Sometimes real events highlight value. Below is a turnaround story provided by our Senior Director of Asset Management where Confidant Asset Management (CAM) “proved its mettle”:
CAM was hired in the third quarter of 2019 by an experienced net lease owner for a two property portfolio of Krystal Burger restaurants after noticing that one of the properties was “dark” (unoccupied). The out-of-state owner was unaware they were no longer operating at the property because Krystal had continued to pay rent.
We conducted property conditions inspections and noticed deficiencies in the physical aspects of the properties including water damage and debris. Conditions at the vacant site were deteriorating with vagrancy, code violations, and water damage occurring due to the vacancy.
During this timeframe we also conducted an analysis into the tenant’s operating performance. We found that Krystal had been closing locations, experiencing declining sales, and conducting sale leasebacks of corporate real estate to restructure their balance sheet and obtain cash.
One of the key aspects of our onboarding process is to engage in dialogue with the tenant to develop a more well-rounded understanding of their operations at a site. There was very little response from Krystal representatives, and we discovered that one of the locations had been subleased. Subleasing poses an additional risk to landlords due to potential property damage and alterations from the subtenant. Krystal would not provide the landlord with information on who the sublease was with, or the subtenant’s contact information to allow direct communication.
All of the signs indicated that a bankruptcy declaration was looming.
We continued to monitor the assets over the next few months while performing a market analysis to determine proper sales and lease rates for the properties.
The landlord did not receive December or January rent payments for the vacant location. This failure to pay rent constituted a default under the lease and we notified the tenant of their default.
Ultimately, the landlord received notice of Krystal filing Chapter 11 bankruptcy in mid-January.
The bankruptcy process is challenging and confusing for most commercial real estate landlords, and as a result we assisted in the selection of real estate bankruptcy attorneys on behalf of our client. The bankruptcy process lasted six months. We helped manage it and advised on business terms during negotiations with Krystal.
During this time we procured a party interested in purchasing the dark location during the early stages of the bankruptcy process. We (and the landlord) also obtained a lease rejection for the subleased site allowing a buyer to purchase the property as an end-user.
The strength of the landlord’s claim in bankruptcy proceedings resulted in full payment of administrative claims for rent payments, a lease guarantee from the emerging corporate entity, and the ability for the landlord to terminate the lease with 12 months notice to the tenant.
The role of an asset manager is to build and continuously update a strategy to enhance the value of a property. COVID-19 has forced a number of retailers and restaurants into precarious financial positions. We involve ourselves early in the process to develop a full picture of a property in an effort to build a strategy to maximize the property’s value.
Please call Noah Shaffer at (877) 233–3331 if you’re interested in learning more about how we can help you manage and protect your assets.