20 ms·
Busted retailers use bankruptcy to break leases by the thousands
- stefan_ 6y agoYes, this is what chapter 11 bankruptcy is meant to enable.
- AgloeDreams 6y agoI thought the same thing, these businesses clearly are out of cash and credit and need to break leases to save SOME stores compared to losing all. The idea of harsh leases in large retail stores kinda always made me laugh: For a JCP or the like, the setup costs, warehousing, and hiring work is so great that the only case where they would close a store is to stop cash from hemorrhaging beyond control. On a large scale this forces the only move for survival to be bankruptcy after falling way too far. If you're PREIT or such one can't help but realize that the overall outcome is that you'll push a tenant of a vast majority of your stores into really bad financial states that then leads to a much harder bankruptcy and possibly dissolving of the company, ripping stores out of ALL of your malls instead of 30%. And thats why PREIT has so many malls with empty giant rooms and defaulted loans.
- seibelj 6y agoThis is exactly why we have bankruptcy! These businesses are failing and need to renegotiate their liabilities. This is expected and healthy if you want any retailers to have any hope of survival going forwards.
- borkt 6y agoIt’s going to have severe consequences somewhere down the line as I don’t believe anything nearing the magnitude and density of the coming bankruptcies has ever occurred. That being said I agree it’s meant to be this way, and I will always prioritize RESPONSIBLE business trying to restructure and preserve jobs over landholders who basically do very little work while extractIng as much rent out of their tennants as they possibly can without them leaving.
- AnimalMuppet 6y agoEver? 1929, maybe? Crash of 1879? Or am I being uncharitable, and you mean recently?
- PaulDavisThe1st 6y agoThere was a lot more regional and even local independence in the economy when these happened. Vastly more people still worked in agriculture, and economies produced far more of what they needed within much more limited areas. 1929 was bad, but the economy then had more of a "node" structure. Today, it is more of a "web", and tugging hard anywhere stands a good chance of pulling the whole thing apart.
- morganvachon 6y ago> This is exactly why we have bankruptcy! You're not wrong, and under normal circumstances this would be a blip on the radar. However, the hundreds if not thousands of locations each of these companies plan to shutter will have an unprecedented effect on the commercial real estate market. Within months we will have thousands of property owners suddenly unable to pay their mortgages because they no longer have tenants, meaning they will have to default on their loans. This will greatly affect banks and other lenders in the months and years following. It's a domino effect that will be felt for many, many years after we've wiped out SARS-CoV-2.
- dragontamer 6y agoWhich is also the point of financing and securities. I invest money into the market. Sometimes the market does poorly and goes down. My job as an investor is to accept risk when others do not. It is my money that disappears in these circumstances. The general idea is for the riskier among us to lose money. The investing class reaps benefits when the economy is good, but they lose money when the economy suffers. ---------- When downturns happen, investors become frightened. Which is fine: it means more opportunities for me to buy back into the market. But accepting this year's losses is part of the plan.
- dencodev 6y agoWon't somebody please think of the landlords and banks
- morganvachon 6y agoI think you missed my point, that eventually the pain will trickle down to the rest of us at the bottom. I should have continued the domino metaphor to this conclusion to avoid misunderstanding, I'm sorry. And to be fair, I and likely many other "regular Joes" benefited initially from the 2008/9 downturn; I was able to buy my first home, humble as it is, at less than half its usual market value. I'm still enjoying that benefit today, with a monthly house payment less than most people's car payment even on a used vehicle. I think this time around it will be much different; this is approaching a true depression, not just a downturn. We are at 30 million jobs lost due to the pandemic, on top of the existing unemployment not related to it. We are on a dark road.
- alkonaut 6y agoThe problem with external shocks is that during the "readjustment", people still have to eat. The people who worked in the shops, the people who own the buildings etc. In the end, just keeping companies afloat through rare shocks might be the cheapest option. Market economies create efficiency, not resiliency.
- TheOtherHobbes 6y agoThere's a difference between strategic failure caused by poor management and interruption of a viable business by an external event - force majeure. You can buy insurance policies to protect your business against the latter. (Although with Covid a lot of insurers are refusing to pay out, and some are being taken to court.) Where there's no insurance it's reasonable for government to act as an informal insurer of last resort, because it's hugely more expensive and damaging to allow businesses that are otherwise viable to go to the wall. You don't just lose a viable business, but you create losses that ripple through the entire system causing upstream insolvencies. So you lose the productivity of all the businesses affected and the spending power of their employees. It takes a good long time to rebuild both. The problem is in the grey area where it's hard to tell if businesses are genuinely viable and just need temporary reinforcement, or whether they're already zombies and need to be killed off. Patronage and politics makes this even more complicated. But the principle is still sound: in a national disaster insolvency is not a clear signal of failure, and allowing all business to crash regardless will do much more harm than good.
- PaulDavisThe1st 6y agoOne could make an argument based on what we've seen during COVID19 so far that very large sections of the US economy are not genuinely viable. They've been fabricated out of the whole cloth that we call debt, they have almost zero resilience in the face of negative economic factors, and they participate in widening income and wealth inequality by not actually being the locus of viable family-supporting jobs. Nobody has wanted to acknowledge that so much of the US economy is a house of cards. COVID19 isn't forcing people to do so, but is making it much clearer.
- asdfasgasdgasdg 6y agoIt's basically the definition of bankruptcy that you need to renege on your obligations to someone. Landlords run that risk. They're hardly the ones losing the most -- think of the poor creditors and shareholders. The landlords are only losing the expense of finding their next tenant, plus any difference in the market rate when the original lease was signed and today.
- gremlinsinc 6y agoI think everyone loses regardless, but I don't think we should prop up businesses, capitalism should be a game that you play to win or play to lose. Government needs to stop getting involved period. Help at the bottom - prop up the citizens who the government IS responsible for, let the rest duke it out. Corporations are not citizens. Government has no duty to help corporations. But, yeah everybody will hurt by this, sure. Malls will close, businesses will close inside malls, investors will hurt, and workers who worked at those businesses lose, even some consumers who enjoy malls lose, cities lose because they become blight, many probably get abandoned and become gang hideouts or something. Homeowners lose because home values drop, but lots of other factors will be causing a lot of the cycles above to happen to. Next 10 years is a hazardous wasteland for prosperity. Should just start bulldozing some of them and building green spaces and parks. I have a feeling open air is going to be a big trend over the next decade (less chance of viral spread).
- dencodev 6y agoLmao gang hideouts
- Nasrudith 6y agoYou can look at what actually happens in abandoned malls - bored teenagers and college students calling themselves "urban explorers" check them out and engage in some graffiti in a long abandoned site or trysts at most. Gangs would find them goddamned useless as territory because there is no income stream there. There isn't anyone to make money selling drugs to or johns for clients to pimp out. That is why the damn mall closed in the first place! The low traffic ironically makes it a poor place to lay low as "I saw some guy enter an hour or so ago" becomes useful instead of vague and useless. That similar noticability and lack of good pretexts makes it a poor choice for a meth lab compared to a random trailer or basement. They wind up such an economic wasteland that they aren't even good for criminal purposes which is vaguely impressive. That is essentially the one "upside" of their separation from residences. They aren't like the Opium Den/Crackhouse/Methhouse because they lack the attractiveness to be an attractive nuisance.
- sartethought 6y agoThis is by design! Who did you think capitalism was supposed to benefit? The working people who create our society? Psh!
- usaphp 6y agotechnically this will allow "working people" to continue having their jobs, otherwise the retailers will have to fire anyone and go out of business.
- skallowax 6y agoRight. Because trickle-down economics have always proven so great for the working class.
- erik_seaberg 6y agoThat worked well for competing workers with lower costs of living, just not for US-based workers.
- dencodev 6y agoWon't someone please think of the retail jobs that exploit workers and don't pay a living wage
- xwdv 6y agoThis will come back to haunt them. Good luck.
- tyingq 6y agoHow so? I'm genuinely curious what the downside for retailers would be in this case. As opposed to staying in place and paying the rent.
- dencodev 6y agoOur Lord and savior, the banks, won't lease again to those bad men at the retail companies
- Nasrudith 6y agoWe saw that shift before - bankruptcy used to be more of a scar for life on credit instead of essentially vanishing in seven years. Going all "scarlet letter" made less money than defecting and accepting redemption which reflected closer to actual risk levels compared to some spiteful imaginary idea of "fairness" or "virtue". It is part of what made the social credit's justification such a laughable lie. We did away with honor based lending centuries ago and got better results both fiscally and morally from banks! When was the last time you saw someone engage in a murderous duel over credit rating?
- dhosek 6y agoI have a heavy exposure in REITs (my only non-index fund investment). I treat these as passive investments so I had to look to see what I was actually invested in. I have no commercial exposure, but even what I have has been hit hard by COVID. AVB (residential), PEAK (life science/medical office/senior housing) and PSA (Public Storage) are all down roughly 25% YTD. I have to imagine that REITS in retail/office space are going to be doing even worse as these three are sectors that are less likely to see long-lasting contractions.
- dhosek 6y agoSomeone mentioned PREIT (NYSE: PEI) in another comment so I checked to see how they're doing. Down 80% YTD. I'm glad not to be invested in malls and shopping centers.
- joshcain 6y agoPSA being down is interesting. I might have thought there would be greater demand for storage units as people clear stuff out of their houses to make room for home offices/gyms/etc. That said, all the people who've lost jobs or hours are probably not looking to pay $100s/month for an auxiliary junk room.
- dhosek 6y agoOne thing I've learned is that markets are rarely rational. But, with REITs, the real return comes in the form of dividends more than capital appreciation, so if the price has irrationally declined, my return will be greater (I have all of my REIT investments set up with dividend reinvestment). I'm not expecting to liquidate any of these positions any time soon so I can afford to wait for them to do whatever they'll do.
- dredmorbius 6y agoA rush to liquidity can take down even otherwise sound investments. J.K. Galbraith describes this (as a "Gresham's Law" if memory serves) in his book on the 1929 crash. Highly recommended.
- ralph84 6y agoNot mentioned at all in the article, but what will be more interesting is when all of the landlords start appealing their property tax assessments. Obviously if the government has prevented the property from being used, it's not worth what is was previously assessed at. State and local governments are in for a world of hurt.
- deleted 6y ago[deleted]
- happycube 6y agoThe federal tax writeoffs tend to make up for it, AFAIK.
- djrogers 6y agoTax write offs never ‘make up for’ anything - if you write off $1000 in property taxes, it will reduce your tax burden by ($marginal_tax_rate*1000), which will by definition be less than $1000. Tax write offs are distinct from tax credits.
- ethanbond 6y ago“I was told that this business was guaranteed upside for zero work” - Landlords
- duxup 6y agoGood. I like that. Now if we can just seem to adjust whatever weird tax rules or situations allow real estate to sit largely empty and apparently not not put all that much pressure on prices... that would help too. I see a lot of commercial real estate sit empty for ages and I hear from the local businesses that the rates are still high and even going up. A development not far from me has been at sub 50% capacity for YEARS and I've heard from locals that they're moving because they won't adjust the pricing or are demanding more... Would be nice to see some variety beyond Chipotle or Noodles & Company or rando fitness center... or mostly nothing. Seems like bad economic policy to have a system that has capacity, but leaves it unused save for only the highest of profit margin chains ... who probably don't pay the rate anyone else would.....
- ethanbond 6y agoIf you’re really interested in this topic, you should look into the Land Value Tax, also in more extreme forms called the Single Tax or Georgism. You’re poking at some really fundamental questions with this line of inquiry.
- philjohn 6y agoI believe in the UK landlords are on the hook for business rates on commercial property when it's empty, so the incentive to lease at more reasonable rates is there.
- TheOtherHobbes 6y agoLandlords get a three month exemption when a lease expires. On some industrial properties the exemption is six months.
- mikestew 6y agoMan, with (currently) four comments mentioning that this is "what bankruptcy is for", I think the point of the article might have been missed. This isn't some sneaky "one weird trick", and that's not the reason Bloomberg is reporting on it. In fact, the tone of the article to me is, "yup, companies do it all the time, but..." And the "but" is: But the moves threaten to upend huge swaths of the real estate market and the half-trillion dollar market for commercial mortgage-backed securities. It's not "Busted US Retailers Use Bankruptcy to Break Leases", but more the "...by the Thousands" part. Malls are going to start becoming ghost towns, especially with no anchor stores like Penny's and the since-departed Sears.
- gremlinsinc 6y agoisn't that the point of capitalism, the fit live the poor die? Let the poor malls die, if their business model fails. We shouldn't force a failed business to last longer than society needs it to, otherwise that's something beyond capitalism.
- soperj 6y agothe point though they're making is that if they die, then it can massively affect the banks. The knock on effect could be huge.
- fl0wenol 6y agoOh well, those banks should have had a backup plan </s>
- Bombthecat 6y agoThe backup plan is state money.
- DSingularity 6y agoNo. The backup plan is to screw the people. Slash interest rates, eliminate fractional reserve requirements, and buy corporate bonds and securities.
- floatingatoll 6y agoIt's a bit depressing to see the greed-by-framing here. I feel like the banks are playing musical chairs rather than trying to operate sustainably. It seems like a more efficient approach — one that is not as economically destructive to GDP after the pandemic — would be: 1. Retailer notifies their lease holders that a given location is impacted by public health closures, reducing revenues for products originating from that location from (100% of $X) to (y% of $X), and warns the leaseholder that the retailer may be forced to file bankruptcy if easement is not granted, reducing rent paid to (0% of $X). 2. Leaseholder notifies their mortgage holder of this, and warns the mortgage holder that the leaseholder may be forced to file bankruptcy if easement is not granted, reducing mortgage paid to (0% of $X). 3. Mortgage holder notifies the property tax authorities of this, and warns those authorities that the lendor may be forced to file bankruptcy if easement is not granted, reducing property tax paid to (0% of $X). 4. Property tax authority grants a public health easement to the mortgage holder, conditional on the same easement being granted to the leaseholder. 5. Mortgage holder grants a public health easement to the lease holder, conditional on the same easement being granted to the retailer. 6. Lease holder grants a public health easement to the retailer. If anyone refuses to grant the easement, they get nothing anyways, because anyone in the stack can just give up and file for bankruptcy as a last resort — and that's where we're at today. It feels like a shell game because they're all trying to extract the maximum amount of money before bankruptcy, while withholding it until they themselves can file bankruptcy. It's such a shame they can't work together to get everyone that's owed a dollar to agree to just suspend their demands for their dollar until this is over. They're not getting their dollar either way, but if they'd rather have their tenants breaking leases left and right, so be it.
- gremlinsinc 6y agothat would've been the smart thing to do... or a mandate from the top down fed > banks > lenders > corp|residential landlord > tenant to allow partial payments based on need, until crisis is over. Everyone succeeds then. Might still need some stimulus for the bottom 10% of society but maybe not as badly.
- dencodev 6y ago7. Abolition of private property
- codezero 6y agoI wonder if, and how much commercial real estate might be turned into residential living spaces in the next few years. That could be a huge coup for young people in the United States. I guess there are a lot of other lagging issues like zoning, rebuilding some places, or just redesigning, so may take quite a while, or not happen at all.
- gedy 6y agoI know this is commercial, but can be good if it drives down property prices and rents. I honestly think a lot of the benefits people want from universal basic income would equally come from just having lower commercial and residential rents. I recognize that's a big "just".
- ethanbond 6y agoThere are actually very simple tax schemes that go quite bit further. A high Land Value Tax + low tax on improvements (eg buildings) means the portion of rent due to the landlord’s actions/investments generally get kept by that landlord, but the portion of rent not due to his/her actions (eg good schools/restaurants/transit/employers nearby) get recouped as tax. You should look into LVT, you’re right that would be huge for people.
- gremlinsinc 6y agoif only the government/bank could've put moratoriums top down, freezing all rent commercial and residential. We'd be in a much better place. Now we have economic collapse, 40 million looming evictions, people will starve, and freeze, or die in a shelter w/ the pandemic. Businesses are failing because they have to meet monthly recurring bills w/ or w/out actual sales receipts. They still need to meet payroll if they're even open. Could've been stopped from the lenders down, instead of try to just throw money every which direction and see which sticks. I'm for handouts for the poorest, but i think the other handouts were horribly done, and the loan program.
- donor20 6y agoI'm in the group of businesses that got handouts that the business didn't need to survive, but the handouts did mean folks were kept on staff even without work. This paid off big time for us (especially if covid had resolved by September) because we have seen demand pick back up pretty quickly in our space and the staff were ready to go. So if the downward trends had continued we'd have been in good shape and it would have been good timing. Of course, our covid control in the US has been a total disaster relatively to other much poorer countries even - we're still trying to figure out if masks are worth wearing (20 cents to maybe save a life). Instead of handouts the layoffs would have been a fine option, folks would have received unemployment. But the overhead and disruption of firing folks, canceling their benefits, and then re-hiring them (maybe) etc is not insignificant. The handouts meant we are ready to go once everything resolves which was supposed to be a lot sooner than it is looking like it will be.
- gremlinsinc 6y agoThe problem is a lot of handouts didn't help anybody. Was just wasted, or bought like 2-3 months max. Now that's over with and there needs to be another, or a better idea... Alot of these businesses struggle because they have recurring bills: Rent, Mortgage, Utilities, etc... if all recurrables were 'frozen' or allowed 'pay what you want/can afford' then arguably everyone would be on better footing. E.g. Big bank has ten malls, Malls go to businesses and ask for rent, J.C. Penny's is like we can only pay 10%. Mall goes back to Big Bank and says our customers can only pay 10% each, so that's all we can pay. Bank's like sure w/e it's a crisis. Utitility companies, etc. same thing. Obviously there's other costs of business, but that would save a lot of the issues. Do the same of course for residential/renters as well, cause everybody is in the same boat. Then we'd need less stimulus $$. In other words try to make sure everyone's minimum (got the roof over my head) is met, and this would've been a good way to do that.
- buraksahin 6y agosohpet etmenin en iyi adresi ile tanışmanın zamanı geldi. https://www.mavisohbet.org/sohpet.html https://www.mavisohbet.org/sohpet.html katılın.
- dwighttk 6y agoI wonder how Apple will respond if malls start collapsing. (I’ve heard rumor that) they pay just pennies on the dollar for their store leases because they draw so much foot traffic to the malls. I can’t imagine them keeping stores open in the middle of a nearly empty mall, but I’ve only ever seen pictures of an Apple store that wasn’t in a mall or strip mall.
- djrogers 6y agoMy guess would be they’d move their mall based stores to better locations. They have a lot of non-mall stores to use as examples, including every one of their flagship stores.
- dwighttk 6y agoI just can’t picture what the flagship store model would look like in e.g. Charlotte NC
- gdulli 6y agoThe only Apple product I have are some gifted Airpod Pros. I can confirm they stopped working repeatedly and got me into a mall 3 times.
- supertrope 6y agoSome leases are conditioned the presence of an anchor tenant. So a department store failing can trigger these clauses allowing rent reductions or early termination for smaller retailers.
- cs702 6y agoIn short, we could see a "tsunami" (the OP's word) of unforeseen losses in highly-rated commercial mortgage-backed securities (CMBSs), because credit-risk models used to construct and price CMBS tranches never considered the possibility that a large number of retailers would simultaneously break so many leases via bankruptcy, simultaneously impacting so many malls across the country. Quoting from the OP: > By seeking court protection, firms like Neiman Marcus Group Inc. and the parent company of Men's Wearhouse avoid the headache of protracted negotiations with individual landlords. But the moves threaten to upend huge swaths of the real estate market and the half-trillion dollar market for commercial mortgage-backed securities. > "This is now black-letter law -- a debtor can cram down a landlord," said Melanie Cyganowski, a former bankruptcy judge who's now a partner at law firm Otterbourg PC. "If this becomes a tsunami of retailers rejecting their leases, it’s going to trigger another part of the sea change -- the mortgages held by the landlords." Think: something analogous to the tsunami of unforeseen losses in residential mortgages that triggered a financial crisis in 2008, but with commercial mortgages this time around. It won't be pretty.
- Traster 6y agoI want to loop this back to something discussed on HN before. During lockdown, some optimistic WFHers were saying that the transition to WFH would up-end rental markets in city centres, as employees flood out of cities since they've been allowed to work remotely and won't pay a premium for a commutable home. Well it's looking more and more like that effect is going to be almost impossible to measure in comparison to the massive recession coming. Rents are going to drop because shops are going bankrupt, those areas are going to try to find new rentals, convert to offices or housing and that'll drive down prices.
- jxramos 6y agoJust curious, at the top of it all are municipalities relaxing property tax dues as well?
- wins32767 6y agoMy town is already facing a ~10% gap due to loss of state aid and income tax revenue. Many municipalities have contracts with contractual pay increases e.g. 3% per year COL increases on top of the constantly increasing healthcare costs (those were ~7% last year for my town). All told, that 10% gap turns into something closer to 15% due to the structural increases in outflows. And all of this for a town that is one of the few that has a AAA bond rating. Absent radically slashing services I don't think most municipalities can afford any sort of cut.
- vkou 6y agoNo, because regardless of whether or not there's an epidemic, someone needs to run the schools, staff the fire station, fund an overpaid police force, and fix potholes. Theoretically, you could borrow money for all this, but then you'll just get a bigger tax bill next year.
- treyfitty 6y agoI’ve owned a physical business before. What the article fails to mention is that small to medium sized businesses generally sign leases with joint and several (personal) liability attached. Landlords can and do go after the person after the bankrupt LLC is raided.
- PopeDotNinja 6y agoA lot of people think that forming an LLC or corporation will protect your personal assets from creditors. When I ran my business, I learned banks like collateral, and given my business has no assets other than the cash in the bank, anything debt I took on would need to be secured by my personal assets. If you use your personal assets as collateral, you’d better hope your business doesn’t run out of money before you’ve paid off the debt.
- jrehor 6y agoThe US has too much retail space. Per capita, it has 5x as much as Europe (23.5 sq ft in the US vs 3-4 sq ft in most European countries) and 8-10x as much as Asia (2-3 sq ft). We may be looking at a permanent decrease as a result of this pandemic. But even if it goes down by 20%, the US will still have way more than anywhere else. I think we'll be better off when we use the excess retail space for something else whether it's apartments, warehouses, or offices. But the transition will be painful.
- munk-a 6y agoA while back, in the early 2000s (maybe the 90s), there was all that talk floating around about the ghost Walmarts left over when they'd over-saturate a market with box stores to kill off the competition then scale back to a single mega-location. When that was happening the US did nothing - they didn't try and protect small businesses ("it's the will of the market!") and nor was Walmart even gone after for littering. This situation exists because the US has been overly complacent for quite a while and happy to ascribe these warning signs as mere minor side effects of the most patriotic American capitalism - this was pretty easy to do while everything was building leverage on leverage and everyone had plenty of bread on the table. The US economy is rotten to the core, it's really unfortunate but I hope when this house of cards inevitably falls down it at least serves as a lesson for history.
- refurb 6y agoI’m not sure if retail space alone is a good measure. The US (and Canada) love massive stores like Costco, Home Depot, Walmart. And there are a LOT of Walmart’s. Those stores seem to be doing just fine during the pandemic (HD has been packed when I went). Would be more useful to see a breakdown by retail size. Say <500 sq ft, 500-2000 sq ft, 2000-10000 sq ft and >10000 sq ft. I’d suggest the small places are the ones at high risk (just thinking about typical tenants).
- Leherenn 6y agoI agree, NA has massive stores because they have the space, e.g. population density is much lower than in Europe or Asia
- advertising 6y agoWorked in commercial real estate before the last crash and have a few friends working at big mall companies. Have seen some really cool plans to turn a whole mall into residential with the interior being common areas and parks etc. Some really neat concepts.
- api 6y agoBetween this and companies going partially or fully remote I would not want to be in commercial real estate right now.
- egypturnash 6y agoI feel like somewhere in the next year or two, Western capitalist economies really need to come up with a sweeping plan to pause everything. Because this is probably not the last major crisis like this we’ll see in our lifetimes (unless we are near the ends of them), and having banks continue to collect on mortgages despite on and off rent freezes across the country is a pretty obvious route to a giant mess.
- LatteLazy 6y agoThe question here is the same as the question when unemployment numbers come up: what will the bounce back look like? If the same people go back to the same jobs in the same locations at the same companies (maybe renamed for bankruptcy purposes) then it will make no difference. If they don't then it will. But there is no way of knowing that until the bounce back begins. And that's a few months (a figure pulled from my arse) away.