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article imageLandlords may throw wrench into Tesla's planned store closings

By Karen Graham     Mar 9, 2019 in Business
Elon Musk's cost-savings plan to save money by closing most of its retail stores may have back-fired on him. Besides blindsiding many employees - Landlords are asking how Tesla plans to get out of its lease contracts.
On March 1, in announcing its cost-savings measures, Tesla basically upended its product lineup and business model — leaving analysts to wonder just what in the devil had just happened.
Besides lowering the base price of the Model 3 sedan, Tesla has once again changed its production forecast. But the decision to close most of its stores has suddenly become the big news of the day. Not only is Tesla going to have to figure out how to get out of all its showroom leases, but it will have to deal with employee morale.
Employees blindsided by the announcement
According to Business Insider, employees found out about the store closings 'after the fact," an issue that has put many employees in a negative mood.
Tesla chief Elon Musk said a company reorganization aims to speed up production of the Model 3  a ke...
Tesla chief Elon Musk said a company reorganization aims to speed up production of the Model 3, a key to expansion of the electric carmaker
Mark RALSTON, AFP/File
One employee, who asked to not be identified, said "It's empty in here right now. This is usually an upbeat place to work, but now it feels like a morgue." Another employee, who was away from his assigned store last week when the announcement was made, found out later that evening only after reading news reports about the plan.
The big gripe by employees is not so much the closing of the car showrooms - but the solar stores. Selling energy requires more of a "hands-on approach," said one salesman, adding that home energy systems can take 90 days to install. "You can test-drive a car for seven days, but solar is a full-blown construction project," the employee said.
The risk of legal challenges
According to the Wall Street Journal, Tesla's plan to shut down many of its stores may expose the company to new headaches to go along with the ones it already is dealing with.
Tesla leases many of its car showrooms from the owners of shopping centers. Robert Taubman, the CEO of Taubmen Centers, which leases eight showrooms to Tesla at its properties, spoke at an investment conference this past week.
According to Seeking Alpha, when asked, Taubman said that Tesla "is a company with a viable balance sheet that is going to owe a lot of landlords a lot of money." He was citing the fact that retailers can't easily break leases unless they meet certain conditions, like filing for bankruptcy or the shopping center loses a number of tenants.
Tesla has total lease obligations of $1.6 billion, with $1.1 billion due between 2019 and 2023, according to its filings, Fortune reports. In securities filings, Tesla has previously warned that there was a risk associated with “various non-cancellable operating lease agreements," that could lead to legal battles if Tesla were to shut down its stores.
The bottom line? The cost-savings Tesla expects to see may be offset by the lease payments it will have to shell out.
More about Tesla, costsavings plan, Employees, Landlords, leases
 
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