City may become Kmart’s landlord

City officials will consider purchasing Kmart's land next month, according to city staff.

The City of Minneapolis and Sears Holdings Corporation haven’t reached a deal to reconnect Nicollet Avenue where the store sits today.

The parties don’t agree on the price Kmart should pay in a new development, according to city staff. But staff expect to ask the City Council in June to exercise its option to purchase the land under Kmart. The Council approved an option in 2015 to buy the Kmart site at 10 W. Lake St. for $8 million.

“The good news is this will achieve certainty that the street will be open,” said David Frank, the city’s director of economic policy and development. “Of course what it won’t have is certainty about when that will happen.”

Kmart’s lease is renewable through 2053, and the company has stated that it should remain operating onsite without interruption and become part of any new development there.

“Sears Holdings remains in discussion with the City but is still waiting for a workable proposal,” Sears Holdings Spokesperson Howard Riefs said in a statement. “The Lake Street Kmart is a successful and profitable store with a long-term lease that provides stable jobs in the neighborhood.”

Frank said the city proposed subsidizing the cost of constructing a new store and offered a rent rate at a new building that would be less than typical market rates for new development.

“Even subsidized, that’s enough more than what they currently pay that they were not interested in that arrangement,” he said. “They don’t want to pay more than what they pay today.”

City staff has focused on trying to reach a deal with Kmart that incorporates the retailer into new development, rather than trying to buy out the lease, he said.

Staff plan to send a recommendation on land acquisition to the Community Development & Regulatory Services Committee on June 20.

“The Council would need to be comfortable that [the site] might look just like what it does for quite a while,” Frank said. “…I don’t think [Kmart’s] position is going to change dramatically any time soon.”

Kmart 1

Frank said they would continue to work toward a deal, however.

“Everyone has read in the financial newspapers about the condition of Sears/Kmart, so it’s not impossible that that changes at some point,” he said.

Sears Holdings said in a March Securities and Exchange Commission filing that it continues to face challenges. The company reported a loss in 2016 and said it drew from investments to pay for operating activities.

“We expect to continue to right-size, redeploy and highlight the value of our assets, including our real estate portfolio, in our transition from an asset intensive, historically ‘store-only’ based retailer to a more asset light, integrated membership-focused company,” states the filing. “Our historical operating results indicate substantial doubt exists related to the Company’s ability to continue as a going concern.”

Kmart also has a say in what is constructed next door. The city purchased the Supervalu site in late 2015 for $5.2 million. The city is still collecting rent from the grocer, which closed in 2014, and the lease runs through next month. Frank said there are no new plans there, and any new development would be subject to approval by Kmart under a current agreement.

“Kmart effectively has veto power over development on the other property,” Frank said. “We would love to put out an RFP [request for proposal] shortly for a development proposal at Lake & Blaisdell in front of the grocery store. We’re not sure yet that Kmart will approve that.”

Riefs said in a statement that Kmart would be open to redevelopment.

“We will gladly continue to review all redevelopment proposals for our parcel and any new proposals for the adjacent site once they are received and will discuss them directly with our partners in the City,” he said.

Not everyone is in a rush to reopen Nicollet Avenue. The status quo was perfectly fine with several people waiting at bus stops this week near Kmart at 1st & Lake.

“Leave Kmart alone,” said Felicia Kirk, who said she’s shopped there for 20 years.

“It’s a good location the way it is,” said Cruz Martinez.

He and others warmed to the idea of reconnecting Nicollet Avenue upon learning Kmart could stay onsite.

“If they move it to the side, at least it would be brand new. It would be a brand new store for the community,” said Carlos Hines.

Cecil said a reopened Nicollet might help traffic.

“If they kept Kmart, that would be fine with me,” he said, adding that it’s the area’s only department store.

Stevens Square resident Jordan Kentfield compared the situation to New York’s 2nd Avenue Subway — a project in development for nearly a century.

“I feel the same way about that as I feel about Kmart,” said Kentfield, who lived in New York in the 60s. “I’m used to it.”

He said Kmart serves an important purpose in the neighborhood, and he feels the loss of the grocery store next door. He noted that Kmart says the store is very profitable.

“I’m not worried about them closing anytime soon,” he said.