Corona, Cheesecake & Testing The Mirage of Lease-Debt Equivalence by @LAForeverHallhttps://lizardbrain.substack.com/p/corona-cheesecake-and-testing-the?utm_campaign=post&utm_medium=web&utm_source=twitter …
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Replying to @CapitalismWorld @LAForeverHall
Liz great piece. One Q - how would CAKE be able to survive as a biz if it rejected all of its leases in BK? Obv they need brick & mortar presence to actually sell their goods. Presumably they would only reject some leases, right? So landlord of “good” leases has upper hand?
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Replying to @TermMgmt @CapitalismWorld
Nuanced IMO. Don't forget that leases can often be "assigned" in bankruptcy if they're good, allowing the estate to generate cash by "selling" below market leases if it's so inclined. Landlord gets its rent but with new tenant it didn't necessarily want.https://www.pbwt.com/bankruptcy-update-blog/the-assignment-of-leases-in-bankruptcy-free-of-prohibitions-restrictions-and-conditions …
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In the case of assignment, the tenant can extract embedded value & prevent landlord from capturing lease spread. In the case of rejection, the tenant has a sort of embedded put option for rents that aren't economic or otherwise above market. Or at least, that's my perception.
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Replying to @LAForeverHall @CapitalismWorld
Makes sense...but theoretically if I own CAKE’s best assets, and CAKE intends to survive as a biz, they would want to operate their best assets. That would put me in a good position when it came to rent relief/lease restructuring
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Replying to @TermMgmt @CapitalismWorld
I mean possibly for sure. It's not impossible for me to see a scenario where CAKE can play its landlords against each other for rent reductions which could alter the ordering of "best" leases. My perception is that such things are fluid, but I am an amateur.
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Replying to @LAForeverHall @CapitalismWorld
No that’s a fair assessment. I think the key piece of this is having the right assets. Units with low rent (high EBITDAR coverage), well-located properties, and simple/small enough buildout so the landlord can easily re-let if needed
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Yes, can see it. The "problem" for the landlord is that in such a situation it's unlikely to be the one leasing it out. Section 365 gives tenants the right to "assign" leases to third parties. This lets the tenant "sell" the under market leases & capture the upside for itself.
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