Cooling Economy:
Disposition
Firms Red Hot
The
disposition sector of retail real estate has been a hot market for the past five
years, and in the current economic slowdown, it’s
only gotten hotter. With continued negative economic news, the sale of leases
both in bankruptcy cases and out-of-court settlements is likely to accelerate,
along with the surplus property holdings of retailers. The Dealmakers
polled some of the industry leaders specializing in disposition to find out what
makes their business work and how they handle their often-difficult tasks.
The companies interviewed bring
different approaches to disposition situations, from total specialization on
moving large portfolios of vacant properties to integrating excess space into a
comprehensive line of retail real estate services. These approaches are
reflected in the companies’ strategies on space that has been vacant for a
while. Each company’s fees are different for each deal, but three of the four
said their fees are performance-based.
Keen Realty, Excess Space and DJM
Asset Management focus on disposition. They are experienced in all sides of the
real estate deal, but focus on moving excess space and bankruptcy situations.
Hilco Realty looks at real estate in context of the client’s business as a
whole. They concentrate on solving cash issues for their clients. A newcomer,
the Staubach Companies (972-361-5050) has jumped into the disposition arena,
primarily as an extension of its brokerage business.
Keen (516-482-2704) is the
grandfather of the retail real estate disposition arena, with long-term
relationships throughout the bankruptcy court system. Excess Space
(516-365-6400) has been in the restructuring business for a decade, and has a
team of professionals that have been together almost five years. DJM Assets
(631-752-1100) is owned by Gordon Brothers, a company that specializes in the
liquidation of merchandise, furniture and equipment, in addition to offering
distressed retailers debt and equity financing. Hilco (847-714-1288) acquires
property, remarkets or participates in sale/leasebacks to expedite a cash
infusion to a struggling retailer or assists with lenders in restructuring debt,
in addition to handling subleases, renegotiations of leases and mitigations of
bankruptcy claims.
Emilio Amendola, a principle of
DJM Asset Management, said his company divides its business into two categories,
bankruptcies and settlements -- the two have to be handled differently in a
long-term vacancy. "In a bankruptcy, the property can hang around a long
time if it is fee-owned," Amendola said. "Out-of-court situations call
for a much different approach. We often look at a use change to help. We have
sold/leased former retail sites to churches, warehouses, etc. We are truly real
estate guys. We have been brought up in development and have been involved on
all sides of the deal," Amendola said. "We have that understanding of
having been on all sides."
Harold Bordwin, president of Keen
Realty, said his company’s focus on disposition and business services helps
avoid extended dark periods. "Long-term vacancies are a pretty rare
scenario for us," Bordwin said. "We come in before vacancy and
normally have a deal in place before the store closes." Bordwin says the
volume of work his company has done in disposition sets it apart from others.
"We have tremendous experience. We have handled over 180 million square
feet of retail space. That’s larger than some REITs," Bordwin said.
"We have over $600 million in sales and a breadth of experience in
tougher-end leases and clauses, plus bankruptcy experience. We don’t do any
tenant rep work and we don’t work as landlords. Clients know we have their
best interests in mind."
Howard Makler, chairman and COO
of Excess Space, said that the longer a space is vacant the more entrepreneurial
you have to be with the property. "The first thing we look at is who we are
trying to lease the space to," Makler said. "Time brings creativity.
You have to consider non-retail and quasi-retail uses." Makler explained
that his company is comprehensive in the dispostion or retail real estate but
also exclusive to it. "The scope of our services is real estate disposition
and lease restructuring efforts and we have a decade of experience," Makler
said. "We are more like a specialized heart surgeon than a general MD or
even a surgeon who does heart surgery and other procedures." Makler said
the firm’s experience has increased its proficiency. "We have a program
and system to manage the process that has been around for a decade," he
said. "The ability to give intelligent advice is directly proportional to
the amount of experience you have in the field."
Mitch Khan, president of Hilco
Realty, describes his firm as more of a "merchant bank for restructuring
companies." Khan says the company won’t handle some situations because
the clients’ expectations aren’t realistic. "Honesty up front with
retail clients helps to avoid long-term vacancies," he said, "and once
the property is listed, Hilco exhausts every option to meet the client’s
needs. Your success in this business is determined by how hard you continue to
push things," Khan explained. "We focus on restructuring. That is it.
We are not burdened by being a tenant rep one minute and changing hats into
property management or anything else in the next minute. We lose clients on the
front end because we are honest with them about what we can do for them and
their properties," Khan said. "That is absolutely different from the
some other guys, some brokerage guys will take any assignment."
Jeff Plauche, who heads the
disposition division of the full-service brokerage firm Staubach Companies, said
excess space is matched up with the needs of the firm’s clients. "Our
list of contacts is a big help. We have properties that we circulate through the
company to try to match up buyers," Plauche said.
In general, respondents said it’s
rare for a client’s entire portfolio to sell so poorly that the company loses
the account, though when it does happen, market factors, time of year and type
of space are usually to blame. Landlords are not a problem according to the
survey, but often a part of the retailers’ solution. Logically, the owner
would be the first in line for a lease buy-back if a store fails on his
property. The statistics from our interviews bear that out. On average, our
respondents said slightly more than one-third of dispositions go back to the
landowner. The number is slightly higher in tenant bankruptcies and out-of-court
liquidations.
Amendola says the owner has to be
considered in finding the best result for his client. "We approach each
situation as someone who is trying to solve a problem," Amendola said.
"The more you understand a landlord’s point of view, the better you can
resolve your client’s issue."
"They (the owners) don’t
see us as competition. In a lease interaction the landlord is critical,"
Bordwin said. "They would prefer us not to release the more valuable
properties, they would rather have it back. On harder properties they are
thrilled to have us working on the project."
Makler said his firm deals
directly with the owners, limiting the role of the local brokers they employ.
"We negotiate directly through our in-house team of 12 senior level
negotiators," Makler said. "These are experienced ‘six-figure
negotiators’ with advanced degrees." Makler said 60% of leases are
ultimately terminated, half of those with a prospective tenant in place.
According to our survey, the
disposition firms move between 60% and 70% of their portfolios every year. One
respondent likened the business to a famous western. "In bankruptcies, you
get the good, the bad and the ugly, whereas out-of-court deals from healthy
retailers are just ugly. And you never know what you might get in an
out-of-court liquidation." Makler cautioned judging leases on location
alone. "The retailer could have gotten locked in to a rent that is 20% to
40% over what the market will bear now," Makler said. "The economy
drags everything down when it slows, including rents."
Business was generally good in
2000 for dispositions, and has continued to be brisk into 2001 according to all
respondents. The disposition market is, not surprisingly, inversely cyclical
with the rest of the retail real estate market. With the clouds of recession on
the horizon, opportunities will stay plentiful for the disposers.
"The rest of this year is on
track to be very busy," Bordwin agreed, "lots of companies are
restructuring." Amendola concurs, "Business has accelerated in all
three areas we serve, bankruptcies, healthy companies shedding properties and
out-of-court liquidations." Khan said the funding behind many of the
big-box stores will be a factor that pushes some company’s holdings into
disposition because of the way bankruptcy law treats leases as opposed to
mortgages. "I see a soft market for retail stores, and stores have little
room to maneuver because of the financing that is in place," Khan said.
"You can have rent abandoned but not mortgage payments. Some other
retailers might be in trouble because of the perceived softness in the market by
consumers. The challenge is not in having the boxes in the industry but finding
the buyers to sell them to."
Disposition has become a highly
specialized field in which buyers or tenants must be found for spaces that didn’t
work before and hemorraging balance sheets must be addressed. Firms focusing
solely on disposition, and now national brokerages jumping in with departments
concentrating on the sector, prove that there are deals to seal and money to be
made in the industry.
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