A lot of landlords did their best to be flexible with retailers and rent payments during the height of the COVID-19 pandemic. Landlords offered deals that allowed struggling retailers to pay a percentage of their monthly sales in rent instead of a standard amount. There’s now a chance this supposed temporary arrangement could go long after the pandemic has subsided, The Wall Street Journal reports.
Currently, more shopping center owners are signing leases where rent is tied to sales, at least for a certain amount of time. Newer retailers find the percentage-based rent leases attractive because of their flexibility. Retailers also feel that the arrangement shields them from potential large financial losses as they’re just getting their businesses going.
Meanwhile, as much as landlords would prefer a consistent monthly rent payment, they recognize that the pandemic has turned a lot of retail into a renters’ market. Many retailers were already having financial difficulties due to competition from online shopping. The COVID-19 pandemic-related lockdowns only made matters worse. A number of retailers didn’t survive the shutdown, and landlords were suddenly left with empty space and put in a position to offer tenant-friendly deals just to fill the vacancy.
“More brands are demanding it,” Philippe Lanier, principal at EastBanc, a property developer, owner and manager of dozens of open-air retail properties in Washington, D.C.’s Georgetown neighborhood told The Wall Street Journal.
Percentage-based rent agreements—temporary no more?
The increase in percentage leases is another example of a deal that was believed to be temporary because of COVID-19, but could now go on longer than expected, if not permanently. Remote work and food delivery service as restaurants move closer to full service are other examples of arrangements thought to be temporary but are going on longer than expected.
This is not to say fixed-rent leases are completely gone, however. The percentage-based rent model has mostly been reserved for the first year or the first few years of a lease before it goes back to the traditional fixed-rent model. Percentage leases also pose another issue—it can be difficult for landlords to obtain sales data. Tenants are typically more forthcoming with that information when their sales are dropping and they need rent relief.
“Tenants love it; landlords hate it,” said Michael Rielly, managing principal at Rielly Retail Solutions, a real-estate consulting firm for retail and hospitality brands told The Wall Street Journal.
Landlords are still trying to find ways to get back in the driver’s seat, however. Measures include lowering the minimum amount of sales at which a CRE owner can start collecting a piece of the revenue. While retailers see percentage-rent leases as a way to keep their costs manageable, the agreement leads to more work, such as extra sales audits. Meanwhile, some landlords are getting prepared for litigation over sales data.
Not all retailers are in favor of the percentage-based rent model, either. More successful outfits like Apple and T.J. Maxx want to hold on to any profits that arise from a sales boom. These retailers often negotiate fixed rents. They are also asking for bigger subsidies in fitting out new stores, however. Typically, “tenant-improvement allowances” are reimbursed to the tenants once they finish a store renovation. Some retailers are now asking their landlords to pay for the construction themselves—and oversee it.
“Landlords are taking on more risks on behalf of the tenant,” Jahan Moslehi, managing principal at Bridge33 Capital, which owns dozens of shopping centers across 18 states, told The Wall Street Journal. “Landlords who undertake the construction work are now on the hook for fluctuations in construction and labor costs.”
Joe Dyton can be reached at firstname.lastname@example.org.