
Busted retailers use bankruptcy to break leases by the thousands - finphil
https://www.bnnbloomberg.ca/busted-retailers-use-bankruptcy-to-break-leases-by-the-thousands-1.1476347
======
mikestew
Man, 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.

~~~
pgrote
>But the moves threaten to upend huge swaths of the real estate market and the
half-trillion dollar market for commercial mortgage-backed securities.

And?

Seriously. We either have to choose to be a market that is somewhat free or
not. At this point, the government is choosing winners and losers. It is a
repeat of 2008. Oh no, it is too big to fail.

Someone will come by with the investment to buy what is left. Perhaps they
will run it better. Prepare better.

We're going through this with airlines and cruise companies now fighting for
more money and loans from the government. Perhaps Delta grew too large to be
what they are now. Maybe there are too many malls in existence. Maybe the
method in which we collateralize mortgages doesn't make sense anymore.

Our economy has developed the too big to fail mindset and forgotten, largely,
you can lose.

~~~
rrrrrrrrrrrryan
When corporations start buckling during sharp economic downturns, everyone's
first instinct is always "let them burn."

But it's often not a choice between letting entire swaths of our economy
collapse, and dumping absurd amounts of our tax dollars to prop up these
poorly-run companies. We can give them loans with strings attached, force them
to go through bankruptcy, wipe out the shareholders but preserve the structure
of the company, bail them out but subject the industry to much greater
regulatory scrutiny, etc.

Personally, I wish we had a straightforward way to bail out a company and have
the U.S. government take ownership in the company until the stake can be
safely unwound, or the too-big-to-fail company can be broken up.
Theoretically, with a controlling stake and the corresponding board seats, you
could force out the lousy management that didn't take adequate precautions as
well.

It'd kind of be socialism-esque nationalization of industries with extra
steps, but Japan has been doing a similar-style thing since the 90s, and I
can't imagine it would be any worse than the relatively strings-free bailouts
we've seen, or the collateral damage and runaway collapse that would occur
from letting a monstrous chunk of the economy fail all at once.

~~~
frandroid
Or you know, make up for the missed opportunity of 2008/2009, where the
government could have bailed out underwater homeowners so that the bailout
would have trickled up to the mortgage holders, instead of pouring money into
banks and letting people suffer. Thanks, Obama.

Canada's CERB and CECRA have been doing wonders to keep ordinary people either
afloat or employed, trickling up to small businesses all over.

(I don't mind your plan either, but it involves more per-company hand-holding
than simply giving out generous unemployment and employment-support benefits)

~~~
bsder
> the government could have bailed out underwater homeowners

Why reward people who gambled and lost? Bust them out.

People will either buy the houses at more reasonable prices or (more likely in
this case) the banks will renegotiate more reasonable terms with the original
mortgage holders because they have too much supply and no buyers.

> instead of pouring money into banks and letting people suffer. Thanks,
> Obama.

That wasn't possible as _liquidity_ also died. Solvent businesses couldn't
give people paychecks because the banks had no cash. You had to bail the
banks.

HOWEVER, what needed to happen was that the bank investors needed to get
busted out. That was where Obama went wrong.

~~~
pgrote
>Why reward people who gambled and lost? Bust them out.

Why reward corporations and investors who gambled and lost? Bust them out.

>People will either buy the houses at more reasonable prices or (more likely
in this case) the banks will renegotiate more reasonable terms with the
original mortgage holders because they have too much supply and no buyers.

Other companies will buy the businesses at more reasonable prices or (more
likely in this case) the banks will renegotiate more reasonable terms with the
original mortgage holders because they have too much supply and no buyers.

And this was the issue with the 2008 fiasco. The government chose to save
large financial institutions instead of breaking them up so the problems would
be less likely to happen again. They chose to save large corporations over
homeowners.

It is happening now with the pandemic response. I get the federal government
wanted to dump a ton of money into the economy through PPP, but man, you
cannot tell me the Catholic Church needed it. They are sitting on assets worth
billions they could have sold/borrowed against to stay afloat. Same with large
private educational institutions and public corporations.

The next round, and there will be a next round, will be more of the same.
Carve outs will be rampant.

The USA should have looked at other countries providing direct income
replacement to citizens. 70% income replacement sent to citizens and not force
them through state's unemployment processes. Other countries did this and it
worked.

~~~
bsder
> Why reward corporations and investors who gambled and lost? Bust them out.

Um, exactly?

As I said, the bank investors should have gotten wiped out.

The worst part is that a _bank_ is probably the single business type that the
Federal government can _actually_ replace on a short timescale.

------
duxup
Good. 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.....

~~~
philjohn
I 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
Landlords get a three month exemption when a lease expires. On some industrial
properties the exemption is six months.

------
seibelj
This 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.

~~~
morganvachon
> 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.

~~~
landryraccoon
I hope it ends up causing residential real estate prices to fall as a
consequence. Maybe then millennials will be able to afford homes.

I understand some people treat their home as savings but that's bad in every
way for society and for the homeowner. I have a home and the only return I
expect on it is to be able to continue living there. I'm certainly not going
to depend on it for my retirement, as that would be really unwise.

~~~
SketchySeaBeast
> I understand some people treat their home as savings but that's bad in every
> way for society and for the homeowner. I have a home and the only return I
> expect on it is to be able to continue living there. I'm certainly not going
> to depend on it for my retirement, as that would be really unwise.

How else can we think about an expense of hundreds of thousands of dollars?
It's ludicrous to spend that much on something assuming it'll just depreciate
and fall apart on you, worthless. I understand that you're not paying rent in
a home, so it's serving a purpose, but they aren't exactly equivalent in terms
of upkeep and taxes.

At this point, given the instability in the market I have no idea what is the
wise move to put money into for retirement. Investments have tanked and I
don't know at what point they'll recover, interest rates are abysmal, and
apparently our homes should be worth nothing. There's really no practical,
accessible way to invest.

~~~
cactus2093
> At this point, given the instability in the market I have no idea what is
> the wise move to put money into for retirement. Investments have tanked and
> I don't know at what point they'll recover

With all the instability of a once-in-a-century pandemic, the S&P is still up
1% today from where it was January 1. Specific large companies' stock like
Amazon, Apple, and Tesla are up 50-300% since January.

The issue of saving for retirement is complex, thinking on a 10-40 year
horizon as the world continues to change and evolve. But this is a bizarre
time to be complaining about stocks as an investment.

------
floatingatoll
It'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.

~~~
wins32767
You need a 4. Federal government issues $$$ to property tax authority to cover
income gap. The property tax authority needs that revenue now to pay their
bills (teachers, sanitation, fire, EMT, police, etc), an easement won't cut
it. They need a backstop before they can do that since all of those are
critical or legally mandated services and municipalities run very lean.

~~~
supertrope
Yes. Property tax shortfalls leads to laying off teachers.

~~~
munk-a
Securing that funding is going to be a hard sell when the Dept of Edu is
really enthusiastic about scrapping the whole "public education" thing for
charter schools since charter schools have an out to get around silly things
like Brown v. BoE[1] and, more importantly to them, Engel v. Vitale[2].

1\.
[https://en.wikipedia.org/wiki/Brown_v._Board_of_Education](https://en.wikipedia.org/wiki/Brown_v._Board_of_Education)

2\.
[https://en.wikipedia.org/wiki/Engel_v._Vitale](https://en.wikipedia.org/wiki/Engel_v._Vitale)

------
jrehor
The 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.

~~~
refurb
I’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
I agree, NA has massive stores because they have the space, e.g. population
density is much lower than in Europe or Asia

------
asdfasgasdgasdg
It'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
I 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).

~~~
Nasrudith
You 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.

------
ralph84
Not 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.

~~~
happycube
The federal tax writeoffs tend to make up for it, AFAIK.

~~~
djrogers
Tax 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.

------
stefan_
Yes, this is what chapter 11 bankruptcy is meant to enable.

~~~
AgloeDreams
I 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.

------
treyfitty
I’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
A 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.

------
dhosek
I 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.

~~~
joshcain
PSA 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.

~~~
dredmorbius
A 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.

------
Traster
I 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.

------
dwighttk
I 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
My 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
I just can’t picture what the flagship store model would look like in e.g.
Charlotte NC

------
advertising
Worked 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.

------
gremlinsinc
if 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
I'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
The 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.

------
LatteLazy
The 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.

------
codezero
I 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
I 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
There 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.

------
jxramos
Just curious, at the top of it all are municipalities relaxing property tax
dues as well?

~~~
wins32767
My 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.

------
api
Between this and companies going partially or fully remote I would not want to
be in commercial real estate right now.

------
cs702
In 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.

------
egypturnash
I 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.

------
xwdv
This will come back to haunt them. Good luck.

~~~
tyingq
How 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
Our Lord and savior, the banks, won't lease again to those bad men at the
retail companies

~~~
Nasrudith
We 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?

