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.Bordwin cautioned, however, that finding a replacement tenant isn't always easy. The lease may have restrictions such as a use clause, or a requirement that the store can only be open during certain hours. Even square footage can be a challenge. In some sites, the retail space may total 10,000 square feet, but the amount of rented space may be just 5,000 square feet, he said.

James Schaye, president and chief executive officer of Hudson Capital Partners, a liquidator, pointed out that while it is always difficult to find new tenants for bad locations, or even to redevelop them, sometimes negotiated deals can work out when there's a group of properties to work with.

"Let's say you have six locations you're trying to get rid of, and three are really good sites where you can find strong tenants. You try to negotiate with the landlords of the remaining properties to allow you some flexibility in re-renting the space. Sometimes you have a good replacement tenant that's interested in just the A-mall locations," Schaye said.

"Because those sites are hard to get, you try to do a package deal where the new tenant takes the sites it wants, plus the not-so-good sites. Many times they wouldn't mind getting a not-so-great location or two in order to get the really good ones. And landlords sometimes forget it's better to get less than to not find someone and get stuck with an empty store at the bad locations," Schaye added.

He pointed out that he's seeing a new trend for some malls to have leases containing clauses that allow tenants to leave based on a landlord's default when the mall anchors have pulled out of their leases.

In addition, many malls these days are changing their tenant mix; a discounter may be one anchor and a department store may be the other, unless it's strictly a high-end luxury mall.

"Tenants no longer mind the mixing of the tenant mix, and the change attracts more traffic to the mall and makes it easier to find replacement tenants," Schaye said.

Still, even with the evolving retail landscape, one thing isn't changing for anyone involved in asset deployment techniques."You have to understand the strategic orientation of the retailers and what they are looking for, and then will you know who would be a good fit for some of the available locations," Gordon Bros.' Bloomberg said.

Bloomberg noted that supermarket retailers were often difficult to resell because of the complex heat, air-conditioning and ventilation systems at those sites.

Retail REITs
(First-quarter 2007 stock performance)
CompanyClosing price 1/3/07Closing price 3/30/07%Change
General Growth Properties (GGP)52.1064.5723.9
New Plan Excel (NXL)27.5333.0320
Forest City (FCE-A)57.7366.1814.6
Pennsylvania REIT (PEI)38.9744.3313.8
Taubman Centers (TCO)51.0457.9913.6
Simon Property Group (SPG)101.70111.259.4
Kimco Realty (KIM)45.1148.748
Federal Realty Investment Trust (FRT)84.4690.627.3
Kite Realty Group Trust (KRG)18.7519.956.4
Regency Centers (REG)78.6483.556.2
Macerich (MAC)87.0292.366.1
CBL & Associates Properties (UBA)42.9244.844.5
Acadia Arealty (AKR)25.00 26.07 4.3
Urstadt Biddle Properties (UBA)18.7819.564.2
AmReit (AMY)8.508.793.4
Tanger Factory Outlet Centers (SKT)39.3540.392.6
Weingarten Realty Investors (WRI)46.5047.562.3
Saul Centers (BFS)56.3256.901
Glimcher Realty Trust (GRT)26.8227.020.7
Cedar Shopping Centers (CDR)16.1316.200.4
Equity One Inc. (EQY)26.3926.500.4
Developers Diversified Realty (DDR)63.2562.90-0.6
Vornado Realty Trust (VNO)121.71119.34-1.9
Inland Real Estate (IRC)18.9418.34-3.2
Feldman Mall Properties (FMP)12.6912.14-4.3
Ramco-Gershenson Properties (RPT)37.9635.71-5.9

Source: Google Finance. *Note: Average is unweighted.

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