On April 16, 156 properties owned by the Chicago-based real estate investment trust filed for Chapter 11 bankruptcy, and an additional eight followed suit on April 23, making it the largest bankruptcy in history for a real estate company.
And yet, General Growth still holds the cards. In fact, bankruptcy protection may make it harder — or at least more tedious — for tenants to get rent concessions.
“If tenants want to renegotiate leases, they will have to go through the bankruptcy court,” said real estate attorney Amol Pachnanda of Ingram, Yuzek, Gainen, Carroll & Bertolotti. “The better hope for tenants might be to wait until after the particular mall is sold and then approach the new owner for rent concessions.”
However, those willing to go through court proceedings may find their concessions granted. “In this sputtering economy, where it is not clear what the bottom is, it makes sense to keep all tenants that are paying rent. I don’t expect the bankruptcy court will reject many leases,” added Pachnanda.
But General Growth’s positioning in the premium mall space has helped it maintain its tenancy, giving it the upper hand in negotiations. “General Growth’s occupancy rates haven’t been affected the way the lower-end malls have,” said attorney Edward Mermelstein of Mermelstein & Associates. “If a mall is more than 90 percent occupied, you are wasting your time trying to negotiate. Somebody else will come in and take over the space.”
Faith Hope Consolo, chairman of retail leasing and sales at Prudential Douglas Elliman, said new deals with General Growth are moving forward as planned. “Retailers going into their properties knew this was a long time coming, but they feel the company is going to come out stronger and really be in a better position,” she said.
Of course, Consolo noted that some tenants may try to strike a new deal, “but that’s no different from what retailers are doing across the country. [The bankruptcy filing] doesn’t give [General Growth’s tenants] any extra leverage,” she said.
Meanwhile, while some market watchers are concerned that mall maintenance will fall by the wayside as General Growth struggles, retailers have been promised minimal impact.
“We’ve been assured that the General Growth reorganization will be seamless to both the customers and the stores in terms of day-to-day operations,” Matt Swartwood, Vans’ VP of retail operations, told Footwear News.
That seems more likely in the short term, observed Pachnanda. “Since General Growth has received debtor-in-possession financing, it can continue to pay tenant-improvement allowances to retailers to build out their stores, something it might not have been able to do outside bankruptcy,” he said. “In the long term, I doubt General Growth’s prized malls will suffer, but it is possible that resources will be diverted from lesser markets and malls.”