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Sears spinoff making a mint redeveloping unprofitable stores

Since its founding in 1892, Sears has been locating stores in prime areas. While the retailer itself is struggling, a spinoff company called Seritage Growth Properties is taking advantage of that prime real estate by buying up underperforming locations and redeveloping them into luxury retail centers, offices and even residences.

Consider a former Sears location in Aventura, Florida. Construction has already begun on a luxury shopping center with palm-lined boulevards, water fountains and upscale eateries. In Hicksville, a town on Long Island, a former Sears is slated to become a 600-unit apartment complex. In Santa Monica, California, offices tailored to the tech elite are taking shape just blocks from the Pacific Ocean.

These projects are coming about as a result of a transaction made three years ago. Sears' board created a spinoff company called Seritage Growth Properties in order to convert underperforming Sears and Sears-owned Kmart locations into more valuable uses. Sears sole 235 stores to Seritage for $2.7 billion. Seritage is redeveloping the closed stores and collecting rent from those that remain open.

The move has been controversial, as Edward S. Lampert, a hedge fund manager, is board chair of both Sears and Seritgage, and other Sears directors have also invested in the real estate concern. Some sears shareholders and pensioners filed a lawsuit claiming that the appraisals on the 235 stores Seritage purchased were unduly low and that Seritage is enriching itself by siphoning off some of Sears' most valuable real estate. Sears settled that lawsuit last year for $40 million.

A spokesperson for Sears counters that the Seritage deal provided Sears with badly-needed cash to apply toward its debts and that the retailer continues to invest in both its core business and online initiatives. The spokesperson added that the sale of the 235 stores to Seritage was approved by a special Related Party Transactions subcommittee that Lampert was not a part of. Further, Sears investors were given an opportunity to take a stake in Seritage and that many did.

Possession of some 125 years' worth of prime real estate doesn't guarantee that every redevelopment will go smoothly. At each location, Seritage will have to deal with zoning, permitting and other legal issues and may face local opposition.

Nevertheless, in recent weeks Warren Buffett, a Seritage investor, lent the company $2 billion for use in Sears and Kmart redevelopment projects. The news of the loan sent Seritage's stock price soaring by 14 percent in a single day to $49 per share. Meanwhile, Sears has announced it will close another 46 stores by the end of November and is laying off workers. Its shares are trading at around $1.

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