aria
Former Moderator
- Joined
- Dec 4, 1977
- Posts
- 39,546
Man, Sega just can't win.
(remember, Ch 11 lets the company still operate and try to get out of debt)
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Sega GameWorks seeks lease relief
by Greg Johnson
Video game arcade operator Sega GameWorks LLC is pleased people keep dropping quarters into its machines. Now if it could just get its landlords to drop its rent.
The Glendale, Calif.-based company is hoping to win a major reduction in its operating costs by asking a bankruptcy court to allow it to reject pricey leases on many of its 20 arcades.
Sega GameWorks, blaming declining business and high operating costs, filed for Chapter 11 on March 9 with the U.S. Bankruptcy Court for the Central District of California in Los Angeles.
The company has no plans to use debtor-in-possession financing and is using its cash collateral to keep operating, said Monica Kim, who along with Ron Bender, is debtor counsel at Levene, Neale, Bender, Rankin & Brill LLP in Los Angeles.
Kim insists demand for Sega GameWorks' interactive games, bars and restaurants remains strong. It's the leases for the arcades that are hurting the company.
Over the past decade, video arcades have evolved from being teenage hangouts to trendy venues replete with upscale bars and restaurants.
But in order to attract a high-paying crowd, such halls have gone from being dingy, bare-walled arcades to elaborately furnished gamerooms.
Thus Sega GameWorks, a joint venture between Japan's Sega Corp. and France's Vivendi Universal SA, spent millions to renovate its arcade sites to compete with Dallas rival Dave & Buster's Inc., which operates 33 sites.
But these high startup costs, called tenant improvements, were rolled into the lease payments and have now become burdensome, Sega GameWorks said.
And the company wants court approval to separate its true rent from the portion attributable to tenant improvements, Kim said.
Many retailers saddled with leases they can no longer afford often ask bankruptcy courts to allow them to reject leases, said Steve Marotta, a principal with Marotta, Gund, Budd and Dzera LLC, a New York restructuring and financial advisory firm that's not involved with the Sega GameWorks bankruptcy.
"If you sign a lease for x number of years, outside of a bankruptcy proceeding, you're obligated for the full length of the lease," he said.
Subleasing is an option, but if it's not achievable, the U.S. Bankruptcy Code does allow the outright rejection of leases.
Often, the cost of rejected leases is capped for a bankrupt company at one year of rent. Or the exposure is capped at 15% of the total lease, Marotta said.
For the debtor, this provides relief from high lease costs. Not only is the lease rejected but the payments become unsecured claims.
And those claims are usually discounted. "This is a tactic [that] is used in all industries," Marotta said.
Landlords, rather than face rejected leases, become eager to renegotiate to keep their tenants.
"It is a significant tool for improving a company's economic model," Marotta said.
(remember, Ch 11 lets the company still operate and try to get out of debt)
----------
Sega GameWorks seeks lease relief
by Greg Johnson
Video game arcade operator Sega GameWorks LLC is pleased people keep dropping quarters into its machines. Now if it could just get its landlords to drop its rent.
The Glendale, Calif.-based company is hoping to win a major reduction in its operating costs by asking a bankruptcy court to allow it to reject pricey leases on many of its 20 arcades.
Sega GameWorks, blaming declining business and high operating costs, filed for Chapter 11 on March 9 with the U.S. Bankruptcy Court for the Central District of California in Los Angeles.
The company has no plans to use debtor-in-possession financing and is using its cash collateral to keep operating, said Monica Kim, who along with Ron Bender, is debtor counsel at Levene, Neale, Bender, Rankin & Brill LLP in Los Angeles.
Kim insists demand for Sega GameWorks' interactive games, bars and restaurants remains strong. It's the leases for the arcades that are hurting the company.
Over the past decade, video arcades have evolved from being teenage hangouts to trendy venues replete with upscale bars and restaurants.
But in order to attract a high-paying crowd, such halls have gone from being dingy, bare-walled arcades to elaborately furnished gamerooms.
Thus Sega GameWorks, a joint venture between Japan's Sega Corp. and France's Vivendi Universal SA, spent millions to renovate its arcade sites to compete with Dallas rival Dave & Buster's Inc., which operates 33 sites.
But these high startup costs, called tenant improvements, were rolled into the lease payments and have now become burdensome, Sega GameWorks said.
And the company wants court approval to separate its true rent from the portion attributable to tenant improvements, Kim said.
Many retailers saddled with leases they can no longer afford often ask bankruptcy courts to allow them to reject leases, said Steve Marotta, a principal with Marotta, Gund, Budd and Dzera LLC, a New York restructuring and financial advisory firm that's not involved with the Sega GameWorks bankruptcy.
"If you sign a lease for x number of years, outside of a bankruptcy proceeding, you're obligated for the full length of the lease," he said.
Subleasing is an option, but if it's not achievable, the U.S. Bankruptcy Code does allow the outright rejection of leases.
Often, the cost of rejected leases is capped for a bankrupt company at one year of rent. Or the exposure is capped at 15% of the total lease, Marotta said.
For the debtor, this provides relief from high lease costs. Not only is the lease rejected but the payments become unsecured claims.
And those claims are usually discounted. "This is a tactic [that] is used in all industries," Marotta said.
Landlords, rather than face rejected leases, become eager to renegotiate to keep their tenants.
"It is a significant tool for improving a company's economic model," Marotta said.
