Author Topic: Commercial retail tenant filing Chapter 11  (Read 1065 times)

freya

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Commercial retail tenant filing Chapter 11
« on: October 29, 2018, 12:59:30 PM »
I'm posting this question on behalf of my mother, who manages a family-owned commercial retail property.

A long-term, reliable tenant was recently bought out by a large chain, who then proceeded to file Chapter 11.  Our tenant happens to be one of their more profitable stores, so they want to keep it open.

The company then asked to renegotiate the lease - actually they just presented a list of demands.  They want the following:

- 2 months rent forgiveness
- Reduction of the occupied space (split one store into 2 at landlord's expense - note that it used to be 2 stores though, so this isn't actually that hard to do)
- Immediate 15% rent cut
- Reduced schedule of rent increases for the remaining lease term, to 5% rent increases (over the new base rent) every 5 years.  This results in getting back to the ballpark of the current rent level 15 years from now.
- Extension of the current lease from expiring in 9 years to expiring in 20 years (this is my favorite...I asked my mother, what would Superman do if you handed him kryptonite?  Pretty sure he wouldn't say he'd just hang onto it for another 11 years).

I interpreted this as the company trying to take advantage of my elderly mother.  She could likely get a new tenant at the full current rent or maybe a bit higher (per the real estate agent) within a few months.

I suggested that she counter by accommodating space reduction, rent forgiveness, and rent cut to 5 years only, then resume current lease terms.  No extension.

Would like to hear opinions from others!  It would cost to get a new tenant, but I am guessing that 20 years of below market rents would be worse.
« Last Edit: October 29, 2018, 04:37:45 PM by freya »

Jon Bon

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Re: Commercial retail tenant filing Chapter 13
« Reply #1 on: October 29, 2018, 02:50:13 PM »
PTF I don't know commercial at all but......

Holy shit is this common? Like I feel 1 of those demands would be a big ask let alone the whole list!

theoverlook

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Re: Commercial retail tenant filing Chapter 13
« Reply #2 on: October 29, 2018, 03:32:13 PM »
I don't know what the market is like where you're at. But where we are, if a tenant asked for those, I would say - no thanks - do you want out now or later? Having said that, it all boils down to numbers for your mother. Would she lease to a new tenant at those terms? If so, then it's probably a good deal for her as long as it doesn't cost her much to reconfigure the space.

However, if what her realtor said is true - that she could probably lease the whole space within "a few months," for the full current rent or higher, I would bail and look for a new tenant. I'm not averse to rent forgiveness or lease modifications but I always look at it from a net dollar point of view. If it costs me more to keep the current tenant I say no. I've had it come up a few times, and even twice with the same tenant. Amazingly enough the 2x tenant has become a long term no issues tenant for us.

It's also important to establish whether she can afford to carry that space empty for a while. In the end, if you say no to all their demands, they may still stay if the store is truly profitable. She should, however, be prepared to have them terminate and move out if she calls them on their move.

Another Reader

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Re: Commercial retail tenant filing Chapter 13
« Reply #3 on: October 29, 2018, 03:49:06 PM »
Your choices may be dictated by the bankruptcy court.  You should see a commercial real estate attorney that deals with bankrupt tenants to figure out your options.

freya

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Re: Commercial retail tenant filing Chapter 11
« Reply #4 on: October 29, 2018, 04:58:58 PM »
Thank you for comments!  Definitely would like to gather opinions, especially about the bankruptcy issue - no idea what could possibly happen with that.  My instinct here is to get rid of the tenant asap, as they've already shown considerably bad judgment on several levels.  But, maybe that's foolhardy.  I don't know.  My mother is depending on me for advice but I'm such a novice here, and don't have a lot of time to figure it out either (very busy at work just now).

The bankruptcy court isn't involved in this (yet anyway).  There is a lawyer involved, but they seem to just want to crank out a deal as fast as possible.  When asked why, they don't mention bankruptcy court, just the risk that the company will decline our counteroffer and leave.  I don't think they know that this store is one that the company probably doesn't want to lose, though.

If that happened, there would be downtime of about 6-8 months, plus real estate broker fees.   This would cost about as much as the 2 month rent forgiveness plus 5 years of reduced rent.   There's certainly a risk that it will take longer to get new tenants.  On the other hand, a tenant in bankruptcy locked into a long term lease is a risk too.  I told my mother that if they offer a bigger rent increase 5 years from now and were willing to give up the proposal to drop the 11 year extension, we should probably accept.


Car Jack

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Re: Commercial retail tenant filing Chapter 11
« Reply #5 on: October 29, 2018, 06:44:17 PM »
20 year lease, eh?  And demands.  And a bankrupt company.  How about instead:

20 year lease.
New rent starts 5% above present with built in 5% increases every year.
At the END of the lease, you will give them 3 free months of rent.
If they only want to rent half of the store, and you can rent the other side separately, ok.  They pay to divide. Their new rent, for 1/2 the space is 15% lower than what they pay for the entire space.

All this gives them what they want, simply rearranged a little.  If they don't agree, pull out a zip lock bag with sand in it.  Hand it to them and tell they can use that to pound.

calimom

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Re: Commercial retail tenant filing Chapter 11
« Reply #6 on: October 29, 2018, 07:03:23 PM »
@Car Jack nailed it - or pounded it. If they're asking for a 20 year lease, that shows they greatly desire the location. Since the store is dividable, it makes sense to do that and rent the new configured space, while keeping the tenant in place, at market rate square foot rent. No deals, no forgiveness of rent owed.

Another Reader

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Re: Commercial retail tenant filing Chapter 11
« Reply #7 on: October 29, 2018, 07:25:52 PM »
Get yourself an attorney.  You have zero understanding of the situation and your position.  Anything else is just foolish.

Another Reader

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Re: Commercial retail tenant filing Chapter 11
« Reply #8 on: October 30, 2018, 09:35:09 AM »
What happened is you had a tenant whose overall business was failing.  A competitor or a company in a related business saw that with some changes and proper management, the business could be successful.  They bought the business for a low price, and segregated it in an entity separate from their main business.  Then they called the bankruptcy attorneys and filed a strategic Chapter 11 bankruptcy for the segregated entity.  Chapter 11 is for restructuring, not liquidation.  The new owners are debtors in possession and manage the entity with the consent of the bankruptcy court.

In a strategic bankruptcy, equity is wiped out.  Not an issue here because the company was already owned by the filer.  The owner restructures debt in ways that are unfavorable to whoever lent them the money.  The leases for unprofitable locations are rejected and the stores are closed and the tenant vacates.  Tough luck for those landlords.  Next up is squeezing landlords in your position.  The new owner of the business proposes very unfavorable terms that go out forever to take advantage of the situation.  Don't like the terms?  Their attorney goes back to court and whines that they will not be profitable unless you accept them. 

Although the new owner is debtor in possession, the court has final say.  Getting the tenant out will likely be difficult, time consuming (as in a couple of years), and you will have no rent until they are out.  It sucks, but their attorneys know that and that's why they ask for the moon.  Your best bet is to hire an attorney that has been down the strategic bankruptcy road before, if you can find one.  You are probably better off trying to get out of unfavorable terms later in the lease in your negotiations.  Your case to the bankruptcy court is that the resulting successful business that emerges from Chapter 11 will be in a position to pay market rent.

Get good help, because you will be screwed if you don't.
« Last Edit: October 30, 2018, 09:36:57 AM by Another Reader »

theoverlook

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Re: Commercial retail tenant filing Chapter 11
« Reply #9 on: October 30, 2018, 01:09:56 PM »
I've been fortunate enough to never have to go to bankruptcy court for a tenant - any failing tenants have just left and I've released the space which worked out great for me. But is it true that a court could force you to accept lease modifications from a bankrupt tenant? I would be shocked if that was the case. I assume they can force you to let the tenant out, but to force you to accept reduced rent for a long period of time? No way.

freya

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Re: Commercial retail tenant filing Chapter 11
« Reply #10 on: October 30, 2018, 01:57:14 PM »
But is it true that a court could force you to accept lease modifications from a bankrupt tenant? I would be shocked if that was the case. I assume they can force you to let the tenant out, but to force you to accept reduced rent for a long period of time? No way.

That's exactly my question (and opinion).  We do have a good real estate attorney who is urging us to accept the deal, including the lease term extension.  He has not said anything about what the bankruptcy court might do. But if the court forces us to accept the deal (somehow), how could that be worse than if my mother just caved in and signed?  I could maybe see them forcing a temporary rent reduction, but I can't understand a bankruptcy court mandating a lease extension.

nedwin

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Re: Commercial retail tenant filing Chapter 11
« Reply #11 on: October 31, 2018, 11:11:25 AM »
But is it true that a court could force you to accept lease modifications from a bankrupt tenant? I would be shocked if that was the case. I assume they can force you to let the tenant out, but to force you to accept reduced rent for a long period of time? No way.

That's exactly my question (and opinion).  We do have a good real estate attorney who is urging us to accept the deal, including the lease term extension.  He has not said anything about what the bankruptcy court might do. But if the court forces us to accept the deal (somehow), how could that be worse than if my mother just caved in and signed?  I could maybe see them forcing a temporary rent reduction, but I can't understand a bankruptcy court mandating a lease extension.

The answer whether a bankruptcy court can force a landlord to accept lease modifications is YES.  It's called cram down (look it up), because the new terms are crammed down the creditor's throat.

@Another Reader is correct.  At this point it's a negotiation with the tenant regarding lease modifications.  If you do not reach an agreement, the debtor will ask the court to approve their plan of reorganization, which will undoubtedly include modified lease terms that you probably will not like, possibly worse than what is proposed.  If you oppose, there will be a trial regarding the feasibility of the plan or reorganization.  You need an attorney with creditor bankruptcy experience and knowledge.

Michael in ABQ

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Re: Commercial retail tenant filing Chapter 11
« Reply #12 on: October 31, 2018, 11:46:03 AM »
Almost every commercial lease I've ever read considers bankruptcy to be tenant default. If they're in default your remedies should include termination of the lease and eviction. However, you definitely need to get a good RE attorney involved.

Another Reader

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Re: Commercial retail tenant filing Chapter 11
« Reply #13 on: October 31, 2018, 01:59:55 PM »
Almost every commercial lease I've ever read considers bankruptcy to be tenant default. If they're in default your remedies should include termination of the lease and eviction. However, you definitely need to get a good RE attorney involved.

Chapter 11 is different.  It's reorganization, not liquidation.  The court's objective is to get the restructured entity on its' feet and out of bankruptcy.  It's fairly common in retail. 

robartsd

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Re: Commercial retail tenant filing Chapter 11
« Reply #14 on: November 01, 2018, 11:55:39 AM »
Sounds like quite a problem. Cramdown is usually applied to underwater secured debt - taking the portion above the asset value and converting it to unsecured debt while leaving the remainder as secured. Certainly rent passed due at the time of the bankruptcy petition is debt that the court can dismiss (if this applies to the two months forgiveness mentioned then there's not much you can do). It looks like the landlord needs to be pretty active in objecting to lease modification plans. Certainly sounds like getting a good lawyer on this case would be worthwhile.

https://www.finservblog.com/2017/07/commercial-tenant-debtors-in-chapter-11-fundamentals-of-landlord-creditor-protection-in-bankruptcy/

freya

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Re: Commercial retail tenant filing Chapter 11
« Reply #15 on: November 02, 2018, 06:05:56 PM »
Update:  my mother proposed accepting all terms with one change:  after 9 years, rent will be set according to current market rents.  Our attorney detailed the process by which that number is determined.   The company agreed.

Our attorneys are actually one of the most well respected practices in our area, but Iím puzzled that they didnít advise my mother better.  At no time did they say that court intervention was a possibility, they said the tenant would leave if they didnít get their way.  I think they just wanted to get a deal done quickly.  Way to go Mom (age 82) for standing up to this group of overbearing men.