Supermarkets (and cinemas) and "captive leases"

A captive lease is when a retailer closes a store but continues to pay the rent on the abandoned space to prevent it from being re-leased to a competitor.  Typically this happens most with grocery stores and cinemas.

My personal experience with this was in the H Street NE neighborhood in DC, where Safeway closed two smaller stores (and other smaller stores in other neighborhoods) when they opened up the large multi-neighborhood serving big store at Hechinger Mall in the early 1980s.

By the time I moved to the neighborhood in the late 1980s, people had changed their shopping patterns, further reducing customer traffic for the H Street commercial district.  One of the store spaces remained empty by then, while the other had been leased to People's Drug (and after that, a Murry's Food Store).  See "Ensuring that lease restrictions don't encumber a commercial property's future."

It's come up more recently with supermarket closures in Suburban Chicago and now Cleveland.

In the latter, Giant Eagle Supermarkets just announced the closure of two stores and a gas station, and the Mayor of Cleveland, Frank Jackson, isn't happy based on this letter ("Mayor Jackson responds to Giant-Eagle closures," WKYC/NBC).  From the letter:

The closure of these stores would require a customer to travel another several miles on the east or west side to one of your stores by car.We also learned that over 120 jobs are at risk. We have been provided no information on whether these employees have been offered positions at other stores and we have received many calls today from concerned employees who also just learned that they will be without a job in thirty to sixty days. The closing of pharmacies on January 14, 2017 means that customers have just ten (10) days to transfer prescriptions, placing a hardship on many of our seniors and those with disabilities for whom this process can be very difficult.

We are also concerned that if these stores remain closed that the remaining term of the lease will prevent other grocery stores from leasing at these locations, to limit competition which was done when Giant Eagle moved from Lorain Avenue to the newer West 117th store. These vacant stores are a negative influence on our community and can affect other leases for nearby retail.

What he needs to do is get the City Council to pass legislation making so-called "captive leases" illegal. DC passed such legislation in 2014 ("D.C. Council bill aims to save Palisades grocery store," Washington Business Journal).

From the Crain's Chicago Business story, "Why some former Dominick's stores are still empty":

Vacant grocery stores inconvenience residents, slash sales tax revenue and can diminish a neighborhood's reputation as a viable retail center. They also can devastate nearby retailers, along with the owners of shopping centers lacking an anchor tenant to draw in the masses.

“It's a stigma on the neighborhood that a grocer is leaving and not being replaced immediately,” says retail broker Dan Tausk, a principal at Oak Brook-based Mid-America Real Estate Group, who represents the Trader Joe's chain in Chicago. “It's devastating in all aspects.” ...

Although the 19 vacant Dominick's buildings have different owners, Albertsons has long-term control over many of the spaces through its leases. In some cases, it has exercised options to extend the leases on empty spaces, according to real estate sources.

By keeping control of those spaces, Albertsons can sublease them to nongrocery retailers that don't compete with Jewel stores, or consider opening its own stores.

“In most cases, the landlords would rather have control of the space,” Witherell says. “In reality, most of the spaces are controlled by (Albertsons).”

In the most unusual scenario, Itasca-based Tony's Finer Foods has been unable to open a store in a Schaumburg building it owns. Tony's announced plans last year to take over a former Dominick's on Roselle Road, shortly before buying the building for almost $6.9 million in July, according to Cook County property records.

Chicago Tribune photo.  Also see "'Dark' former Dominick's stores frustrate suburbs."

In the year since that story was written, local governments in suburban Chicago are working together to try to get the lease owner, Albertsons, to release restrictions.  Interestingly, the stores had been owned by Safeway, when Safeway wasn't owned by Albertsons.

Now that it is, the company is not interested in the buildings being leased supermarkets, because Albertsons still owns Jewel Supermarkets, the market leader in Chicago.  From "Suburban leaders ask Albertsons to work with them to fill vacant stores," Chicago Daily Herald:

Leaders from nearly a dozen suburbs gathered Thursday in Naperville to express their concerns with leases on former Dominick's locations that have been sitting vacant for nearly three years.

The mayors and village presidents of Bartlett, Buffalo Grove, Glen Ellyn, Fox Lake, Naperville, Oswego, Palatine, Palos Heights, Romeoville, Schaumburg and Woodridge gathered for a news conference in which they called upon Albertsons, the parent company of Jewel-Osco, to do more to fill the spaces.

"The damaging effects of keeping these spaces vacant is very difficult for a lot of these communities," Naperville Mayor Steve Chirico said. "We need to do a better job working together and putting the community first, and right now the communities are not being put first. We're asking for their help. We need to see some participation." ...

However, leases on 15 vacant Dominick's continue to be paid for by Albertsons. On Thursday, municipal officials said they want the practice of extending those leases to cease.

"When you're leasing a space that doesn't have a tenant and you're renewing that lease for five years purposely so you can control whatever goes in there, that's where we're having an issue," Bartlett Village President Kevin Wallace said.

Romeoville Mayor John Noak said there is interest in the vacant spaces and willingness from suburban leaders to work with Albertsons to get them filled, but the company is not cooperating.

These suburbs should develop and pass model legislation making captive leases illegal. Chicago did this about 10 years ago.

Cinemas.  I mention cinemas in passing because as companies moved from small locations of one to three screens to large screens, they would put similar lease restrictions on the buildings.  That's why so many cinema buildings have been converted to other uses like pharmacies--CVS is particularly fond of such buildings, although they are not the only company.

A Rite Aid in Capitol Hill neighborhood of Seattle is in the old Broadway Theater building, and Rite Aid maintains the theater marquee.