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Not Just Simon And Brookfield: Smaller Landlords Consider Buying Their Tenants

Staff Reporter

Tens of thousands of restaurant owners, shopkeepers and retailers have been in financial distress and struggling to make monthly rent payments for much of the past 18 months. Fearing that the bankrupt businesses they lease space to will leave storefronts vacant lowering the value of the real estate, some landlords have been employing an unorthodox business strategy: buying their own tenants.

“Some landlords have been acquiring their distressed tenants’ businesses, which may have been unheard of 20 years ago,” said John D. Giampolo, an attorney at Rosenberg & Estis who leads the New York firm’s reorganization and bankruptcy practice. “That would have been an opportunity for a private equity fund to make a stand-alone investment. But since the pandemic, in some instances, it’s become a strategic alignment between the owner of the land and the tenant store operator to keep the tenant alive and maintain the value of the land.”

Simon Property Group and Brookfield Property Group, two of the nation’s largest mall owners, have made headlines for their bids to rescue and take over bankrupt national retailers including JCPenney and Brooks Brothers. But Giampolo said similar arrangements have been considered and playing out on a more modest scale in New York and other U.S. cities with local or regional owners of space considering arrangements to maintain and take over smaller struggling retail tenants.

While Rosenberg & Estis lawyers have advised a handful of clients regarding acquisitions of tenants during the first round of business closures, the firm anticipates seeing more acquisition opportunities in the future.

For landlords, acquiring their tenants out of bankruptcy can mean avoiding prolonged vacancies and preserving their tenants, thereby preserving the value of their real estate and cash flow with the prospect of sharing in profits once the business recovers, Giampolo said. Acquiring their tenants can also make it easier for landlords to repurpose the property.

But is not a decision to be made lightly and requires a thorough examination of the tenant and all potential options, Giampolo said. Before deciding to acquire its tenant, a landlord should thoroughly examine the tenant’s financial records to understand its cash flow, operating costs, how quickly the tenant is likely to recover in a post-pandemic environment, and how the tenant’s closure may impact the value of the landlord’s real estate.

“The landlord should also look for financial pitfalls in the tenant, such as excessive overhead costs, and make a very conservative determination of how much cash the business will likely need to survive the coming years, during which foot traffic and sales may still be depressed,” Giampolo said. “Owning real estate as a landlord is not the same as owning the retail business occupying it.”

Fortunately for acquirers, he said, the bankruptcy sale process tends to help identify and eliminate business liabilities and enables the acquirer to install a management team that can handle the business going forward.

For distressed businesses smaller than the largest national retailers, having their landlord buy them out may be their best bet as they may be overlooked by private equity firms that acquire and rehabilitate larger distressed businesses.

“As with any distressed acquisition, acquirers should ensure they have an exit strategy and understand how they could scale the business down or repurpose the land if demand does not recover fast enough and ensure they are protected if the situation worsens,” Giampolo said.

This feature was produced in collaboration between Studio B and Rosenberg & Estis. Bisnow news staff was not involved in the production of this content.

Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.

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With more than 80 attorneys, Rosenberg & Estis, P.C. is one of the largest real estate practices in New York City and has distinguished itself by offering a diverse array of integrated real estate services to clients. Founded in 1975, the firm is known for its tenacious representation in every aspect of commercial and residential real estate litigation, transactions, administrative law proceedings, and appeals.

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