JCPenney filed for bankruptcy early in the pandemic joining other longtime retailers, such as Neiman Marcus, J.Crew and Aldo.

By 2018 the nearly 120-year-old retailer had accumulated a $4 billion debt load that it needed to restructure and the following year the company’s stock dropped below $1 for the first time. The pandemic put the final nail in the coffin , but JCPenney had a savior.

Its landlords, Simon Property Group and Brookfield Asset Management (the two largest mall landlords in the country) put together an $800 million deal that split the company in two. Simon and Brookfield will keep the stores in their own malls, while the lender group will purchase 160 stores and six logistics facilities and lease them back to the landlords (JCPenney started the pandemic with 846 stores nationwide, it owned 387).

“[JCPenney] ran a sale process, and as far as I know, nobody showed up other than the landlords,” said Adam Harris, a partner at Schulte Roth & Zabel and co-chair of the law firm’s business reorganization group, who has represented many retailers in their bankruptcies, including Aéropostale, Neiman Marcus and Forever 21. “I don’t know that there’s any true third party who would look at Penney’s, and say, ‘That’s an operating business I want to own that I can make money at.’”

In the case of Aéropostale, a group of landlords, including Simon and General Growth Properties (now owned by Brookfield), bought the chain together with several liquidators and split the spoils. The landlords agreed to operate the chain based on a reduced store footprint, while the liquidators sold the inventory in the stores that closed.

“It was the first sign that we really saw in the industry that the major landlords were beginning to get nervous about what was going to happen to their mall tenancy, as a result of this sort of transfer from the brick-and-mortar experience to online,” Harris said.

Simon continued buying more distressed mall tenants, including Forever 21, which it purchased in February 2020 with Brookfield and Authentic Brands Group, whose portfolio includes Juicy Couture and Nautica. Simon and ABG also acquired Brooks Brothers and Lucky Brand in August 2020.

Simon malls included around 160 Aéropostale stores and 100 Forever 21 stores when the chains filed for bankruptcy, compared with about 60 JCPenney locations.

“Simon and Brookfield are buying JCPenney for one simple reason,” said Shlomo Chopp, a managing partner at Case Property Services (CPS), a commercial real estate workout firm. “If JCPenney goes dark, other tenants can reduce their rent; so they can let JCPenney go vacant, or they can buy JCPenney and keep the occupancy in their malls.”

“From the business perspective of the operating business you’re buying, so long as it can break even or make money on pure operations, without accounting for rent, then you might as well keep it open and keep it running,” he said. “Because every dollar in excess of the actual cost of operations, you can put in your pocket as rent, which you wouldn’t otherwise be getting if that store were dark.”

In the case of Forever 21, which had roughly 500 stores at the time of its bankruptcy, Simon and Brookfield controlled about 300 of them, and negotiated with the remaining 200, said Harris.

“They went and looked at store locations subject to leases with other landlords, and negotiated with the landlords there, people like themselves, and said, ‘Would you like to keep the store open or not? And, if you want us to keep it open, here’s the adjustments we’re going to need to our rent obligations. Otherwise, we’re just going to shut it down, liquidate the inventory, and you’re gonna have a dark story in your mall,’” Harris added.

It’s one of the benefits of buying JCPenney, and other retail tenants, out of bankruptcy. “They get to effectively make those kinds of decisions and walk away from those leases without any real liability associated with it,” said Harris.

“[As a landlord] you’re going to own the underlying property, you’re gonna own the businesses that occupy the property, and you don’t really have a choice,” Harris said. “So, unless you’re gonna have your mall half-empty, or close it and repurpose your real estate for something else, you got to keep the lights on, you got to keep the businesses operating.”

Is there a world in which mall department stores are, in fact, repurposed?

“The argument from the shareholders was that they weren’t given an opportunity to do a genuine reorganization,” said James Silver, a partner at Kelley Kronenberg and the head of the law firm’s commercial creditors rights bankruptcy practice. “The sale was pushed by the lenders.”

At several points in the case it was rumored and reported that Amazon was in talks with Simon over JCPenney’s real estate. But looking back that does not appear to be the case. “I think this whole Amazon thing, it was made into something by some people who want it to be true,” said Chopp, who advises retailers on logistic conversions. “Amazon doesn’t need to buy JCPenney’s carcass.”

“There have been suggestions that this bankruptcy was artificially manufactured and we imposed a fake emergency with the intention of escaping legal review,” Joshua Sussberg, the Kirkland & Ellis attorney representing JCPenney, said during a court hearing in November. “Nothing could be further from the truth.”

Additionally, online purchases over the last 2 years has taken the lion's share of holiday spending.

If the shareholders are in fact wrong and the only buyers for JCPenney were the landlords hoping to avoid the fallout then how long will it be before a reckoning over mall real estate arrives.

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