by Calculated Risk on 7/14/2008 01:30:00 AM

The WSJ has a feature story on Steve and Barry's: Retailer's Collapse Hits Mall Owners. This is the retailer that used tenant improvement payments to fuel their growth.

The WSJ reports that Steve & Barry's received $380 million in tenant improvement payments for fiscal years 2004 through 2007. In fiscal 2006 alone, the company received $122 million in payments, but only used $59 million to build out stores. Although these payments were for "tenant improvements", most malls apparently didn't monitor how the money was spent.

Steve & Barry's was occupying large anchor spaces usually occupied by department-stores. These anchor spaces draw shoppers to the mall, and some mall owners are willing to lose money on these spaces:

On some deals, the upfront payment exceeded the total rent to be paid on the life of the lease, according to one executive at the retailer.
...
One mall owner says he talked to Steve & Barry's about leasing space, but the terms they demanded were absurd. "Leasing to them would have been like bringing prostitutes to a party to look popular," he says. "They might look good, but you're paying for it."

So the collapse of Steve & Barry's could hit mall owners in several ways:

The bankruptcy proceeding is likely to saddle a bunch of mall owners with empty stores. Mall owners that paid the company millions of dollars to open stores that may now go dark are unlikely to recoup any of that money ...

Also, the WSJ article notes that leases for many smaller tenants contain clauses that lower their rents if the anchor tenant goes dark.

There is much much more in the WSJ article ...