Changing consumer shopping habits, e-commerce, fast-fashion and overstoring are rendering flocks of retailers distressed -- which lays out an opportunity for dealmakers running healthy retailers. Because shedding real estate is so often one of the first steps of a retail restructuring process, companies born in or well-adapted to the digital age are poised to take advantage of those jettisoned leases to expand -- and rapidly.
“If you’re looking to expand and you’re looking to expand quickly, when a retailer goes into bankruptcy and is sitting there with a couple hundred leases, that is an opportunity,” says Patrick Nash, a partner at Kirkland & Ellis LLP. (For more on how retailers use real estate during turnaround processes, see American Apparel Underscores Retail’s Big Problem: Overstoring.)
“Sometimes the best opportunity is to pick up surplus real estate in bankruptcy,” agrees Andy Graiser, the CEO of A&G Realty, the real estate company that has handled real estate for Dots, RadioShack, Cache, Delia’s, Alco, Wet Seal, C Wonder and others during bankruptcy proceedings.
One company that has taken advantage of lease scrapping is Game Stop (NYSE: GME), which stepped in and picked up 163 leases during RadioShack’s bankruptcy case. A move like that allows a retailer to have new stores up and running quickly. In Game Stop’s case, the new locations expanded the retail footprint for Spring Mobile, an AT&T dealer. RadioShack, which had around 6,000 stores at its peak, also sold locations to Sprint (NYSE: S) – which was able to more than double its store count through the deal.
Dealmakers looking to acquire leases out of bankruptcy need to act quickly. “It’s not complicated, it just moves fast,” Graiser says. Step one is often buying designation rights, which give their purchaser the debtor’s authority to assume or reject leases, or renegotiate them with landlords. The fee paid for those rights is negotiated directly with the debtor, so it varies. If a potential buyer decides not to buy the leases, or they are not able to negotiate them successfully, they can reject them and all they have lost is the initial fee.
“If you’re buying a group of locations, it is the best option,” Graiser says.