A few blocks from the ocean, in the heart of Santa Monica, Calif., plans for “creative” offices are taking shape, tailored to the area’s burgeoning tech industry.
In Hicksville, on Long Island, a proposal for nearly 600 units would form the community’s largest apartment complex.
And in Aventura, Fla., construction has started on a “luxurious” shopping center with restaurants, water fountains and boulevards lined by palm trees.
These developments are rising from the ashes of former Sears department stores. And they represent an audacious feat of financial engineering by a group of wealthy investors who bet that one of the retailer’s greatest assets was its real estate.
Three years ago, Sears sold about 235 stores to Seritage Growth Properties, a spinoff company that was created to convert Sears and Kmart locations — which Sears also owns — into more valuable uses like offices and restaurants. The struggling retailer, in return, got a $2.7 billion infusion of cash.
The real estate play, put in motion by Edward S. Lampert, a hedge fund manager with a large role in both companies, is simple. As Seritage works to redevelop some of Sears’s best locations into more profitable uses, it is also collecting rent from Sears for stores still in operation.
But Mr. Lampert has been accused in lawsuits filed by pensioners and Sears shareholders of picking apart the more-than-a-century-old retailer to enrich himself. His hedge fund ESL Investments also made an offer this month to buy Sears’s Kenmore brand for $400 million, with the goal of selling the appliances in other stores.
“This is a play to wring the last drop of value from Sears until there is nothing left,” said Mark A. Cohen, a former chief executive of Sears in Canada. “And it’s working.”
The fortunes of Seritage and Sears could not be more different.
In recent weeks, Seritage’s share price has notched big gains for investors like Warren E. Buffett, who also lent the company $2 billion to fund its redevelopment projects. News of Mr. Buffett’s loan sent Seritage’s stock price soaring 14 percent one day this month to $49 a share.
Sears, meanwhile, is closing stores and laying off hundreds of workers. Last week, the retailer said it was closing an additional 46 unprofitable Sears and Kmart stores by the end of November. Sears shares are trading at just over $1.
In executing his real estate strategy, Mr. Lampert has put himself at the center of a thicket of related companies and investments.
Mr. Lampert is chairman of Sears and one of the retailer’s largest shareholders. He is also chairman of Seritage and holds a significant stake in the real estate company.
Other Sears directors also became investors in Seritage, including Steven Mnuchin, who is President Trump’s Treasury secretary and was Mr. Lampert’s roommate at Yale. (Mr. Mnuchin recently sold off his Sears and Seritage holdings, according to financial disclosures with the office of government ethics.)
Many retailers are selling off stores to generate cash, which they are reinvesting in their digital operations. Macy’s is selling a portion of the ornate former Marshall Field building in downtown Chicago. Lord & Taylor sold its Fifth Avenue flagship last fall.
Sears’s deal with Seritage generated sorely needed cash to pay down debt, but did not stabilize the retail business over the longer term. Sears continues to lose hundreds of millions of dollars a year as its sales decline.
A company spokesman said Sears continued to invest in its core business, including online initiatives. “We look at investments in our business and stores through a broader lens than simply that which is represented by capital expenditures,” the spokesman, Howard Riefs, said in an email.
Seritage declined to comment.
Some Sears shareholders have questioned the price that Seritage paid for the properties. A lawsuit filed by shareholders months later contended that the real estate broker that Sears hired to appraise the properties had failed to fully account for their value if they were converted into other uses. Sears settled the lawsuit for $40 million last year.
The Sears spokesman said the sale had been approved by a special Related Party Transactions subcommittee, of which Mr. Lampert was not a member. At the time of the Seritage deal, Mr. Riefs added, Sears investors were offered an opportunity to take a stake in the real estate company and many did so.
A spokesman for Mr. Lampert’s hedge fund said “we are and have consistently been committed to following transparent procedures that ensure that any transaction with ESL takes place on fair and reasonable terms.”
When Mr. Lampert took control of Kmart after it emerged from bankruptcy in 2003 and bought Sears a year later, many on Wall Street figured he was mostly interested in the real estate.
In places like West Hartford, Conn., it’s easy to see the potential payoff in finding a second life for an outdated department store chain.
Seritage recently converted part of a former Sears into an REI, the outdoor gear retailer. A Shake Shack has moved onto the property, and an urgent care center is slated to take space in another part of the building.
“This is a very strong retail corridor,” said Kristen Gorski, an economic development specialist with West Hartford.
Many of the former stores are getting complete makeovers to keep up with evolving communities. Built just after World War II, the Art Deco-style Sears building in Santa Monica is across from a train station. Renderings of the new office space show young people working on a roof deck overlooking the Pacific.
“It is going to be worth an enormous amount of money,” said Bob Safai, founding partner of Madison Partners, a commercial real estate firm in the Los Angeles area.
In New York State, Seritage acquired property in relatively higher income areas.
The median income in the 12 ZIP codes in New York where Seritage bought stores is $74,266, according to an analysis by The New York Times. The median income in the ZIP codes that include the 46 Sears and Kmart stores in New York that Seritage did not acquire and are still operating is $67,962.
Seritage’s approach isn’t guaranteed. Analysts worry that it could take many years for the company’s redevelopment ambitions to come to fruition, given the realities of permit processes and local politics.
In Hicksville, many residents are pushing back against Seritage’s plans to build a huge mixed-use development on the site of a former Sears. The concern is that the project — along a busy commercial road — would detract from plans to revitalize Hicksville’s downtown.
“Seritage is trying to say, ‘Our development is the center of everything,’” said Eric Alexander, director of Vision Long Island, a nonprofit group fighting sprawl. “But the community has not bought into that.”
The loan from Mr. Buffett is expected to give the company more financial cushion to see through some of its marquee projects.
Another key source of financial support comes from Sears itself. The retailer paid $117 million in rent to Seritage last year. Sears also covers a share of insurance and property taxes on the stores that Seritage owns and are still operating, according to a company filing.
“They are keeping the patient on life support while Seritage withdraws rent money and lines up new tenants,” said Mr. Cohen, the former Sears Canada executive, who is now director of retail studies at Columbia Business School. “There is something really wrong with this picture.”
Keith Collins contributed reporting. Doris Burke contributed research.