When the COVID-19 pandemic was at its worst, many commercial landlords gave their tenants a deal: pay us a portion of your monthly sales in rent instead of the normal amount in order to remain open.
But that seemingly temporary arrangement could become permanent, The Wall Street Journal reported Tuesday (June 15).
“More shopping-center owners are signing new leases where rent is tied directly to a portion of sales, at least for a period,” per the news outlet. “These percentage-rent leases are especially attractive to newer retailers, offering some flexibility so that they aren’t saddled with large losses as they are starting out.”
Many retailers were already feeling a pinch thanks to eCommerce, and found themselves struggling even more when the COVID lockdowns began. At the height of the pandemic, 73 percent of the country’s biggest retailers had closed a bulk of their locations. More than half of retailers sought some form of rent relief.
When stores began closing, landlords found themselves with more space than anticipated, leading them to offer generous terms — like percentage leases — to find new tenants.
It’s the latest example of practices that were considered temporary pandemic measures morphing into fixtures of society, such as companies letting workers do their jobs from home, and a continued food delivery boom in spite of restaurants reopening dine-in service.
But it doesn’t mean fixed-rent leases have vanished, the news outlet noted. Most percentage-rent agreements apply just to the first year or so of the lease before reverting to a fixed-rent model.
And these arrangements don’t come without problems.
Charting a store’s sales to determine how much rent they owe can be tricky, as tenants aren’t always eager to give their landlords access to sales data, except in cases where they need a break on their rent because of flagging business.
“Tenants love it; landlords hate it,” Michael Rielly, managing principal at Rielly Retail Solutions, a real-estate consulting firm for retail and hospitality brands, told the Journal.