JV Buys Service Merchandise Asset Rights for $235M

NEW YORK CITY-A joint venture including community shopping center REIT Developers Diversified Realty, Lubert-Adler Funds and Klaff Realty LP has purchased the asset designation rights for bankrupt Service merchandise Corp. for $235 million.

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.