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Mattress Firm provides an example of poor real estate practices

It is no longer a secret that Mattress Firm, the nation's largest bedding retailer, has recently filed for Chapter 11 bankruptcy protection. In fact, it recently came out of that filing with a restructured focus and about 700 fewer storefronts. Why, then, is Mattress Firm a good example of poor real estate practices?

In December 2017, the company filed a lawsuit against its former real estate representatives and outside brokers citing they were responsible for getting the bedding giant into bad leases all to make a quick and shady buck.

The allegations

The lawsuit claims the trio of real estate professionals often entered into extremely high leases to help the landlord drive up the price of the property. In commercial real estate, being able to sell a property with high-paying and reliable tenants only increases the appeal and market for the property. Other companies or people are more skittish about purchasing commercial properties that have been vacant for long periods of time or have low-level tenants.

The real estate scheme first gained traction when Mattress Firm started expanding its visibility through a series of competitor buyouts, including the New Jersey-based Sleepy's. When Mattress firm acquired a company, it was hesitant to shut it down, even though there may be another one or even three of its own brands within a very short distance.

The brokers, instead of helping the company stop oversaturating the market after it made an acquisition, kept grabbing up vacant storefronts. The trio even charged the company $50,000 "broker fees" for each lease. Mattress Firm officials estimate the broker fees alone cost them $40 million.

The respondents in the lawsuit allegedly personally gained from most of the deals; they owned a stake in many of the developers it signed high leases with.

The lesson

How can consumers and companies avoid Mattress Firm's real estate mistakes? For starters, they should pay attention to what their realtor or broker is doing. It is important to check anything that might seem off, and do a little bit of homework. Finally, they should read every word in the property contract or lease, paying close attention to rising rents year-over-year and fees.

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