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Shopping Centers Today -> March 2002
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WINN-DIXIE PLAYS HARDBALL ON RENT
By Debra Hazel
In what many small developers see as an attempt to squeeze the little guy, Winn-Dixie Stores has stopped paying rent on some shuttered stores at centers owned mostly by individuals or companies with small portfolios.
The move, according to some affected landlords and their attorneys, is an attempt to force new rent or buyout terms on the owners least able to fight back.
“They know it’s the small guys who can’t ride it out,” said Andrew Kent, a Pensacola, Fla.-based attorney representing two developers that are suing the giant supermarket chain.
On Nov. 1, 2001, Kent and others said, Winn-Dixie informed the center owners that it would stop paying rent on the stores unless and until the lease or a buyout was renegotiated.
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Such things are not entirely without precedent. Struggling retailers have approached landlords before, seeking rent reductions or relief to help them through a difficult time, or to warn that without a rent break, a lease could be rejected in a future bankruptcy filing. Musicland Stores Corp., Regal Cinemas and Video Update, among other chains, attempted to renegotiate leases just before or instead of filing for Chapter 11 bankruptcy protection, according to various developers.
“Every time a tenant goes bankrupt, or is about to, they hire a consultant who comes to us about renegotiating. It’s extremely standard; it happens 100 percent of the time,” said Richard A. Baker, president of National Realty & Development Corp., a neighborhood and community center owner in Purchase, N.Y., unaffected by the Winn-Dixie actions. “But it is unusual to have them stop paying rent and make us sue them.”
It is the scale of the Winn-Dixie effort that is particularly frustrating for landlords. Several companies said that at least 50 stores were involved, though SCT could not verify those numbers.
A spokesman for Winn-Dixie declined to respond, saying, “We don’t comment on relationships with vendors or landlords.”
Equally as galling, said the affected landlords, Winn-Dixie is utilizing this strategy with small-portfolio developers that rely more heavily on that rent stream, and not with larger companies, which are able to spread a shortfall over a bigger portfolio.
“There’s always a view on the part of a retailer that if they’re a bigger piece of the pie for a smaller company, [they] have a better bargaining position,” noted Larry K. Wheeler, vice president of Columbia, S.C.-based Edens & Avant, also unaffected by the current situation. Edens & Avant’s portfolio totals some 250 centers in 19 states.
The goal, said one property manager who requested anonymity, is to get better terms on the buyout of the lease. Other shopping center professionals also declined to speak for attribution, citing pending litigation and/or ongoing relationships with Winn-Dixie at other projects.
The problem is that the affected stores often are more than 20 years old, and replacing them has been difficult. They are too small for other supermarkets and too large for any other uses. Meanwhile, these smaller owners have to pay the mortgage without that rent stream and lack many other properties to help absorb the blow. As a result, they are at the mercy of the shuttered anchor.
Several lawsuits were under way early this year. In Dahlem Enterprises v. Winn-Dixie Charlotte and Winn-Dixie Stores, Dahlem claims that Winn-Dixie signed a 20-year lease for Colby Station Shopping Center, in Winchester, Ky., taking occupancy in 1985. The chain ceased operating the store on or about June 19, 2000, and failed to pay rent, CAM, insurance and real estate taxes due in November and December 2001 and January 2002. In addition, the suit alleges, a contracted sale of the Colby Station Shopping Center was terminated as a direct result of the default.
The suit seeks compensatory damages, recovery of litigation costs and “any and all relief to which plaintiff may be entitled.” Counsel for Dahlem, a privately held developer of about 1 million square feet of office and retail space in Louisville, Ky., declined to elaborate.
Dahlem and other owners in similar straits are receiving a lot of support from the industry.
“It’s not happening to us,” said Alan Smith, CLS, executive vice president of Konover & Associates, Farmington, Conn., which manages about 100 centers in New England. “But if it did, we would sue their butt.”
Indeed, Konover did sue one tenant that declined to pay rent and CAM. Though larger developers may have a greater ability to absorb the cessation, they should not do so, Smith added. Lenders take a poor view of nonpayment of rent — or the resulting nonpayments on a mortgage, he noted.
But resolving this situation could take a while. If a trial becomes necessary, proceedings could drag on for as long as 18 months, Kent predicted. Unless a settlement occurs, the affected developers will get little relief, he added, and even if any of the cases go to court, Winn-Dixie probably won’t lose much; it would be liable for the unpaid rent, plus interest, but would probably not have to pay legal fees. That leaves the owners in a long-term bind.
And despite all the problems, none of this is likely to deter developers — the larger ones, at least — from dealing with Winn-Dixie in the future.
“It’s the price of doing business with national retailers,” said Beth A. Azor, president of Miami-based Terranova Corp. “Even the best retailers have problems.”
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