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Don’t Write That Mall Obit Yet

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The litany of recent store closures reads like a who’s who of once beloved retailers. Whether to bankruptcy or restructuring, hundreds of doors have been—or are already slated to be—on the chopping block.

What’s a mall owner to do?

There’s been lots of talk about of how malls can transform from retail destinations to more lucrative—and one hopes—secure lifestyle centers, but at the rate doors are shuttering, they’ll have to move at the speed of Superman’s Clark Kent.

For mall owners who have seen the writing on the walls, the pivot is already underway. In the meantime, they’ll deal with the broken leases and legal maneuvering that follow each new harrowing headline.

Dealing with delinquents

While consumers might be surprised to learn their favorite store is “suddenly” going under, malls are rarely caught off guard, said Jasmin Yang, an associate attorney at Los Angeles-based law firm Snell & Wilmer. Often, struggling stores are already on the landlord’s radar, and they get away with it to avoid a mall corridor pocked with darkened doors.

“A lot of times, even before a bankruptcy, they haven’t been paying rent for a long time,” said Yang, who handles bankruptcy-related actions. “[Mall owners] don’t like to have empty store fronts, so they’ll wait to pull the trigger. They’d rather have the mall busy, full and lively, even if [tenants] are two years behind on their rent.”

While the property owner may turn a blind eye in some cases, others prompt a round of “Let’s Make a Deal,” in which the landlord has to decide how much its worth to them to trade off revenue from one store for the good of the entire mall.

“You’ll see malls where a tenant has switched from a base rent to a percentage of sales rent,” said Edward Dittmer, vice president, CMBS, Morningstar Credit Ratings, adding modifications like that would be negotiated for a specific period of time to give the store a little relief.

But olive branches like those are reserved for viable businesses. If that delinquent store ends up throwing in the towel, the mall now has the dreaded empty spot on top of years of missed rent.

That’s why Corali Lopez-Castro, a bankruptcy and commercial litigation attorney for Kozyak Tropin Throckmorton in Coral Gables, Florida, advises her clients to be proactive.

“Always enforce your rights,” she said. “I would start eviction proceedings immediately, and I would try to get a judgment of eviction as possible because once the rights under that lease have been terminated, you cannot get them extended in bankruptcy. The squeaky wheel gets the grease so it’s in their favor.”

In Corali-Lopez’s experience, once a retailer starts a downward spiral, the situation rarely recovers.

One reason not to hold on till the bitter end is that if the store files for bankruptcy, the landlord is lucky to collect “pennies on the dollar” for back rent, according to Yang.

A filing doesn’t necessarily mean the storefronts will close immediately. After a store files, they have the option of assuming (continuing) or rejecting (terminating) a lease. If they decide to assume it, they have to play by the rules from that point forward.

“In bankruptcy, you have to pay rent as you go,” Lopez-Castro said. Otherwise, she said, rent becomes an administrative claim, which has a higher legal priority.

This difference in status between pre-bankruptcy and post-bankruptcy rent claims is one reason why a landlord might push a tenant to decide to assume or reject as quickly as possible.

“Historically people would ask for multiple extensions and have years to decide if they were going to keep or reject a lease,” Lopez-Castro said. “Now, those decisions are made much more quickly.”

Breaking the mold

A property owner may hope the store rejects the lease because it frees them up to pursue other options.

Owners that have “B” malls may feel a bit more handcuffed to their ailing tenant but “A” mall owners are likely to feel liberated due to a long list of would-be suitors.

“If it’s a desirable location, and [the tenant] wants to bargain on the rent, you can reject the lease because you have two or three other tenants that want it,” said Joe Bell, director of corporate communications for Cafaro Company, which operates more than 43 locations.

Bell said Cafaro stays in communication with companies looking for space in its properties so as soon as a vacancy opens up, it already has the right new tenant lined up. “It’s like a game of chess,” he said.

And these days, property owners are making the first move. “They’re not waiting for the Sears to close its store before they start looking at new tenants. If they find a new tenant, maybe they won’t renew Sears’ lease because they think that tenant will bring in more traffic and money for the mall,” Dittmer said, by way of example.

“They’re going after tenants that have an entertainment component and dining seems to be a big thing. Those all add to the appeal because you can go buy a few things, stop for a nice dinner and then you can go home. If you think about your customer as a lifestyle consumer as opposed to a retail consumer, I think that’s the right mindset.”

Dittmer said in-demand businesses are those like Dave & Busters, Legoland Discovery Center and a Sea Life Aquarium—all places where families flock to entertain the kids. And, while they’re there, they’ll often stop to eat or shop.

The holy grail of tenants, according to Dittmer? “If everybody could have a Cheesecake Factory, they’d probably put one in there. Obviously every mall owner would love to have an Apple store because of how high Apple sales are on a per square foot basis.”

But it doesn’t have to be marquee brands like those, Bell said. His company replaced a space once occupied by Sears with a Planet Fitness and a trampoline park. In another large space, Cafaro had luck with a technical training school. Though it might not sound like an ideal fit for the stores in the mall, it paid off. “Suddenly you have a couple hundred students who were on the property every day who needed to go get lunch, wanted to shop, wanted to hang out with their friends, so that provided a new source of customers,” he said.

Of course these days, any tenant could turn out to be a bad bet. If nothing else, the recent retail upheaval has taught landlords to be more savvy.

In addition to staying on top of accounts receivable, Lopez-Castro said landlords need to limit their exposure. “Landlords are now requiring a letter of credit to protect themselves,” she said, allowing property owners to guarantee they’ll get paid even if there’s a bankruptcy.

Yang suggested malls consider shorter durations for their leasing agreements, enabling property owners to be more agile.

Bell advised mall owners to consider all angles before signing a new tenant. Just because a business comes in waving money around, it won’t matter if it flames out tomorrow.

Ultimately, he said, malls are surviving—and even thriving—by focusing on the future.

“We’re keeping a close eye on the experiences and services that our customers want to see, and the next thing coming down the road,” Bell said.

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