(Each month, Site Optimizer discusses industry trends—most importantly, leasing issues—with experts in the retail real estate industry in our Tenant's Perspective interviews.)
As the number of bankruptcies continues to mount, retailers with stable financial footings are making silk purses from other retailer's sows' ears. Paul Kinney, executive director of the National Retail Tenants Association, says more and more retailers are searching through the lease portfolios of their bankrupt competitors and considering buying the unexpired leases. Kinney offers some advice to those retailers looking to turn one chain's troubles into another's growth opportunities.
Site Optimizer: When a retailer enters bankruptcy, whether it’s Chapter 7 or 11, what happens to any unexpired leases?
Kinney: It all depends on whether the trustee who is running the bankruptcy will accept or deny the leases. Let’s just assume the trustee would like to keep the property going and resell them. This is happening more and more in recent months because of all the bankruptcies. Any savvy retailer who has a solid balance sheet who’s willing to take some risk will start looking at these properties very diligently to make some decisions. The process moves fast. Retailers really need to move quickly. I think the quicker you can get your name in there and seriously negotiate, the better off you are.
SO: Are there a number of retailers now looking to buy leases from tenants who have declared bankruptcy?
Kinney: Most retailers are at least interested in looking at them. Theses properties have to meet the criteria of the retailer who’s looking. If I see three or four locations that are prime locations for my business and I have the balance sheet and I can do it, I’m going to look at it more carefully.
SO: What should prospective purchasers keep in mind when they’re evaluating whether a lease in a bankruptcy portfolio has value?
Kinney: They have to look at the lease term. What is the rent? How much of the lease term remains? [That influences] whether the trustee is looking to extend the lease. They have to look at the title issues. They have to look at their own corporate philosophy as far as determining if the neighborhood where the store is located is right for the company.
SO: What should prospective buyers be looking at when they evaluate the area around premises and the center where the property is located?
Kinney: If a mall is 50 percent vacant, that’s certainly a big red flag. You have to look, certainly, at the space you're considering and the space around it. You have to look at the tenants. If you’re in a strip center, the same thing applies. Who is the anchor tenant in the center? One of the things I always used to do is contact the local planning board or zoning board in the town and ask them what’s being developed. A vacant lot next door may soon be a Wal-Mart.
SO: What should buyers look at in the lease itself?
Kinney: When you’re looking at the leases you need to look at those clauses that could really hurt you. Is there a co-tenancy clause in there? If that’s not there, that’s something you’ll want to renegotiate. There are so many things in there that can trick a retailer if the retailer is just trying to look at it and say, "I need this property." You really need to do your due diligence.
SO: Is this a good idea for every tenant? Or are there certain tenants who should stay away?
Kinney:: I think absolutely having a strong balance sheet is the key here. If you are looking at expanding … then it’s a good. If you have some issues and questions, then it’s certainly something you’ve got to slow down and look at. One case might be that if this particular site is where you’ve been looking for the past five years and haven’t found a property. Then, obviously, this is an opportunity here. What worries me is a retailer that says, "I have to be here at any cost," and it winds up killing them.
In a related piece, we explored the implications for tenants when owners have financing issues in our "What Happens When the Landlord Defaults?" podcast.
Check out some of our previous interviews in our "Tenant's Perspective" series:
- February: Larry Sidoti, vice president of development with long-time mall stalwart Mrs. Fields Original Cookies Inc.
- March: Jack Kyser, founding economist of the Kyser Center for Economic Research at the Los Angeles County Economic Development Corp.
- April: Chuck Fallon, the president for North America at Burger King Corp.
- May: Nick Koros, senior vice president of development with Quiznos.
- June: Dan Porter, senior vice president of real estate and new store development at 7-Eleven Inc.
- July: Bill Sullivan, partner at the real estate and financial restructuring firm Huntley, Mullaney, Spargo & Sullivan LLC
- August: Yves Mizrahi, president of the real estate strategies group at Seattle-based and design firm Callison.