As Kmart stores across U.S. close, store blocking Nicollet Avenue in Minneapolis endures

For years we have read of a top-performing Kmart store in south Minneapolis, as recently as 2017 described as the most successful Kmart in the country.

While that seems implausible, at least there will be no more argument over whether it is Kmart's best in the state. With two others confirmed as closing it will soon be the last of them remaining.

Hopes in Minneapolis are bound to rise that our last Kmart soon exits on this earth, too. It's the infamous store that for more than 40 years has sat in the middle of Nicollet Avenue, blocking one of the main streets of Minneapolis and sapping vitality out of a big part of the city south of downtown.

Yet there is not much reason to hope. As Kmart's owner knows, the asset to hang onto here is not an aging store flying the flag of a dying brand. It is a land lease, with renewal rights into 2053, that is far too valuable to trade away cheap.

The story of the street-blocking Kmart is a great way to understand how painful it is to buy yourself out of a big real estate blunder. It costs both time and money — and that is with a willing seller.

Kmart's deal is a kind of lease that goes on so long and is so cheap that it is a little like owning the land, but maybe better.

The City Council approved the store's construction in 1976. There is not even a door into the store from the back side near 29th Street, just concrete street barriers, tall weeds, a chain-link fence and then a block wall. There are acres of mostly vacant parking out front.

It is insulting to suburbanites to call something like this a suburban-style project.

In the mid-'70s folks in City Hall were growing desperate for anything to generate taxes to make payments on bonds that had financed a redevelopment district, as outlined by history writer Iric Nathanson in a fine 2014 explainer in MinnPost.

It is not clear when the city realized how dumb this deal was. In city documents, reopening Nicollet gets described as "a city priority for decades."

Kmart, of course, has been painfully going out of business for a long time, too. Most recently it was taken into bankruptcy as part of Sears Holdings, yet the investor who bankrupted it ended up in control by promising to keep operating about 425 Sears and Kmart stores.

It is a little difficult to know, just months later, how many Kmart stores will soon be left. The latest closings were confirmed over the last couple of weeks or so state-by-state.

Kmart will soon be down to one store in Illinois, and the last store in greater Des Moines was on the list of Kmart closings from last May. Fargo's Kmart also will be closed by year-end, one of the first stores opened as Kmart got rolling in the early 1960s.

It is tempting to dismiss this news with a shrug, as it has been years since Kmart's been cool if it ever really was. But these store closings are taking a lot of middle-class jobs with them.

In Minneapolis, the death of Kmart wouldn't even mean an easier pathway to opening up Nicollet.

Kmart's parent controls the lease through an affiliate, with the right to assign its interest to another party. It can do that even without first getting the consent of its landlord, which happens to now be the city of Minneapolis.

Even another Kmart bankruptcy wouldn't help get the land back from Kmart's control, because a bankruptcy court won't look at this lease as a normal liability that needs to be gotten rid of. It is clearly an asset.

The city of Minneapolis gets less than $10,000 per month in base rent for a 7-acre site, roughly $0.38 per square foot a year. The land, though, is worth a lot more than that, and to Kmart and its successors that lease is worth all the excess cash flow into 2053.

It is an odd kind of lease, with declining rents since the deal was struck. Once the development costs were recovered, the former landowner got a near risk-free coupon to clip, hopefully all the way to 2053. It took the city $8 million a couple of years ago to buy it out.

That is still a good decision, said David Frank, director of the city's Community Planning and Economic Development Department, even though not much has happened since. Minneapolis will be in business in 2053, he said, as owner firmly in control.

While it is Kmart's right to assign its interest, Frank points out the city still has influence. City Hall is the city land-use regulator, for instance, and can scrutinize plans for any successor to a Kmart there.

"We do have something to say as a landlord under the terms of the lease, over what can be built there," Frank added, "and we have rights as an adjacent landowner."

It should be a lot tougher to make money operating just one Kmart store in the state than even a few of them, Frank said, because there won't be other stores to share distribution and advertising costs. So the value of the site to Kmart has to have slipped.

That, of course, would only be true for land that doesn't block a major street that a prosperous city seems to really want reopened.

"My job for the past couple years has been to not get everyone's hopes up," Frank said. "Because if you get people's hopes up, then they become willing to talk about paying too much. It's important to let the public know there's 30-plus years to run on this lease. I hope not, but it could be that it looks similar to like it looks now for a while."

"Is it just a matter of money?" Frank added, to get control back from Kmart. "I hope so. But we have to come closer to agreeing on what the right amount of money is."

lee.schafer@startribune.com • 612-673-4302