Video Update Expects to Retain Half its Leases

ST PAUL, MN-Bankrupt Video Update officials expect that they will retain as many as half of the 119 store leases it will put up for auction next month. But one lease that’s not on the block is the one for the company’s 38,000-sf of office space in the World Trade Center Downtown. In fact, Video Update is suing its landlord Zeller Realty and the building’s former building owner Principal Financial Group.

The retailer alleges that Principal hindered its attempt to sublease the space and reneged on its promise to arrange a long-term lease for the space. The company also alleges that Zeller hurt Video Update’s relationship with its main lender by falsely representing its financial condition.

Principal officials could not be reached for comment, and Zeller officials declined comment.

Earlier this week, the St. Paul-based video rental chain hired Keen Realty LLC to organize a bankruptcy auction of the leaseholds on about a fifth of its 586 stores, 119 of its retail sites.Specific locations were not available yet because Video Update is still revising the list, says Chris Mahoney, a representative of Keen Realty, based in Great Neck, NJ.

But Dan Potter, Video Update’s chief executive, says that most of the locations are in the southeast, inherited from its merger with Moovies, and only two or three of the stores on the auction block are in the Twin Cities.Mahoney said the auction will most likely be held in mid-November.

Reorganizing in bankruptcy court allows tenants like Video Update added leverage to sell, drop or renegotiate its leases. In putting the store leases up for auction, Video Update gains additional strength in negotiating with owners, since they may prefer to give the retailer better terms than allow an unknown business to take it over. As a result, Video Update could end up keeping many of the 119 locations, perhaps even up to half. “There are a lot of options,” Mahoney says.

Meanwhile, Potter says he has about 90 days to file his reorganization plan with the US Bankruptcy Court in Delaware. The retailer filed for protection from creditors nearly a month ago.Potter said his goal is to exit Chapter 11 proceedings as quickly as possible. He argues that his company will be much stronger since it will have fewer weak stores, better lease deals and much of its debt will be converted into equity.