Much has been written about the expected impact of the federal Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which was signed by President Bush on April 20 and will take effect October 17. From a retail perspective, the recently-passed bill has largely been interpreted as a benefit to landlords and a disadvantage to struggling retailers. As the head of the largest third-party manager of retail space in the nation, I’m here to tell you that landlords have just as much vested in the success of retailers and are ready to partner with struggling tenants to help them avoid bankruptcy.
The new legislation requires troubled companies to maintain or reject a lease within seven months of bankruptcy filing. Previously, landlords faced great uncertainty because bankrupt companies could wait until the end of the restructuring process before deciding whether or not to maintain a lease.
The seven-month notice requirement could threaten the Christmas holiday sales surge, which has traditionally served as the last chance for ailing stores. Retailers typically see holiday sales comprise 30-40 percent of annual sales and use this as a way to get out of the “red”. Gift card sales are also becoming a license to gamble on increased sales through January and February. Under the new plan, stores will be forced to decide about bankruptcy well before they see holiday results. This does not bode well for the retailer or the landlord.
Partnering Up
The tenant-versus-landlord mindset is unnecessary and misleading. Bankruptcy is still a lose-lose proposition for both parties. “Going out of business” signs posted by failing stores may compromise the vitality of the overall mall, harm the careful balance of the tenant mix, diminish cross-sales and otherwise, drive customers away from the center. Furthermore, the landlord may receive reduced rent and common area maintenance (CAM) fees from bankrupt tenants. These losses are only compounded when a space “goes dark” after a bankrupt retailer leaves, even if the space will soon be filled by a new tenant.
What can be done, then, to prevent the headaches that bankruptcy causes for both landlord and tenant? With a bit of creative thinking, landlords and retailers can partner to find ways to help under-performing retailers boost sales and reduce costs
One popular cost-cutting method is “right-sizing,” in which a tenant’s space is reduced in order to better align with its sales and consumer traffic. The excess space can then be released to a new tenant. Jones Lang LaSalle has successfully right-sized retailers at malls nationwide. A national retailer at West Oaks Mall in Houston, for example, reduced its space from 25,000 square feet to 12,000 square feet with a gross percentage rent deal. Many landlords may temporarily revise lease terms from a triple net lease to a percentage rent deal to help the retailers to get back on their feet and become a healthy tenant.
Another proactive way landlords can avoid the pain of bankruptcy is by helping struggling retailers to focus on their sales. One mall that we work with recently started an aggressive, six-month campaign to boost the sales of an ailing video game store. In February and March, an empty storefront located at the opposite end of the mall was merchandised to promote an upcoming event at the troubled store. Press releases, “e-mail blasts” to shoppers and additional signage at the mall have all been routinely used to publicize various promotions. Finally, mall management and store executives have been instrumental in brainstorming and executing large-scale mall events to drive sales at the store. For example, the mall staged a Star Wars video game promotion to coincide with the release of the latest Star Wars movie, The Revenge of the Sith. The following week, a “Star Wars Mania” took place outside of the store, complete with shoppers dressed as their favorite character.
Overall, the 2005 Bankruptcy Act should be viewed as an opportunity for both landlords and tenants. By setting in place a defined timeline, the new law encourages both parties to consider proactive arrangements prior to bankruptcy filing. In the end, this extra time, when approached with flexibility and creativity, can produce some amazing results for both the retailer and the landlord.