By  on April 16, 2007

NEW YORK — Sometimes it's best to sell a location to get value for the site, even if the store is profitable.

That's one of the evaluations that businesses need to do to determine what real estate assets to keep and which to sell, and they generally don't do it often enough, said Jeffrey Bloomberg, a principal at Gordon Bros. Group, a firm known for its expertise in asset dispositions, appraisals and recovery solutions.

"Companies need to have an understanding of what is the four-wall contribution. Firms operating profitable stores in leased locations that are below market rent might do better selling the location," Bloomberg said.

"Many retailers haven't done this [analysis] and they should. The below-market lease terms may have more value for someone else. For the operator who has other stores nearby, it can make sense to close the site and get a premium for the location while they still can. As for the sales at the former site, they can transfer that to another nearby store. This can be a win-win situation because the operator often adds 10 percent to 15 percent to the volume of an existing business, which is all profit because it's all on the margin."

Scott Bernstein, chief operating officer of SB Capital Group, said that when he works on financing deals, one of the asset areas he always checks out are the real estate holdings. "We find that the market has not deteriorated for leases that have terms considered 'undermarket.' By and large, the values have held up," he said.

To be sure, these days retailers are more likely to have leased stores than sites they own outright. Property that is owned is far easier to sell, or it can be refinanced. Another option is sale and leaseback.

Retailers looking to divest themselves of some leases first need to take a good look at each store's operations.

"One has to know which locations are losing money and which are making money....Then the question is, 'What do we do?' One option is to keep operating the store until the lease expires. If that's very soon, then it's an easy decision. If the business is losing money, one possibility is to stop operating and just keep paying rent. If there's a term in the lease that says the tenant is defaulting on the lease if it ceases operation, then the options are to find a replacement tenant or pay the landlord to get out of the space," said Harold J. Bordwin, president of Keen Consultants, a firm that specializes in real estate analysis and disposition of owned and leased properties.

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