McNellis: Bankrupt Values

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In bankruptcy, even a retailer being silver-plated from one billionaire to another may dump any lease it wants by paying its landlord a walk-away fee of one year’s rent. Unfortunately for landlords, retailers, despite occasional appearances, are not stupid—they seldom drop leases of any value. They punt where the rent is over-market or where tenant demand for their former premises is non-existent. The landlord may get a year’s rent from the bankruptcy court, but it might take her 5 years to lease the space for half the bankrupt retailer’s former rent.

[contextly_sidebar id=”579467683ee56053f1112a19f7c3b96d”]Not content with the reaming officially sanctioned by law, the billionaire’s henchmen offered the landlords of the 50 closing stores—including us—a pre-bankruptcy, take-it-or-leave-it special of 8 months’ rent. When we asked to see F&E’s financial reports to assess the likelihood of at least getting the official pittance, we were told, no, take the offer blind or get in line at the courthouse.

If the future is anyone’s guess, here’s mine for how this plays out for the billionaire and a typical owner of one of the closed stores:

The billionaire will announce to the owners of his remaining 150 stores that he will shutter their stores in a heartbeat unless they, too, lower their rent by 50 percent.  Many will comply. With his new reduced cost structure, the billionaire will then slightly retool the supermarket chain, change its unfortunate name (like “Nigel”, “Fresh and Easy” sounds better in London) to Wild Oats, run the company for a few years, add a location here and there and then sell the little chain to a big one, making a few hundred million for the effort.

Let’s say our hypothetical owner paid $3,400,000 for an F&E market that was paying $240,000 in annual rent (about a 7 percent return). Let’s say her rent has fallen about as far as ours has with our own F&E market—roughly 33 percent.  If capitalization rates remain steady and she manages to re-lease her market within the next year, her loss will only be about $1,500,000 (value loss, new tenant improvements and leasing commissions). Depending on her net worth, this could be a tragedy. If, for example, she had a two million dollar loan on the property, she would have no equity and could easily lose the property in foreclosure.

Why do we care that a billionaire is screwing 50 small landlords—all presumably at least worth a few million and unlikely to ever go hungry? Because the same cut-throat maneuvers can be applied against anyone in bankruptcy court. Because if we let big business run free, if it can continue to subvert the good intentions of simple laws—here, those protecting a small, failing retailer with a single location—everyone else will lose. As it relates to commercial real estate, our bankruptcy code is a national disgrace.

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