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Circuit City Bankruptcy Sends Landlords Reeling

Circuit City’s bankruptcy filing is causing concern among U.S. shopping center and mall property owners as they face the prospect of every Circuit City store turning into vacant space, Reuters reports (via Retailer Daily).

The No. 2 consumer electronic retailer will continue to operate through the rest of the year, thanks to $1.1 billion of debtor-in-possession financing from existing lenders, led by Bank of America. However, that financing must be brought down to $900 million by Dec. 29, and Circuit City will be forced to use holidays sales proceeds to repay other outstanding loans.

The liquidity will get them through the retail season, but it “remains to be seen” if they will get through the next year, retired bankruptcy judge Frank Conrad was reported as saying.

If Circuit City does end up closing the 566 stores that remain (after the 155-store cut announced last week), its retail landlords will suffer, Bloomberg writes. They first lose rental revenue because under bankruptcy protection a retailer can break a lease with court consent, unlike a regular store closing where rent is still due. Then the landlord is forced to find replacement tenants, which can often be a costly process.

Analysts have suggested that landlords try to renegotiate leases with Circuit City so as not to lose their business completely, but often that ability is blocked by constraints under their own lender agreements or by the new owner of a sold-off “problem” mortgage.

The market reacted harshly to the news: Shares of Developers Diversified Realty, which has 50 Circuit City stores and derives 1.7% of its annual revenue from them, fell 24.6% on Monday. Real estate investment trusts (REIT) Kimco Realty and General Growth Properties also declined 9.6% and 34% respectively. (General Growth dropped another 68% in Tuesday trading.) Simon Property Group and Vornado Realty Corp are among the other REITs that lost value.

“Traffic is down in malls throughout the United States and as a result, the landlords, depending upon how leveraged they are, may have to file bankruptcy themselves,” concluded Conrad.

Circuit City stores leasesBefore Circuit City filed for Chapter 11, retailers had announced about 6,000 store closings so far this year. According to its latest yearly report, most of Circuit City’s leases were set to expire between 2014 and 2023. The chain owns almost none of its stores.