Record Bankruptcies Potentially Impact Local Property Tax Revenues
The impact of the pandemic on the tax bases of local governments is slowly becoming clearer as the number of retailers filing for bankruptcy protection grows. Last week, Tailor Brands, owner of Men’s Wearhouse and Jos. A. Bank Clothiers stores, became the latest big-name retailer to file for bankruptcy. Demand for business apparel has plummeted as COVID-19 keeps America’s office workers at home. The company has 1,400 stores and 18,000 employees nationwide. It is undertaking the bankruptcy process for restructuring and to address at least $630 million in debt. The impact of retail bankruptcies like this on the value of real estate holdings and lease agreements is part of a developing trend that may have a long-term, substantive impact on the property tax bases of school districts.
Accelerated by the COVID-19 pandemic, many retail stores have filed for bankruptcy protection this year, including several anchor department stores in Illinois malls. They include:
- Neiman Marcus
- J.C. Penney
- Lord & Taylor
- J. Crew
- Pier 1
- Ascena Retail, parent company of Ann Taylor and Lane Bryant
- Brooks Brothers
- Art Van Furniture
- Modell’s Sporting Goods
The recent bankruptcy filings add to previous major bankruptcies that were fueled by the emergence of online shopping. These filings included anchor department stores and in-line national retail brands such as:
- Carson’s (Bon-Ton)
- Forever 21
- The Limited
- H.H. Gregg
- Mattress Firm
These filings and related closures threaten to erode a robust property tax revenue stream for local taxing bodies, including school districts. One way in which these bankruptcies impact a school district’s tax base is through the renegotiation of leases. Since the value of these commercial properties is largely related to the landlord’s ability to charge rent, renegotiation of lease terms in bankruptcy proceedings can lead to lower income and a reduction in the assessed value of these properties. Another factor affecting assessed values is that store closings will increase the availability of retail space, resulting in supply outpacing demand. However, it is important to remember that a bankruptcy filing does not mean these properties will become vacant. Many of the reported bankruptcies are reorganizations, rather than liquidations, so these stores will continue to operate even as the parent company makes its way through the bankruptcy process.
However, a number of creative steps are also being taken to preserve the property tax base. For example, it was reported in today’s Wall Street Journal that the largest mall owner in the U.S. (Simon Properties) has been in talks to turn Sears and J.C. Penney stores into Amazon fulfillment centers. Mall operators have also repurposed their real estate footprint to include residential and medical office space rentals to attract new tenants.
We will continue to monitor changes as they affect Illinois school districts and the property tax assessment, appeal, and collection process and bring you more information as it becomes available. For more information on this topic contact the authors of this alert or any other Franczek attorney.