Real Estate Consultants, Chapter 11 And The Changing Retail Environment

By Kenneth A. Rosen

In the challenging landscape of retail, the silver lining for struggling retailers lies in Chapter 11 bankruptcy. This legal avenue allows retailers, with approval from the Bankruptcy Court, to override contract provisions and sell leases—opening up new possibilities for financial recovery. Kenneth A. Rosen, a legal expert from Lowenstein Sandler LLP, explores the strategic potential of this process, shedding light on its role in reorganization, lender repayment, and providing dividends to unsecured creditors.

Navigating the Changing Retail Landscape

Traditional retailers are facing an array of challenges, from the rise of e-commerce to changing consumer preferences. The oversaturation of malls, especially in communities with numerous shopping centers, adds an additional layer of complexity. While top-tier malls (classified as "A" malls) continue to thrive, those in the "B" and "C" categories must reevaluate their strategies to remain relevant.

The current retail environment demands more than just retail spaces; malls need to provide engaging experiences, offer amenities such as WiFi, dining options, children's entertainment, rest areas, and ample parking. Moreover, individual retailers are expected to merge the benefits of online and in-store shopping seamlessly.

Maximizing Value through Lease Sales

For retailers facing bankruptcy, selling leases can be a crucial source of much-needed cash, especially when the contract rent is less than the market rent. The distinction between contract and market rent becomes a pivotal factor in determining the value of the lease being sold.

To optimize the sale price, it's essential to consider the owner's investment track record, the shopping center's competitiveness, and its ability to attract customers. Prospective lease assignees may be willing to pay more than the arithmetical difference between present values, depending on the landlord's commitment to further investments.

Chapter 11 Approval and Strategic Considerations

In the Chapter 11 bankruptcy process, retailers require Bankruptcy Court approval to sell leases. The urgency of this process is heightened by the debtor's administrative obligation for post-bankruptcy rent. As the shopping center and retail environment evolve, the analytics necessary for maximizing lease values become more detailed and individualized.

The intricate nature of this process necessitates an early start, well before the petition date. The Bankruptcy Code sets a limit of 270 days from the petition date for a debtor to assume or reject a real estate lease. However, considering the time needed for a "GOB" (Going-Out-of-Business) sale and vacation within this period, decisions must be made even sooner.

Challenges in the Retailer's Journey

Selling leases during a time when retailers face unprecedented challenges isn't a straightforward task. Retailers need a deep understanding of factors affecting lease values to navigate Chapter 11 successfully and maximize cash for a more robust emergence from bankruptcy.

As retailers navigate the complexities of Chapter 11, the strategic analysis of lease values becomes paramount. This understanding not only aids in a more informed decision-making process but also contributes to the overall success of the retailer's journey through bankruptcy.