Borders: A Cautionary Tale for the Net Lease Investor

By Bruce Davis, Senior Partner, Lee & Associates Atlanta

Other than distressed and deeply discounted properties as well as medical office buildings, the only product type that could be classified as brisk for investment brokers as we climb out of this cycle has been the net leased property. Though smaller stand-alone retailers and national fast food restaurants are the typical currency for traders and investors in this type of commercial real estate, other types of properties have been duly noted to have traded hands, including industrial, institutional and corporate assets which can readily be found on the market today.

One item that may give pause to the investor, or remind him of credit risk in such vehicles is Borders Group Inc.’s filing of bankruptcy. This national brick-and-mortar bookseller, second only to Barnes & Noble, has been rumored for some weeks to be paying creditors slowly and trying to work with their lenders. With $1.3 billion in assets and slightly more than that in debt, a bankruptcy filing was made in U.S. Bankruptcy Court of the Southern District of New York. With over 600 stores all around the country, and its purchase of B. Dalton Bookseller, Borders is falling on hard times due to the recent trend of electronic publishing, as well as being undercut in its pricing by vendors such as Amazon, the virtual purveyor of books that has become such a strong competitor in the last several years.

The key here for owners and prospective investors is the power of bankruptcy judges. Though a strong infusion of cash has been pre-negotiated with GE Capital Corp. to accommodate their reorganization under Chapter 11, the terms are said to be most specifically contingent on the borrower having the bankruptcy judge set aside, or give them an escape plan for, a number of their deals. Not only an anathema to landlords, this can also very adversely affect other tenants who co-locate around vendors such as Borders, and other type of retailers, not to mention the employees involved. Early word from the press is that the bankruptcy process will eventually allow them to vacate or abandon 30 percent of their locations, which equates to an estimate of 275 locations. This can happen in a matter of weeks.

It’s not that Borders is typically a tenant that has very many net leased properties out there in the marketplace owned by investors, as they are typically more of an anchor or junior anchor in larger projects. The point here is that there is always the credit risk to be determined in placing money into net leased projects.

Key for protection against such calamities, of course, lies in early due diligence. Are you a larger investor that can diversify into in several types of tenant leased assets in order to allay this risk, or are you a one-off investor that is placing all your retirement eggs into one basket? Even so, the asset’s location, the surrounding demographics and trends, its adaptability to alternate use grows in importance in light of such market conditions that can sometimes easily turn on you.