A recent version of this article appeared March 27, 2013 on page C6 in The Wall Street Journal, with the headline: Mall Landlords Get a Penney for Thoughts. Penney leases three spaces in Tucson, the El Con Mall (115,900 SF), Tucson Mall (136,864 SF) and Tucson Spectrum (99,956 SF). We encourage readers to comment on this article and make any suggestions for options they would like to see at these sites.

U.S. shopping-mall owners, already hit with store closures by longtime laggard Sears Holding Corp., are now pondering what steps to take if struggling chain J.C. Penney Co. closes some of its 1,104 stores.

The 111-year-old retailer is struggling after it failed to spur sales and attract new clientele with such striking programs as eliminating sale promotions in favor of making low prices the chain’s standard. Penney is pushing ahead, though, with a plan to re-create hundreds of its properties as collections of boutique stores for brands such as Joe Fresh and Jonathan Adler. The changes, however, are expensive. Penney finished its prior fiscal year with $930 million of cash, down significantly from prior years.

Penney hasn’t announced any plans to sell or close stores in the wake of posting a $985 million net loss and a 25% decline in sales for its fiscal year ended Feb. 2. Yet investors and analysts are querying mall owners about their contingency plans in case Penney vacates certain stores – at least 675 of which are in malls.

The retailer’s struggles have some observers thinking it soon will turn to its real estate as a savior by selling some of the 429 stores it owns or the long term contracts on those it leases. “The challenge is that they may need more cash to complete their transformation,” said Cedrik Lachance, an analyst with Green Street Advisors Inc., which tracks real estate investment trusts, including most big mall owners. “To that end, I think that J.C. Penney may look to its real estate as a source of cash.”

Mall owners predict that it wouldn’t be difficult to replace Penney stores in the best U.S. malls, where other large tenants might want to take over space. In other cases, mall owners could restructure the space to house several smaller stores.

Macerich has 36 Penney stores in its U.S. portfolio of 62 malls. Art Coppola, Macerich’s chairman and CEO, said he anticipates that Penney will remain a viable tenant for mall owners. But, “we have a plan for each and every (Penney) location,” Mr. Coppola told investors at a conference in Hollywood, FL, hosted by Citigroup, Inc. on March 5. “Some of them would be terrific. Some of them would be OK. And some of them would be more challenging.”

Possibilities include Penney selling some of its stores and leasing them back, or Penney selling some to mall owners who intend to raze them and rebuild them for other tenants. The latter is most likely to occur in malls with high sales volumes, where demand from other retailers for space is strong.

The trouble for Penney is that its stores are skewed toward average malls. Since the recession, retailers and shoppers have favored strong malls over their average and struggling peers. And the few expanding department stores that might replace Penney tend to choose the best malls in each market.

Mall owners, in turn, are spending most of their time and capital redeveloping proven malls to generate more sales rather than pouring money into struggling properties unlikely to produce a similar return.

According to Green Street, 157 Penney stores are located in so called A-grade malls, which typically generate sales per square foot of $350 or more. Far more of Penney stores (351) are in B-grade malls, which generate annual sales of $325 to $450 per sq. ft. Another 146 of Penney stores are in C-grade malls, which generate annual sales of $200 to $325 per sq. ft., and many of those are struggling to remain malls. The U.S. average for malls is $391 per sq. ft.

What would you suggest for the JC Penney stores in Tucson?

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Dunkin Donuts franchisee, Campbell Tucson Retail, LLC of Chandler, AZ (J. Aaron Klusman, manager) exercised a purchase option on the restaurant at 2553 N Campbell Ave. in Tucson[mepr-show rules=”58038″]for $575,000 ($336 PSF) after doing a complete reconstruction of the former Los Alazones Mexican Food restaurant. The 1,712 sq. ft. building was originally built in 1970 as a What-A-Burger and is located northwest of Campbell and Grant. The sellers were Edward E Colson and Karen Jeanne Colson, Trustees of the Colson Family Trust of Carlsbad, CA.

As part of a double escrow, also on March 22nd, Campbell Tucson Retail resold the property to Ronnie and Judith Green of Aurora, CO in a sale leaseback agreement with the franchisee for $1.25 million and undisclosed terms.

The new Dunkin Donuts is to open Saturday, March 30th. The building has been completely transformed from the original structure that was razed down to the slab and one wall, as the before and after photos indicate. The transformation to the entire city block is a dramatic one. The franchisee owns other Dunkin Donuts and / or coffee shops in the Phoenix and Las Vegas markets. This is its first store to open in Tucson.

Rick Borane of Volk Company in Tucson handled the lease and purchase option with sale for the franchisee.

To contact Borane call (520) 326-3200. Klusman is at (602) 774-3300.

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Tucson-based Modular Mining Systems, Inc. (a wholly-owned subsidiary of Komatsu America Corporation) recently purchased the 31,100 sq. ft. office building at 3285 E. Hemisphere Loop in an all-cash transaction totaling approximately[mepr-show rules=”58038″]$2.2 million ($71 PSF). The single-story, Energy Star-rated facility, situated on 277 acres in the Tucson International Business Park, formerly housed the US Drug Enforcement Administration (DEA). The DEA vacated the building in a consolidation move to its other location at 6970 S. Palo Verde Rd.

The seller, GPT Properties Trust, David Blackman, President; is a self-managed, self-administered real estate investment trust (REIT), and an affiliate of Government Properties Trust, Inc. (NYSE:GOV).

Scott Baker, VP of Support Services at Modular commented, “Over the next several months, we will remodel both our current 50,000 sq. ft. building (at 3289 E. Hemisphere Loop) and the new facility, to create a unified, campus-like environment.” Baker continued, “We needed more space to accommodate the expansion of our software and hardware development groups. With this in mind, we considered various options, such as building on land we already own, moving to a larger space in another location, or buying the empty facility next door. After evaluating the pros and cons, the latter option won out as being best for us. The old DEA building hasn’t been renovated since 1993 so we have plenty of work ahead, but we’re pleased with our decision.”

Founded in 1979, Modular Mining Systems, Inc. developed and brought to market the DISPATCH® fleet management system. With configurable hardware and software, this groundbreaking technology optimized the assignment of trucks to loading and dumping points in an open-pit mine and produced operating reports during the shift. Using this early success as a springboard for further innovation, Modular went on to develop the IntelliMine® mine management solution.

DISPATCH, ProVision®, MineCare®, and MineAlert™, comprise IntelliMine,addressing the big picture areas of operations, planning, maintenance, and safety. Powerful reporting and maintenance management tools integrate seamlessly and provide mines with the tools they need to carefully manage operations at all times. With more than 220 installations worldwide, IntelliMine is the mining industry’s solution of choice.

Tim Healy of CBRE in Tucson handled the transaction.

[mepr-show rules=”58038″]Contact Baker at (520) 746-9127. Blackman can be reached at (617) 219-1440. Healy is at (520) 323-5119.[/mepr-show]