A St. Petersburg commercial real estate firm finds itself in what’s becoming an increasingly common position as it’s charged with helping a client lease several properties abandoned by a tenant who filed for bankruptcy.
The Outlier Group’s client owns 30 properties in the state that were leased to the radiology firm Akumin when it filed for Chapter 11 bankruptcy in October. As part of that process, the company looked to shed or rework leases for offices as it restructured its finances before selling itself to a private investor.
It turns out that only three of the leases were broken in that particular portfolio, and Outlier is now working to find new tenants for those spaces.
But the process has been an educational one for the firm as it looks at a commercial real estate landscape where more tenants are turning to bankruptcy and walking away from leases.
“It really is like David and Goliath, which is why we sympathize with them, because we're doing that all the time,” says Mackinley Autrey, the principal broker and founder of The Outlier Group. “We're a small, boutique firm so we understand the feeling.”
Landlords across the state — and country — are facing increasing risk as a number of tenants are filing bankruptcy as they navigate through difficult times. In just the past few months Express, Red Lobster and Rue 21 have filed for protection and announced they were closing hundreds of locations.
It’s not just a recent phenomenon. The federal Administrative Office of the U.S. Courts reports that business bankruptcy filings rose 40.4% last year, jumping from 13,481 filings to 18,926 filings.
(Of those, 10,229 were Chapter 7; 7,070 were Chapter 11; 1,326 were Chapter 13; and 301 were classified as other.)
While the companies go into the process as a way to restructure their finances — or shut down — under the protections provided by the bankruptcy courts, the landlords are the ones left with vacant properties that they are unable to collect back rents on or lease to new tenants.
Autrey remembers a situation in Orlando where a client he represented bought a shopping center and the main tenant, who leased about 60% of the center, went bankrupt.
“We pretty much thought we had done all our due diligence from the purchasing side,” he says. “Not even a week later…we come to find out he filed bankruptcy and then he retired.”
One of the biggest challenges for the property owner in that situation — and most like it — is that there was nothing that could be done.
Autrey says the store closed full of inventory, but because of the court’s process neither his client nor the store’s owner could go into the space to clear it out.
It sat that way for four months before the new owner could take possession. And only then could it begin the process of clearing, refurbishing, listing and eventually releasing the space.
In all, the landlord went about eight months without being able to collect a penny.
“It adds up, and it's really frustrating,” says Autrey.
Looking for protection
The problem is not going to go away any time soon. In fact, says one attorney who specializes in bankruptcies, it’s probably going to get worse.
“I think that trend will continue. Sadly,” says David J. Coyle, a partner at the law firm Shumaker.
Coyle, who works in Shumaker’s Toledo, Ohio, office, says the issue is that many of the leases for commercial space in effect now were signed before the pandemic struck in 2020 and continue to be used as they were before.
But the economy and consumer habits have changed in the past several years making previous business models difficult to operate in today’s atmosphere.
Companies that find themselves in trouble, then, have to turn to the courts to restructure their finances. This, of course, is not new. Over the decades some of the best known companies with brands once thought unsinkable have taken that route — Sears, Roebuck and Co., Kmart, Circuit City, General Motors among them.
But that fact brings little comfort to property owners who are the ones dealing with the aftermath when companies shed leases and close locations.
Who pays?
That process is a complicated one for landlords.
Coyle says that in a Chapter 11 bankruptcy a company is allowed to decide whether it will keep or reject existing leases. If it chooses to keep that lease, it has to honor the original terms.
That said, the landlord and tenant may renegotiate if there is a provision in the lease that allows for it or if the landlord wants to keep the tenant from rejecting it and is willing to make concessions.
If a tenant does reject the lease, and the court allows it, the landlord is still owed for any monies due before the filing and up to the date of the ultimate rejection.
The landlord may be entitled to future damages owed under the lease, but future damages may be capped.
But it is not guaranteed to be paid the full amount. That’s because it is a creditor like anyone else owed money and in bankruptcy cases creditors usually wind up getting pennies on the dollar.
“A debtor is given, in a Chapter 11, wide latitude on whether or not is going to assume or reject the leases. And if it chooses to reject, the bankruptcy court will almost always defer to the business’ judgment,” Coyle says.
“And so, the landlord cannot do much of anything if the tenant decides to reject the lease.”
Cashing in
As for Outlier, the firm was founded in Orlando in 2016. Autrey and his wife, Vanessa, moved to Dallas, Texas, to work on an industrial project before moving back to Florida a few years back and settling in St. Petersburg.
The firm, he says, has completed several large sales since setting up shop here but the deal with the Akumin sites came about from a phone call where the 30 properties came up.
Autrey, sensing an opportunity, told the client (who doesn’t want to be identified) that Outlier could set up a strategy to market the spaces.
As it turns out, the tenant only vacated three of the leases, and Outlier listed them last week.
While there was some initial concern about finding tenants for the space, there has already been a lot of interest mostly from national radiology chains looking to expand into the market.
Autrey credits the interest on the fact that the three properties are in desirable locations — Tampa, Wesley Chapel and Trinity — with low vacancy rates and are already set up as radiology centers.
Once they’ve been leased, he says, there will be a discussion about selling the entire portfolio.
But it is not lost on Autrey that this is one of those rare cases where the property owner turns out to be alright when a tenant declares bankruptcy.
"Yeah," he says, "the landlords just kind of have to take the hit. It's unfortunate."
