The extension of the leasehold review--to Feb. 23, 2009 fromNov. 25, 2008--was granted earlier this month by US BankruptcyJudge Kevin Gross. This week, Gross was scheduled to sign off onthe hiring of Hilco Hilco Real Estate LLC of Northbrook, IL toreview Mervyn's leases and negotiate discounts with landlords whereappropriate. Hilco is currently handling the going-out-of-businesssales now occurring at 26 Mervyns locations.

|

In arguing for the extension of the leasehold review period, atranscript made available online last week lays out the reasons forMervyn's request. The first is that Hilco, whose hiring was to beapproved by the court late last week, has only recently begun itsreview process.

|

"The debtors need time to review the appraisals, to discuss itwith the Committee and the banks, and to have Hilco engage insubstantive discussions with the landlords," Mervyns' lawyers toldthe judge. "This process is large and time consuming and isunlikely to be completed by November of '08."

|

The complexity of its real estate holdings is part of thereason. As part of a 2004 acquisition, all of Mervyns' real estateproperty were removed and transferred to 24 related entities, knownas the MDS entities, which then leased or subleased such propertiesback to Mervyns pursuant to several master or unitary leases.

|

"[Mervyns] needs time to review the master leases and tonegotiate with the MDS entities and perhaps to even litigate someof these issues which will be fact intensive and time consuming ifno resolution can be had on consent with MDS," according to Mervynslawyers. "Moreover, since 2004, many of the stores were carved outof the master leases and sold by MDS to a large number of existinglandlords. These leases also need to be reviewed, [as do]approximately 40 leases which did not get assigned to MDS due toprohibitions on assignment in those leases."

|

And just in case those arguments weren't sufficient, Mervyn'slawyers saved the best reason for last: Its debtor-in-possessionloan allows Wachovia to take a reserve against the inventory at anystore if the lease for such store has not been assumed at least 10weeks prior to the assumption or rejection deadline. Without theextension, that deadline would have been this week.

|

"If the reserve were taken…this would significantly reduce thedebtors' borrowing availability and would dramatically underminethe debtors' efforts to restore vendor confidence and trade terms,to restore customer confidence and employee morale at a criticalearly stage in the Chapter 11 cases," Mervyns arguedsuccessfully.

|

In order to overcome objections to the extension, three Bay Areaproperties were held out of the Judge's order approving the 90-daytime extension for accepting or rejecting the leases. One is thecompany's 336,000-sf headquarters–located at 22301 Foothill Blvd.in Hayward, CA—which was acquired last year by an entity of CapmarkFinancial (North 3 Holdings LLC) for $60 million. North 3 Holdingsretains the right to compel Mervyns to accept or reject the leaseat any time and Mervyns retains the right to object.

|

The other two Bay Area properties not included in the decisionare store locations in Cupertino and Santa Clara that are owned byByer Properties. These were omitted from the decision becauseunlike the other leases, MDS is directly responsible for the lease,not Mervyns.

|

Mervyns filed Chapter 11 at the end of July. Wachovia CapitalFinance arranged for a $465 million debtor-in-possession facilityfor Mervyns, which is being used to fund the company's ongoingoperations.

|

The 26 stores already slated for closure include 11 inCalifornia [Antioch, Canoga Park, Fairfield, Foothill Ranch,Huntington Beach, Irvine, Laguna Niguel, Livermore, Napa, PalmDesert, and Thousand Oaks]; four in Arizona [Phoenix (3) andScottsdale]; six in Texas [San Antonio(3), Lubbock, Midland andOdessa]; four in Nevada [Carson City, Las Vegas, Reno and Sparks]and one in Boise, ID.

|

In seeking the extension for its decision on leases, Mervynsalluded to the re-trading of Mervyns-leased buildings by the MDSentities. In the most well-known of those deals, a joint venturebetween Developers Diversified Realty and Macquarie Trust in mid2005 acquired 36 open and operating Mervyns stores for $396.2million. The stores total 2.74 million sf and are located primarilyin California and are generally leased to Mervyns for the next 15years. DDR president/COO Dan Hurwitz spoke about the portfolio andspeculation regarding Mervyns in a second quarter conference callheld just days before Mervyns bankruptcy filing.

|

"We acquired 36 of our 38 Mervyns stores in 2005. Notably webought the first portfolio they sold post LBO and were able toselect what we believe are the most attractive locations," he said."Approximately 70% of the assets are based in California includingnearly one million sf in and around Los Angeles and over 500,000square feet in the Bay Area. If our Mervyns locations should becomeavailable to release, we believe there will be significant retailerinterest in the sites we own, based on their desirable West Coastlocations with high barriers to entry, infill locations and strongdemographics."

|

In addition, Hurwitz said that DDR holds a $25 million letter ofcredit that it can access if Mervyns files for bankruptcy or ifMervyns defaults and we terminate all the leases, and also holdsthree other letters of credit totaling $8 million that it can tapshould Mervyns default on individual leases. "The combination ofquality locations, and significant credit enhancement coupled withalready known tenant interest clearly minimizes any risk we haveshould Mervyns file Chapter 11 or Chapter 7," he said.

Want to continue reading?
Become a Free ALM Digital Reader.

  • Unlimited access to GlobeSt and other free ALM publications
  • Access to 15 years of GlobeSt archives
  • Your choice of GlobeSt digital newsletters and over 70 others from popular sister publications
  • 1 free article* every 30 days across the ALM subscription network
  • Exclusive discounts on ALM events and publications
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.