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Creative Structuring Maintains Retail Construction Momentum Through Recession

Tuesday, July 9, 2013

By James Henegan, Ruben Firsel & Ross, LLC.

Conventional wisdom suggests that the recession caused industries to contract across the board. However, for some industries the overall economy slowdown had secondary benefits, as consumers adapted their buying habits to fit their personal budgets. For example, the tire and auto repair industry saw an upturn during the recession, as consumers opted to keep their older cars rather than replacing them. For these industries, the recession years were an opportunity to expand – if the financing was available to support that expansion.

From 2006 to 2013, I was in-house counsel with Bridgestone Retail Operations, which owns and operates approximately 2,200 Firestone and Tires Plus stores across the country. Prior to the start of the recession in 2008, Bridgestone maintained a build-to-suit preferred dealer program to promote new store development. Bridgestone had four preferred developers who would locate and purchase land, build a Firestone or Tires Plus store, and then lease it to Bridgestone for a rent based on the costs of acquiring the land and building the store. The developer would then sell the property and lease to an investor, who would primarily be looking to the credit of Bridgestone for the rent stream. Bridgestone was opening approximately 60 new stores a year using this model.

Constrained Credit

In the spring of 2009, with the recession in full force, all four preferred developers approached Bridgestone in crisis. They could no longer get loans to buy property and build new stores, nor could the investors to whom the developers planned to sell the completed stores get loans to purchase the stores. Consequently, all the developers were holding completed Firestone and Tires Plus stores that they could not sell, even though the tenant was open and paying rent. Much of their capital was tied up in those stores. The four developers also had approximately 60 properties under contract, many with non-refundable earnest money and all with significant out-of-pocket costs, that could not proceed to closing because they could not get loans to purchase the land and build the store.

As mentioned above, the car repair industry and, to a lesser extent, tire sales business is somewhat countercyclical. Despite the credit crunch caused by the recession, Bridgestone saw the opportunity to expand in this environment and was determined to keep the new store program alive.

While the individual developers could not get loans, Bridgestone itself could borrow the money to purchase the land and build the stores. Bridgestone Retail Operations requested permission from its parent entities, Bridgestone Americas and Bridgestone Japan, to borrow enough money to take over the outstanding contracts from the preferred developers and move ahead with construction. Bridgestone's management approved the loans and in August 2009 closed on a $75 million synthetic lease with a subsidiary of Sumitomo Bank. This was the first of a series of such leases entered into by Bridgestone over the next four years.

At closing, the developer would assign to Bridgestone the Purchase Agreement and any construction and architectural contracts entered into by the developer. Bridgestone would reimburse the developer out of the loan proceeds for its approved out-of-pocket costs. Bridgestone would assign the Purchase Agreement and other contracts to the Bank at closing. The seller would deed the property to the Bank, and the Bank would lease the property back to Bridgestone. Bridgestone would construct the store and other improvements under a construction management agreement, using the proceeds from the synthetic lease. At the end of the term of the synthetic lease, if the synthetic lease is not renewed, Bridgestone is obligated to purchase the land and the store from the Bank for the balance due under the synthetic lease.

Developer Deals Saved

Bridgestone was able to keep most of the 60 developer deals alive using this new model, and then continued the new store program through the end of 2012 with Bridgestone entering into new contracts to purchase (and sometimes ground lease) land and build and its own stores. Bridgestone continued to use the preferred developers on a fee-for-service basis to help manage the process. In 2013, the Firestone new store program continues at a scaled-back level, with a reduced new store target and less involvement by the preferred developers.

The Bridgestone experience reflects the importance of staying committed to goals in turbulent times. Instead of walking away from the plight of the preferred developers and retreating to the status quo, Bridgestone took affirmative action to keep its new store program moving forward. Approaching that risk with creative strategic financing delivered long-term sales benefits for Bridgestone, while also preserving the relationship between the company and its preferred developers.

James Henegan is a partner at Ruben Firsel & Ross, LLC.

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