Tesla Inc.’s TSLA 2.73% 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.
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 $1.6 billion, with $1.1 billion 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 Centers Inc., at the Citi 2019 Global Property CEO conference in Hollywood, Fla., this week.
His U.S. 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 owners Simon 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 center 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 honor its obligations. Federal Realty owns two shopping centers with Tesla leases.
Tesla tends to occupy prime locations in malls and often brings cachet to the shopping center. 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 $3.7 billion in cash and equivalents on its books, with more than $5 billion in accounts payable and accrued liabilities, as well as nearly $10 billion in long-term debt. Another $541 million 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 esther.fung@wsj.com
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