October 28, 2023
Hey, Retail Real Estate Rockstars! When a tenant files for bankruptcy and refuses to renew their lease, as Rite Aid has started to do, it may be extremely difficult to navigate the waters of retail real estate. This unexpected turn of events may leave property owners struggling to maintain a consistent income flow and occupied properties. You may, however, hit back with enthusiasm if you have the appropriate information and approach. Here’s the lowdown:
When a tenant rejects a lease due to bankruptcy:
It can lead to a sudden loss of rental income which could affect your ability to cover mortgage payments or other property related expenses.
If other prospective renters think the site is less appealing, the vacancy may discourage them.
It requires more money to promote the area again and could require renovations to draw in new renters.
What happens to the rent that is owed by the tenant?
Pre-Petition Rent Arrears: The outstanding rent till the date of bankruptcy filing is considered pre-petition debt. This debt is now unsecured, and unfortunately, stands in line possibly behind other creditors, waiting for a slice of whatever assets are liquidated.
Post-Petition Rent: Post the bankruptcy filing, if the tenant continues to occupy the space, they are required to pay rent. This portion is considered an administrative claim, generally standing in a higher priority than unsecured claims.
Now, let’s tackle this with some solid, actionable steps:
Stay Proactive: Keep tabs on your tenants' financial health and be ready to discuss modified lease terms if necessary.
Legal Advice: Seek legal counsel to understand your rights and possible recourses in the face of tenant bankruptcy.
Restrategize: Assess the market and reposition your property if needed. A fresh coat of paint or a minor remodel could be a game changer.
Marketing Magic: Launch a robust marketing campaign to attract new tenants. Highlight the strengths of your location and property features.
A study by the National Association of Realtors showed that retail vacancies hit a high of 7.5% in 2020, reflecting the economic turmoil of the pandemic.¹
According to a report by Reis, the average cost to turn over a retail space can range from $10 to $30 per square foot, depending on the extent of renovation required.²
Don’t let a bankruptcy hiccup turn into a long-term setback. With proactive management, legal savvy, and some marketing jazz, you can reposition your asset(s) and continue rocking the retail realm. For a deeper dive into managing such retail realty hurdles, call, text, or DM me. Let’s keep those retail spaces buzzing with activity and profitability!
Ever thought about how a tenant’s financial health mirrors the vitality of your retail real estate?
Always consult with your Attorney or legal counsel regarding a tenant's bankruptcy.
1. National Association of Realtors, Retail Vacancies Report, 2020.
2. Reis, Retail Space Turnover Costs, 2019.