Simon Property Group and Brookfield Properties were faced with a Hobson’s choice in the Forever 21 bankruptcy. Should they let yet another retailer – Forever 21 – which was an anchor tenant in many of their malls be liquidated, or should they mount a last ditch effort to save the tenant by purchasing it out of bankruptcy.
Our sophisticated readers are surely familiar with the Forever 21 transaction in which certain Forever 21 assets including inventory and leases were purchased by a consortium comprised of Simon, Brookfield and Authentic Brands for $81 million so there is no need to rehash them at the granular level. Rather, the key question is what do they mean for the future of landlord-tenant relations.
The bankruptcy of a major anchor tenant in a mall can cause significant harm to the mall’s owner. For example, Simon stood to lose up to $8 million and Brookfield would have lost up to $5 million in pre-bankruptcy rent if the Forever 21 stores closed.
But that was just the beginning of the landlords’ problems. The spillover effect for the malls with Forever 21 would have been disastrous if replacement tenants could not be found. Not only would the landlords be losing millions of dollars in future rent, but the traffic in the malls would be substantially reduced, thus impacting other tenants and ultimately depressing the value of the property.
As a result, it was far better to come up with a creative patchwork solution where the developer buys the anchor tenant‘s business in the hopes that it can right the ship. This would yield the double benefit of preserving a flow of rents and avoiding the damage from a dark anchor store on other mall tenants.
Accordingly, the decision to bid for Century 21 by the consortium may not have been that difficult. Given the damage that the closed stores would have created in their malls, the deep-pocketed bidders led by Simon with a 51% equity holder blew other potential bidders out of the water and the scheduled auction for the Forever 21 assets was not even held.
Flush with $7 billion in cash as it heads into the $3.6 billion Taubman Centers acquisition, Simon looked to the playbook that it used in the Aeropostale case in which it bought that company out of bankruptcy and executed a successful reorganization. That model is a variation on the book of bondholders who often swap their debt for the equity of bankrupt companies rather than take the loss resulting from a liquidation.
So kudos to Simon and Brookfield for trying to make lemonade out of a lemon by coming up with a creative solution to their Forever 21 problem. By keeping Forever 21 open in the hope of a successful rebranding, Simon and Brookfield will retain an important source of rent and the critical tenant in dozens of malls. Whether you live in New York City where we do business and can see all the empty store fronts in otherwise booming Manhattan or anywhere else around the country where there are malls, the devastation wrought by online shopping is evident. In this difficult retail landscape, creative approaches – even if it means buying your tenant‘s business – are to be celebrated. Will other landlords take note and follow suit if they think a defaulting tenant’s business is viable in the long term?
What do you think? As always, we are eager to hear from our clients and friends.