Buying Once-Troubled Retail OutletsRequires Homework

CHICAGO—The recession pushed a number of retailers into bankruptcy, but the recent $13.8 million sale of seven properties in the region leased to Giordano's Restaurant and Pizzeria, bought out of bankruptcy in November 2011, shows that investors don't have to be put off by troubles suffered by businesses due to the downturn.

“A lot of restaurants got caught when the economy turned,” Ian Schroeder, senior vice president of CBRE, tells GlobeSt.com. This includes normally solid businesses with good, even famous brand names that should help give investors confidence in their long-term viability. And many of these businesses emerge even stronger because bankruptcy allows them to jettison debt obligations.

Schroeder, along with Maurice Nieman, also senior vice president, and associate Matt Dobie, as well as Chicago-based executive vice president Richard Frolik and first vice president Michael Kaider represented the seller, Origin Capital Partners and the buyer, STORE Capital.

“When we underwrote the Giordano's bankruptcy assets in 2011, we saw well located, in-fill real estate that was offered well below replacement cost," says Michael Episcope, principal at Chicago-based Origin. "We also believed in Giordano's as a brand and business concern, as their financials suggested that they remained profitable, despite the dislocation in the economy and their business. The stable cash flows provided by the long-term leases provided additional down-side protection for our investors.”

CBRE analyzed the possibility of selling the Giordano's restaurants, long identified with Chicago's signature deep-dish pizza, one at a time, but Origin opted to go with a quicker portfolio strategy, Schroeder says. The restaurants have a total of 46,029 square feet of space, and include one in Chicago at 1040 W. Belmont Ave. The other properties, including a 27,600 square-foot industrial facility, are in suburban Oakbrook Terrace, Willowbrook, Oswego, Oak Park, Addison and Mount Prospect.

One consideration when looking at retail properties in bankruptcy is that repairs, maintenance and advertising suffer during the process, so when the businesses emerge they may have a hidden potential, he adds. For example, after Giordano's emerged from bankruptcy it signed an exclusive deal with the Chicago Cubs to supply deep-dish pizza at Wrigley Field, giving an incredible boost to an already-powerful local brand.

“These companies are not just shutting down and going away,” Schroeder says. “Many are coming back to the market with less debt.”

“We ended up with five or six solid offers,” he says about Giordano's. They did have to address concerns about the properties' financial strength, but prospective buyers such as STORE were able to look at the sales figures, among other indicators, and see that things were on the upswing. “They also had the opportunity to do a physical inspection of the properties.” But the Scottsdale, AZ-based REIT tends to conduct its due diligence efficiently, and made its decision in about 30 days.

“There were still a lot of players who looked at the deal and thought it was too messy,” he says. “But if you get in and do your homework and understand a business' story, there is the opportunity to make a lot of money, and those opportunities still exist today.” STORE went in and “rolled up their sleeves; that's the attitude you have to have in this market,” especially considering the intense competition for assets. “I think they bought the asset at a fair value and made a good deal for themselves.”