.

“If you're a retailer and you signed leases two to three years ago for new locations, today those rents are so above market that they have zero value,” says David Solomon, president of retail services for NAI Global.

If dumping leases and chopping costs aren't enough, a company can hunt for a buyer. But realistically, a cash-strapped retailer may make just a brief stop in Chapter 11 before calling it quits.

“If there's no buyer for a retailer, a lot of lenders are now forcing liquidation,” says Solomon. No longer can a retailer make a pit stop in bankruptcy, drop underperforming stores and turn things around. “That playbook has fallen by the wayside.”

Here are five steps owners can take to stay solvent and avoid bankruptcy, based on expert advice from leading financial consulting firms.

1. Take stock

   Examine your retailer base and determine what steps you can take to assure the center's long-term viability. Try to understand your tenants' needs. Some may be facing bankruptcy.

2. Renegotiate lease terms

   You may need to bite the bullet and renegotiate a tenant's lease before the current term expires. As consumer spending has waned, many retailers' income has declined. Reducing the rent may keep the space occupied, and less income is better than none.

3. Offer short-term relief

   Consider a brief rent-free period. This may strengthen the retailer's financial position in the long run.

4. Fill vacancies quickly

   When a major tenant exits, find a replacement fast. If a remaining retailer's long-term prognosis is poor, line up a new candidate and negotiate for early possession of the space. Anticipate that a retailer in Chapter 11 may reject its lease, and prepare to rent the profitable space.

5. Talk to the lender

   Negotiate new financing with the lender. “The symbiotic relationship among the three parties — tenant, landlord and bank — has never been more crucial,” says Al Williams, a principal of Excess Space Retail Services.