Turmoil in Mattress Store Sector Leads to Important Considerations for Property Owners

One of the retail sectors that is currently experiencing significant upheaval is the mattress industry.  Mattress Firm, the largest mattress retailer in the country, is closing hundreds of stores and scrambling to bolster its digital business as a result of significant sales declines.  Bed-in-a-box e-commerce mattress companies are sprouting up and beginning to expand to brick-and-mortar locations, but they are expected to continue to focus primarily on growing their online sales.

Analysts say overexpansion is at the heart of the industry’s troubles.  They point to the fact that there are now more mattress stores than McDonald’s restaurants in the U.S.  The end result is that the industry is in contraction, which comes at a difficult time for struggling malls and shopping centers while many other retailers are also flailing.

As landlords begin to receive rent reduction and concession requests from mattress store operators, they need to carefully consider and weigh their options.  This should begin with a thorough financial analysis of the value of the new lease rates that are being proposed, the long-term impact of the reduced lease payments on the property, the likelihood of leasing the space to a new tenant at comparable rates, and the costs and challenges that would stem from suing a tenant that may end up filing for bankruptcy. mat-store-300x200 This type of analysis can be very difficult to process, as it entails a clear-eyed look at the state of the market, the current vacancy and lease rates, and the marketing and commission costs that would be associated with securing a new tenant.

Properties with commercial mortgages will also need to consider how any proposed rent reductions would impact lender-required rent minimums and whether the decreased payments or vacant space would affect the Debt Service Coverage Ratio stipulated in the loan documents.  If a technical default is triggered, would the property owner be able to pay down the loan in order to cure such default?

Absent some sort of settlement, mattress store tenants that default on their lease payments are opening themselves up to lawsuits.  Bear in mind that any judgments that are obtained will make the landlord a higher-level creditor in any subsequent bankruptcy, but that may only yield a fraction of what is owed depending on the financial strength of the company.  Those who agree to a discounted rent only to see the tenant file for bankruptcy and shutter the store anyway will be granted a liquidation payment under the U.S. bankruptcy code.

Those who decide to move forward with a revised rent structure should ensure that the concession is structured as a rent abatement and not a restructured rent payment method.  They should also add a provision stipulating that if the store closes for more than 60 days or if the tenant defaults under the lease in any way, the abatement is terminated, the abated rents are due and payable, and the rent reverts back to the original sum in the ensuing months.

In addition, the rent abatement should apply only to the mattress store tenant for its current use of the space, and it should revert back to the original lease terms if the tenant changes the use or sublets the space to a different company.

The contraction of the mattress store sector in retail appears to be only now beginning.  By conducting a thorough financial analysis and employing these suggestions when faced with a concession request by an operator, property owners will be able to mitigate the consequences and achieve the best possible outcomes.