Shuttered stores get shopped

By Catherine Curan

The consumer-spending drought and rising tide of retail bankruptcies are creating a boom in business for companies handling retail lease dispositions. Dealing with thousands of square feet of space that once-hot chains no longer need or want.

Even during the go-go era of the last few years, DJM Realty, Excess Space Retail Services and Huntley, Mullaney, Spargo &Sullivan were busy working for big-name national chains on deals to exit or restructure leases on thousands of money-losing stores. DJM alone boasts of evaluating over 2,500 stores and handling dispositions or restructuring of more than 50 million square feet a year, mitigating $1 billion of leasehold obligations.

Now, with sales slumping, the economy in crisis and retail experts estimating that 7,000 to 12,000 stores will shutter this year, demand is spiking for these firms. Roseville, Calif.-based restructuring and financial advisory firm Huntley, Mullaney, Spargo & Sullivan – which is handling the disposition of hundreds of excess Starbucks locations – is working on 25 stores within a 15-mile radius of Rockefeller Center. That is more than double the amount of clients it had in the region last year at this time.

The New York area was a little bit slow to be affected by the downturn but it is now feeling the force of that full-on, joining the rest of the country,” said Tom Mullaney, partner at Huntley, Mullaney, Spargo & Sullivan.

As the volume of deals is rising, executives at these firms say it is becoming increasingly difficult to unload retail space. In addition to the dismal outlook for sales, the credit crunch is crimping deals, since tenants need access to capital to take over vacant spaces.

“It is slow, and you’ve got to be able to find a tenant that needs the space,”said Jim Avalone, senior managing director at DJM Realty in Melville, N.Y., which is handling local lease dispositions for bankrupt national chains Circuit City and KB Toys. DJM is the real estate division of Boston-based liquidation giant Gordon Brothers Group.

Retailers often turn to workout firms to dispose of problematic stores more quickly than they could on their own. Avalone notes that the process often takes just four to six weeks from the time liquidators are hired to liquidate the inventory and the lease is marketed and sold.

But the rap on these firms from landlords is that they are like divorce attorneys. Some landlords would rather have an opportunity to try working out a deal directly with a struggling tenant before a third-party negotiator gets involved.
Still, sometimes landlords are willing to shell out sizable sums to quickly buy back a coveted lease. This can be preferable to awaiting the outcome of a lease auction organized by the restructuring firm, when a less desirable tenant might be the highest bidder.

That was the case for George Constantin, president and CEO of Heritage Realty Services, who negotiated with Gordon Brothers to buy back the lease on the former CompUSA store at 420 Fifth Avenue. Heritage, which owns and operates $500 million of real estate in New York and Westchester, wanted to re-rent the 74,000-square-foot space after Gordon Brothers bought CompUSA in 2007 and began liquidating it, Constantin said. The location-reportedly CompUSA’s highest grossing store with revenues topping $110 million a year – has been coveted by its neighbor Lord &Taylor, as well as electronics and furniture retailers.

“We thought it wise to quicken the pace of taking the space back,” said Constantin.

Last year, he met with Gordon Brothers and negotiated a lump sum payment of just over $1 million to buy back the 20-year
lease. CompUSA was paying rent of about $2.8 million annually. Now Constantin is marketing the property at $10 million a year, and says he can sit tight for several years until he finds the right tenant.

In other cases, restructuring firms are expediting dispositions of leases of bankrupt chains. After Pittsfield, Mass-based KB Toys Filed for bankruptcy last December and began liquidating, the retailer hired DJM to dispose of leases. The thousands of mailings and e-mails DJM sent to brokers and retailers marketing KB’s spaces drummed up deals for two Queens stores on 82nd Street and on Myrtle Avenue, Delaware bankruptcy court documents show.

Last month, DJM worked out private sales on these two spaces, and tried to get the bankruptcy court judge to approve the deal quickly. A fast deal would help KB avoid the time and expense of auctioning the leases, and save it from paying March rent, court papers said.

At press time, hearings were set for approval of two deals for new tenants to assume the leases. Both agreed to pay key money for the stores, which are located on busy retail strips. The lease for the space on 82nd Street in Jackson Heights, which runs through 2012 at an annual rent of $325,000 per year, commanded $75,000 in key money from Prima Donna Retail Stores Corp., according to the filing.

“Both these leases were fairly attractive,” said Avalone.