Retail Limbo Prelude to Summer of Hell

Filene's Basement is the latest national retailer to head to retail heaven joining other former power center main stays like Circuit City, Linens N' Things and Steve & Barry's. With the closing of hundreds of these stores nationally, shopping center owners are left holding the bag. Now what were once stabalized, income producing assets have become white elephants where net operating income is insufficient to cover debt payments.

With diminished net operating income, asset values are cascading downwards and wiping out mega retail owners like General Growth Properties. This trend is in the early stages of development and is sure to build up momentum and attention over the summer. Unbeknownst to many is that national retailers have escape clauses built into their leases allowing them loopholes to leave malls when anchors or similar tenants leave the center. These loopholes are known as cotenancy clauses.

Co-Tenancy Could Lead to Retail Bankruptcy
By Terry Sheridan

MIAMI-As the list of store closings grows exponentially so does the pain felt by landlords because of a common but little known clause in retail leases. And with bankruptcies in the retail sector expected to spread as spending remains depressed, experts say these so-called co-tenancy clauses could drive landlords into bankruptcy along with many of their tenants.

The clauses allow store owners to take several options--including not paying rent--when key tenants leave a shopping center. The clauses sometimes make leases contingent on certain anchor tenants because those big-box stores often drive most of the traffic to smaller stores. Other options triggered by co-tenancy clauses can include lease termination, reduced rent for a certain period or payment of a percentage of sales only.

Lease modifications because of co-tenancy ultimately can create a cash-flow domino effect for the landlord, says real estate lawyer Irwin Fayne, a partner at Holland & Knight, who focuses on commercial leasing. “Co-tenancy clauses are a big issue in the threat of bankruptcy to the landlord,” he says. The more vacancies that arise in a mall or shopping center, the more co-tenancy kicks in. That brings more rent reductions, and steadily decreasing cash flow for the landlord. That in turn affects the landlord’s ability to maintain the property. The lack of maintenance can violate other lease provisions. And the rundown appearance of the property discourages other prospective tenants. “It spirals downward and the trigger for filing bankruptcy is when the landlord can't make the debt service,” Fayne explains.

Read More Here: http://www.globest.com/news/1339_1339/florida/176671-1.html

Blighted retail centers and vacancies are spreading faster than the swine flu hysteria and have built up a morbid, cult following at places like "Dead Malls.Com" http://www.deadmalls.com/
At the moment we are in limbo between the last phase of mega bankruptcies and the inevitable, tsunami of bad debt, negative equity and excessive inventories of "luxury goods" which are sure to smother the rest of the economy as the commercial real estate bubble's smaller, less leveraged cousin - the housing bubble has in 2007-2009.

The temperature is heating up outside and the business environment for retailers, mall owners and developers may get just a little too hot to handle.