DUBLIN — We all know that South African-born Elon Musk likes to ignore the precepts of business-as-usual and go his own way. That attitude can pay big dividends – no one thought he could build a viable global auto manufacturer based on electric cars, but today Tesla is valued at billions. However, one cannot ignore all the inconvenient facts that one wishes weren’t so. Musk has been ignoring the settlement he reached with the SEC and now faces potentially serious consequences for doing so. He is also, apparently, overlooking some of the realities of commercial lease agreements in his bid to end Tesla’s brick-and-mortar store operations. There’s no doubt that Musk is a visionary with a keen eye for marketing and brand building. But increasingly, he’s been putting shareholder value at risk by making decisions by fiat and ignoring some of the commercial realities facing his company. History has shown time and again that it’s dangerous for anyone to have too much power, no matter how fine their moral nature. When devout religious women – Anglican and Catholic – were given charge of unwed teenage mothers in Ireland, the torture and abuses of the Magdalene Laundries were the result. Tesla seems to have allowed itself to develop in such a way that Musk wields absolute control over the company. The board is staffed exclusively with his friends and family members, and there seem to be no constraints on his ability to make unilateral decisions. While he may make many good decisions, there is always a risk that he will make bad ones, and the absence of checks and balances means that there’s not likely to be any due diligence on his choices. This is not a good way to run anything, whether it’s a country or a company. – Felicity Duncan
Landlords to Tesla: You’re Still on the Hook for Your Store Leases
By Esther Fung
(The Wall Street Journal) Tesla Inc.’s plans to save money by closing most of its retail stores and selling all cars online face a big potential hurdle: Store landlords show no signs of giving the company an easy way out of its leases.
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The electric car maker has offered few details about which of its 106 stores and galleries in 26 states it plans to close. Even many shopping center landlords say they have heard nothing from the company about whether their Tesla store will be shut down, according to real-estate brokers and landlords.
What is clearer is how much Tesla owes in future rent payments. The company has total lease obligations of $1.6bn, with $1.1bn due between this year and 2023, according to its securities filings. The payments include leases for stores, galleries and other uses including real estate abroad.
In a February securities filing, Tesla said it has “various non-cancellable operating lease agreements,” and any effort by the company to terminate those leases could result in legal battles. Landlords could seek a court injunction to prevent Tesla from closing stores before the lease expiration. Property owners have challenged in court recent efforts by Starbucks Corp. and Kenneth Cole Productions Inc. to break leases.
Tesla “is a company with a viable balance sheet that is going to owe a lot of landlords a lot of money,” said Robert Taubman, chief executive officer of Taubman Centres Inc., at the Citi 2019 Global Property CEO conference in Hollywood, Fla., this week.
His US properties have eight Tesla stores, including ones at the Dolphin Mall in Miami and Cherry Creek Shopping Center in Denver. Tesla also rents space from big mall ownersSimon Property Group and Macerich Co.
A Tesla representative didn’t respond to requests for comment.
Many mall owners said that Tesla stores have produced strong sales numbers and that they were surprised by the car maker’s announcement. Only a month ago, Tesla signed a new lease at Santa Monica Place in California that goes through 2025. As recently as last month, Tesla was negotiating and signing leases, according to executives at Taubman and Macerich.
Retail tenants generally can’t break their leases without penalty unless certain conditions are met, like a retailer files for bankruptcy protection or the shopping centre suffers from persistent vacancies that allows a tenant to leave before the lease expires. Mall tenant leases typically run five to 10 years.
“The bottom line is, this is a business of contracts,” said Don Wood, CEO at Federal Realty Investment Trust, who indicated that landlords will enforce their contracts and expect Tesla to honour its obligations. Federal Realty owns two shopping centres with Tesla leases.
Tesla tends to occupy prime locations in malls and often brings cachet to the shopping centre. The company’s sales stores and galleries, which are showrooms where people can view the cars but can’t buy them on-site, typically occupy 2,000 to 4,000 square feet with a couple of cars and a handful of employees.
The car maker hopes to save money from the store closings, and it could use the cash. As of Dec. 31, it had $3.7bn in cash and equivalents on its books, with more than $5bn in accounts payable and accrued liabilities, as well as nearly $10 billion in long-term debt. Another $541m of debt is due in November, according to FactSet.
While Tesla has reported two consecutive quarters of profit to end 2018, the company said it is moving all sales – including the $35,000 version of its Model 3 sedan – to online only, which will allow the car maker to be “financially sustainable.”
Real-estate brokers speculated that Tesla may keep its most high-traffic stores, and even stores that close wouldn’t be as devastating a blow to mall landlords. Some also suggested that Tesla stores may have already served their purpose for the company.
“It’s like an expensive billboard to get the name out to people,” said Scott Holmes, national director of the retail division at Marcus & Millichap, a commercial real-estate services and consulting firm. “Tesla believes that it has received benefit from that.”
– Charley Grant contributed to this article.
Write to Esther Fung at [email protected]
