Case Study: Grocery-Anchored Shopping Center Risk Mitigation
Finding Solutions To Common & Uncommon Problems
Case Studies. When I present a case study, I try to attempt the following:
Identify the problem(s).
Focus on the major problems in the case.
Suggest solutions or methods of further analysis.
Recommend the best approach to understanding the implications of the problem.
Detail how to present, understand, mitigate or give context to the problem.
I also will sometimes focus on minor problems, and apply a similar approach.
For example, in the recent sale of a grocery-anchored shopping center, the regional grocery chain (about 100 stores) had been in the location for almost 21 years and at the time had more than four years left on its lease with one 5-year option remaining.
But, in the town, there had been a recent Walmart grocery store open, a nearby Target started added groceries to its offerings, and some smaller upstart competition opened nearby. The shopping center was in the downtown. The big boxes were just north of the city line. The tenant had never been late on its rent, paid its full NNN obligations, never sought concessions and reported sales were steady at about $300/sf for the last three years.
There was also a shifting demographic in town and the tenant was able to accommodate the demographic shift quite well with ethnic offerings and prepared foods and keep what seemed like its historic market share.
During due diligence, the buyer sought advice on how to handle the grocer issue. As the anchor tenant accounting for 43% of the square footage and 30% of the gross income, the risk was real. If the grocer went under, the space would require a major upgrade and investment in its structure. We knew going in that if we lost the grocer the deal (as it was written) wouldn’t make sense.
We decided to approach the seller during due diligence and request a modification of the contract and condition the sale on the seller procuring either an extension of the existing term for the grocer or a early exercise of the existing option.
Although this would not mitigate the risk of the grocer going under, going dark, or going bankrupt, a careful look at the chain’s other stores in similar demographics revealed other stores averaging sales in excess of $475/sf, and an otherwise healthy company.
The seller agreed. So did the grocer (in exchange for some TI allowance paid for by the seller).
The extra term on the lease satisfied the buyer’s lender and gave the buyer peace-of-mind that even if the grocer went dark or otherwise closed the store, we had the larger corporation behind the lease. An early-termination fee or buyout would more than cover the costs of vanilla-boxing the store and upgrading the infrastructure. Bankruptcy was unlikely given the strength of the chain. What we had was an under-performing store in need of a cosmetic upgrade.
If the grocer went dark, we’d still have to deal with the months of vacancy that it would take to replace the tenant and pay a new broker’s fee, but on balance, the risk seemed more manageable (especially with the security of a likely early-termination fee).
I’m curious: How would some of my readers have handled the issue?
I would have handled it exactly as it was handled above.