\u201cPercentage Rent\u201d is a familiar concept to retailers and landlords and has long formed a significant aspect of the business arrangement between commercial landlords and their retail tenants.\u00a0 In a lease arrangement that includes percentage rent, a landlord may negotiate a relatively reduced base rent for the chance to have some \u201cskin in the game\u201d by agreeing to participate in a percentage of tenant\u2019s revenue, through gross sales, when that revenue exceeds a certain threshold amount.\u00a0 Tenants appreciate this arrangement because they pay percentage rent if they are doing well and their sales exceed that negotiated threshold level. Landlords appreciate this model because it compensates them for the costs they incur in creating and maintaining successful shopping centers with amenities, such as food courts and open spaces.\u00a0 If a successful shopping center drives foot traffic to individual tenants that increases their sales, tenants are often willing to compensate landlords for their part in driving that foot traffic. \u00a0The concept really is a \u201crising tide lifts all boats\u201d model, in which landlords and tenants work as partners.<\/p>\n
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The explosion of on-line shopping throws a wrench into this scheme.\u00a0 With more people purchasing from retailers on-line, and more retailers encouraging customers to place orders on-line, how will retail leases with percentage rent provisions be affected? Many percentage rent leases are carefully crafted to limit the types of sales that count toward the revenue in which landlord shares, often by including only those sales \u201cmade from the store.\u201d\u00a0 The question to consider: if a large percentage of a store\u2019s sales are made on-line, can or should those sales be treated as made from, or initiated in that store, such that the landlord will be entitled to a percentage of such sales?<\/p>\n
It is clear that out of stock items unavailable during a customer\u2019s visit to a store, but ordered at the store and delivered directly to the customer\u2019s home should be counted toward gross sales at that store and counted toward the percentage rent calculation.\u00a0 Similarly, on-line sales made at a computer terminal in the store, or on-line sales made at the customer\u2019s home and picked up at the store should also be counted.\u00a0 It becomes much less clear when a customer never sets foot in the store itself in either placing an order or receiving goods.\u00a0 It may be difficult for a landlord to assert their right to a percentage of an on-line sale made by a customer in their home where the merchandise is then delivered directly to that customer\u2019s home where the transaction occurs without any contact with the store premises.<\/p>\n
As traditional retail stores work to accurately account for on-line sales with their landlords, another issue has recently emerged.\u00a0 Traditional on-line only merchants such as Amazon have seen a potential benefit of having a brick and mortar presence to market their business and may soon open physical locations.\u00a0 The question of percentage rent may become even more difficult to account for when the store front is really merely a marketing device to drive customers to company websites.<\/p>\n
A thoughtful balance should be found to properly compensate landlords for the sales they are driving to retailers. At the same time, from a tenant\u2019s perspective retail leases must be carefully drafted to exclude sales that are not derived from a particular store.\u00a0 If this balance is struck properly, landlord\/tenant partnerships will be well positioned for success in the retail and commercial real estate markets.<\/p>\n","protected":false},"excerpt":{"rendered":"
\u201cPercentage Rent\u201d is a familiar concept to retailers and landlords and has long formed a significant aspect of the business arrangement between commercial landlords and their retail tenants.\u00a0 In a lease arrangement that includes percentage rent, a landlord may negotiate a relatively reduced base rent for the chance to have some \u201cskin in the game\u201d […]<\/p>\n","protected":false},"author":9,"featured_media":5623,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_monsterinsights_skip_tracking":false,"footnotes":"","_links_to":"","_links_to_target":""},"categories":[1],"tags":[7,18,19,39],"class_list":["post-1152","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-general","tag-commercial-real-estate","tag-leasing","tag-retail","tag-shopping-center"],"acf":[],"yoast_head":"\n