Simon Property Group and Brookfield Asset Management are paying an initial annual base rent of $156.6 million for JCPenney leases.
The two mall operators were the mass retailer’s largest landlords at the time bankrupt J.C. Penney filed its Chapter 11 petition in May last year.
A regulatory filing with the Securities and Exchange Commission on Monday stated that the PropCo transaction, in which 160 store leases and six distribution centers owned by bankrupt J.C. Penney Co. Inc. would be sold to first-lien lenders as part of the asset sale, has been completed. The sale of OpCo, the operating business of JCPenney to Simon and Brookfield, was completed in December.
The filing documented lease agreements for the 160 stores and one for the six distribution centers (CD), which cumulatively form the governing master leases between the PropCo and OpCo components.
According to the filing, the master leases have an initial term of 20 years, followed by five option periods of five years each. The store leases have an initial annual base rent in the amount of $121.2 million, while the DC agreement has an initial annual base rent of $35.4 million, both subject to adjustments.
The two mall operators have said they believe that JCPenney is a good investment, although not everyone agrees on the retailer’s chances of survival. And some industry watchers point to co-tenancy clauses as the main driver for their investment in JCPenney, though Simon has publicly downplayed these stipulations.
Large retailers such as JCPenney serve as traffic-driving anchor tenants. Other tenants nearby, specialty chains, pay different rates depending on the type of anchor tenant in a particular wing. These merchants tend to want to be clustered with brands of a similar ilk because of the demographic that’s attracted to that overall store base.
The risk for landlords is that when an anchor tenant folds up its tent, the specialty chains that have a co-tenancy clause could elect to pack it up, too, leaving a swath of stores empty in one part of a mall. And with the Covid pandemic still hanging around, it might not be so easy to secure new, quality tenants. While not a problem for A-rated malls and most in the B category, that’s a scenario that has quickly shifted the fortunes of malls lower on the totem pole.
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No doubt mall operators have been keeping close tabs on their retail tenants. Specialty chains have also been reviewing their store networks, many with plans either to renegotiate existing leases up for renewal or to relocate elsewhere.
For Simon and Brookfield, paying rent for JCPenney is a risk, but it also just might buy it enough time to maintain the status quo until they and their mall operator peers can figure out what a shopping mall in a post-Covid world should look like that would resonate with consumers.