The designation rights, awarded by the US Bankruptcy Court in Nashville, allow the partnership to dispose of the bankrupt estate's real estate assets. Cleveland-based Developers Diversified, which has a 25% stake in the venture, will also earn fees for the management, leasing, development and sale of properties in the 227-property Service Merchandise portfolio. The bankrupt retailer's former stores total 12.4 million sf.
According to sources involved in the deal, Brentwood, TN-based Service Merchandise's assets break down roughly into 70-80 fee properties, 115-120 leaseholds and 25-30 ground leases. The partnership's control of the assets gives it the right to assign the leases to interested parties. And with most of the properties reportedly leased below market value, the JV stands to make a significant profit both on leasing fees and off the spread on leases the partnership assumes and re-leases.
"The plan for the assets is to take these vacant stores and to lease them out to good quality retailers," Klaff Realty's Hersch M. Klaff tells GlobeSt.com. "The principal revenue stream is the rental we will derive from the retailers. There is significant income right now from stores that Service Merchandise subleased to other retailers. We'll try to fill up the rest with equally good tenants."
Hersch adds that Developers Diversified's extensive retail contacts make the REIT a logical JV partner. "They're very strong in the shopping center business and very knowledgeable about which tenants are looking for which spaces. We'll rely on them primarily to coordinate the leasing activities of these stores."
According to Developers Diversified's director of marketing and communications Scott Schroeder, the process of re-tenanting the Service Merchandise properties has already begun. "We're actively marketing the assets," he tells GlobeSt.com. "We're talking to retailers and leasing space. We are looking at every opportunity with all the retailers that we normally do business with. And the retailers are reaching out to us as well.
Hersch predicts the leasing process will be accomplished in relatively short order. "Most of the properties will be accounted for in the next 18 months to two years."
Court approval for the transaction was handed down on Friday and the deal was scheduled to close yesterday. According to Developers Diversified chairman and CEO Scott A. Wolstein, the Service Merchandise deal "is a natural fit to our core business. Our role in remarketing the portfolio clearly plays to our leasing and development strengths and will further solidify relationships with our national tenants by providing them opportunities to grow and capture additional market share."
This isn't the first time Chicago based Klaff and Philadelphia's Lubert-Adler have searched for plunder in the bankruptcy courts. The two firms bought up 35 properties in nine states from bankrupt furniture retailer Levitz and picked up 53 Montgomery Wards locations when that once-venerable chain went south. According to Hersch, Lubert-Adler principal Dean Adler sits on the Developers Diversified board. Developers Diversified also entered into a joint venture with Lubert-Adler involving a shopping center deal in Minnesota. "The three of us basically were introduced that way," Schroeder says.
Developers Diversified currently owns and manages roughly 230 shopping centers in 41 states totaling 57 million square feet of retail real estate. The NYSE-traded REIT is a self-administered and managed, fully integrated real estate company.
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