Why Kroger still holds the lease on its shuttered Southland Terrace location

(Louisville Business First) - Despite the dark aisles and locked doors, Kroger Co. continues to pay rent for its shuttered Southland Terrace location.

The grocery giant made the decision to close the store last November, saying it was on track to lose about $900,000 in 2017.

But the company couldn't break its lease when it closed the 51,000-square-foot store, which is at 3917 S. Seventh Street Road. Loan-servicing documents for the shopping center show that about a year before the store closed, Cincinnati-based Kroger re-upped the lease on the location for a five-year stint. The lease is up in December 2021.

Kroger's regional director of corporate affairs, Tim McGurk, said the grocer has been looking for a new tenant to take over the space.

"Our real estate managers have tried repeatedly to negotiate a termination of that lease but so far have not been successful," McGurk said in an email. "This remains a priority so that another retailer can use the space."

In the meantime, Kroger is stuck paying a lease on a closed store until it finds a sublessee or until it comes to an agreement with the landlord to break the lease.

The property is owned by a New York-based holding company called Southland Terrace Shopping Center LLC, and Louisville-based CG Commercial Real Estate manages the center.

CBRE Louisville is handling the marketing to find a new tenant.

Holding Kroger to the lease is not abnormal, said David Seewer, an attorney who works in commercial real estate at Wyatt Tarrant and Combs LLP and who is not involved in the deal.

"A lease is a contract," he said. "Both parties have signed it, so it’s legal and binding."

For Kroger, making the payments is a hassle, Seewer said, but the landlord just wants to have a tenant who is able to pay the rent.

"The dilemma here is you’ve got a tenant, Kroger, that’s got the financial wherewithal to make payments," Seewer said. "The landlord is just going to kind of wait, I’m sure, and find something that fits."

Neither Kroger nor CBRE would disclose the lease costs, but through some math, we can make an educated estimate.

In 2016, the shopping center was 75 percent leased and generated $2.27 million in revenue, according to loan-servicing documents.

The center has 220,234 square feet in total, so 75 percent would be about 165,175 square feet. With a little more than 51,000 square feet of space, Kroger accounted for about 31 percent of the occupied space.

If Kroger paid a similar portion of the rent, that works out to between $600,000 and $800,000 in annual rent. But being that Kroger was both the anchor tenant and a grocery store, it probably got a bit of a rent reduction.

"The landlord, they want an anchor tenant, so they will incentivize them," said Michael Tabor, a partner at TRIO Commercial Real Estate. Tabor spoke broadly about commercial real estate transactions and not specifically about this one, in which he is not involved in this deal. "Whoever the anchor tenant is in a shopping center, they're a larger tenant, so it's typically less rent [per square foot] than the smaller tenants will pay."

Tabor said it's hard to estimate, but it's possible — even likely – that Kroger could have been given some type of rent reduction deal for holding down the shopping center.

Seewer also said grocery stores often are cut better leasing deals because they operate on very slim profit margins.

Taking all of this into account, Kroger's rent could be closer to $500,000 annually.

And without a sublessee, the grocer will be paying until December 2021, according to the loan-servicing documents.

Seewer said he has seen some grocery chains hold leases to keep competitors from entering the market. But Kroger officials said Kroger is not tying up the property for competition purposes. They said the company wants out of the lease because it gets no return on paying rent for an empty property.

Kroger officials declined to comment on why it signed a long-term lease for the struggling property about a year before closing the store.

Carmalita Goldsmith, owner of CG Commercial Real Estate, which manages the property, said she wants to see the space filled. The longer it stays empty, she said, the worse off the shopping center will be. But because of its size, the space is best-suited for a grocery store, and it will be difficult to retrofit for another kind of retailer.

"CBRE is working to get another tenant in there, and once we do that, we will release Kroger," Goldsmith said. "Our goal is to backfill that space."

But no landlord is going to let a tenant who makes guaranteed payments get out of a lease without an equally credit-worthy tenant lined up to take over the space, Seewer said.

"If you're a landlord, you’re getting your rent payments, so you’re not in a hurry (to break the lease) if you don’t get exactly what you want," he said. "Landlords like getting their payments. Kroger is a creditworthy tenant. They'll just keep paying the rent."

Louisville Business First


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